institutional arrangements for governance of oil and gas in federal regimes

Module 4Institutions for sound governance of oil & gas

in Iraq’s evolving federal arrangements

Prepared by David Péloquin

Background materials forUN workshop on oil and gas in IraqDead Sea Marriott Resort, Jordan

April 4-6, 2006

Fiscal / oil & gas institutions in federal countries

• Key institutions in most oil & gas-producing countries include– government ministries (finance, planning and oil ministries) and

legislatures that play key policy-making roles– roles in independent agencies that may administer those policies– (in most cases) state oil companies that manage state commercial

interests (and sometimes play certain policy and regulatory roles)

• In federal countries, these institutions may exist at both the federal and regional levels – with a resulting need to– describe their distinct (but sometimes overlapping) responsibilities– develop mechanisms for harmonization and/or coordination

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Design principles for fiscal / oil & gas institutions

• Key government policies in relation to oil & gas include– overall resource management (including its pace of development)– ensuring security of supply– determining oil & gas market structures, e.g. domestic market and

exports, distribution networks, the role of state oil companies, etc.– setting the structure of oil & gas fiscal regimes (including

incentives for private investment)– determining how resulting revenues are to be shared– setting environmental and safety standards

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Clear responsibility for policy making:Which policies?


• In most federations, the design of oil & gas policies within each level of government is the joint responsibility of– the legislature (in setting policy into law)– the finance ministry (especially in relation to fiscal regimes)– the energy and planning ministries (e.g. in relation to pace of

development, technical and market regulation)– the environment ministry, trade ministry and other ministries with

interests in oil & gas

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Clear responsibility for policy making:Who?


• In any well-functioning system of government:– the legislature and ministries work together in advancing the

overall policy interests of the government as a whole– key policies are established (by the legislature) in laws and

(by the government or agencies) in published regulations

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• When different aspects of oil & gas policy are assigned to different levels of government, need to ensure– that all important policy areas are clearly assigned to at least one

level of government (i.e. to minimize the risk of policy “gaps”)– clear paramountcy (or rules) in cases where the independent

policies of different governments may potentially be in conflict• Concurrency of federal and regional powers (as under Iraq’s

constitution) can also help minimize policy “gaps”…… but increases the need for clear paramountcy

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• Where particular aspects of oil & gas policy are subject to joint decision-making (e.g. management of oil & gas under article 111), need to– make clear what the decision rules are (e.g. by consensus, by

simple or weighted majority voting, etc.)– build trust and common understanding among governments of the

interests of other governments• Will be particularly important to avoid “joint decision traps”

that prevent timely decision-making in key areas

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Clear responsibility for policy making:How?

• When aspects of oil & gas policy are made independently by different governments, need to strike a balance between– benefits to citizens from more coherent policies– benefits to citizens of more timely policies (in the absence of

coordination-related delays) and policies tailored to local needs

• Because of the importance of its oil & gas sector, a federal Iraq may have a particular need to coordinate fiscal regimes, regulatory / environmental policies, revenue collection, etc.

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• Even when different governments have independent (rather than joint) responsibility for policy, it remains important to– have mechanisms to ensure regular communication and

consultation between their respective legislators and ministries– build up trust and common understanding of each government’s

legitimate interests in pursuing particular policies

• Often, their interests may coincide, enabling them to informally harmonize their policies or make policy jointly

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Clear responsibility for administration of policies:Which aspects?

• Key aspects of the administration of government oil & gas policies include– technical regulation of industry practices (e.g. to prevent depletion

of reservoirs, prevent pollution, inspect workplaces for safety, etc.)– economic regulation of individual industry players (e.g. pricing of

monopoly pipeline services, enforcing export quotas, etc.)– collecting and remitting revenues generated by oil & gas fiscal

regimes

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• Many governments choose to separate most administrative functions from policy making (and from policy makers)

• Many use independent commissions of experts acting transparently and “at arm’s length” from government, i.e:– commission members enjoy secure tenure– commission and its members insulated in principle and practice

from day-to-day and behind-the-scenes interference by ministries

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Clear responsibility for administration of policies:Who?

• To act transparently, an independent commission needs to apply clearly stated rules / principles that are set out– in explicit statements by joint or independent policy-makers– or by the commission itself (if it sees a need to clarify its interpretation

of the rules and principles it is applying)

• Must also be publicly answerable for its decisions, e.g.:– stakeholders to publicly present arguments (and respond to others’)– commission to make public the reasons for their decisions and be

subject to formal appeal to another similarly transparent body

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Clear responsibility for administration of policies:Who?

• Clearly separating (general) policy making from (case-specific) administration can minimize “leakages” to corruption and unduly favourable terms for private firms if:– commissions (and their members) have minimal discretion in

dealing with particular cases (including with state oil companies)– commissions and members are subject to ongoing scrutiny likely to

expose or “short-circuit” wrong-doing (e.g. regular audits, successful appeals against wrongful decisions)

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Clear responsibility for administration of policies:Why / how?

• Stakeholder governments likely to apply intense scrutiny…… especially where financial stakes are high (e.g. revenue collection

agencies, fiscal commission assessment of “needs”)

• Even when discretion is inevitable (e.g. assessment of “needs”), scope for systematic unfair treatment is limited by– intense scrutiny of gains/losses resulting from decisions– the repeated nature of the decisions that would be required (and

the corresponding increase in pressure if unfairness persisted)

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• Public and civil society confidence in the soundness of oil & gas policy (and in its administration) is also enhanced by– ready availability of information and data on oil & gas that do not

compromise commercial or other confidences– regular reporting on the activities of fiscal / oil & gas institutions

• To facilitate administration, may also need to be able to share confidential information among federal / regional agencies (subject to requirements to preserve confidentiality)

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Fiscal / oil & gas institutions in the Iraqi context

• A key feature of Iraq’s constitution – the joint management of oil & gas – needs further clarification:– how is the joint decision-making body to be structured (i.e. its

membership and their relation/obligations to governments)– the decision rules to govern joint policy making– the precise nature of the policies to be made jointly (and which

related policies may be made independently by governments)– the relationship of the joint body to any independent agencies

charged with administering joint policies

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Joint management of oil & gas (article 111)

• Also need clarification on Iraq’s fiscal commission:– its composition (‘”experts and representatives” from both federal

and regional governments) suggests a joint policy-making body– some of its responsibilities (e.g. ensuring appropriate use and

division of federal resources) also seem to be clear policy matters – but: other responsibilities appear suited to independent agency:

e.g. distribution of grants, aid, loans and shared revenues to regions on the basis of transparent principles is frequently delegated to independent fiscal commissions (e.g. India, South Africa, Australia)

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Iraq’s fiscal commission (article 105)



• Decision-making bodies consisting of both government representatives and “independent” experts are problematic:– “independent” members would often be de facto federal or

regional representatives (depending on how they were chosen) – because of the central importance of political considerations to the

views expressed by government representatives, such bodies may not succeed in generating a truly independent perspective…

… nor would accountability for policy be served by depicting policy decisions as technical matters for “experts” to deal with

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Iraq’s fiscal commission (article 105)


• Similarly, inherent conflicts of interest make it difficult for state oil companies to play policy-making / regulatory roles: – the impacts of their policy influence or regulatory decisions on

partners and competitors would inevitably colour their views– they are also less likely to effectively regulate their own activities on

the same basis as they regulate the activities of others

• However, government policies / laws can empower them to– hold the state’s commercial stake in oil & gas developments– make oil & gas investments and generate government revenues

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Role of Iraq’s national oil company


• May be important to coordinate policies made independently by federal / regional governments– e.g. to avoid unintentionally heavy taxation / regulation

• Coordination among regions may also help reduce risk of “race to the bottom”:– e.g. excessive fiscal competition, tendency to lax environmental

regulation, etc.• Oil & gas commissions at both federal and regional levels

(e.g. as in Sudan) may be worth exploring

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Need for coordination of fiscal / regulatory regimes?


• Until regional policy/administrative capacity in place, may need to rely on federal collection and remittance– could, however, consider options for jointly managed (i.e. federal /

regional) revenue collection agency– asymmetric revenue collection (federal in some areas, by regions

in others) can also work if capacity is uneven across regions – providing coordination is in place (e.g. Canada, Spain)

• When multiple governments collect revenues, also need timely publication / sharing of information

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Need for coordination of revenue collection / remittance?

Key issues for discussion

• Policy-making:– should Iraq more clearly distinguish between institutions designed

for policy making and those designed to administer policies?– in which areas should policy be made by the federal government?

by regional governments? jointly?– in areas of joint decision-making (e.g. management of oil & gas

under article 111), what should be the decision rules?

• Administration of policy:– to what extent should the administration of policy be delegated to

independent commissions?

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Key issues for discussion

• Role of national oil company:– should a national oil company be limited to serving as an

instrument for managing Iraq’s commercial interests in oil & gas (including as a vehicle for generating revenues)?

– should it be prevented from playing either a policy-making role or a regulatory role?

• Other institutional arrangements:– How can Iraq facilitate informal coordination of federal / regional

fiscal regimes, regulatory policies and revenue collection (i.e. in addition to formally joint decision-making in specific areas)?

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institutional arrangements for governance of oil and gas in federal regimes

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