These observations by former officials of the World Bank, the IMF and USAID describe the political and economic context in which discussions began on the Chad/Cameroon Petroleum Development and Pipeline Project in the early 1990s. A sense of disillusionment dominated development professionals and the general public alike as they witnessed the steady economic decline of most African countries and found growing pessimism about prospects for progress.
This pessimism was all the more dispiriting since it followed decades of effort, reflected in the billions of dollars in loans, grants and other assistance, to put those countries on a sound economic glide path after acquiring independence. Despite these commitments, there was little in the way of results. What gains had been made were largely incremental, limited to a few selected sectors of the economy. Overall, the sad fact was that the vast majority of African countries were suffering declining economic growth and a deteriorating quality of life.
Origins of the Chad Project
The reasons, first and foremost, originated in the realization that all resourceswhether grants of Official Development Assistance (i.e. ODA, known as foreign aid), or loans for structural adjustment or revenues from private sector investmentswere being largely squandered. The most notorious "poster boys" whose excesses aroused public anger and resentment were Mobutu Seso Seko of Zaire and Sani Abacha of Nigeria who openly robbed billions from their national treasuries. Anger assumed the proportions of a tidal wave of criticism, gradually engulfing all parties, beginning with the corrupt individuals and governments but quickly extending to the World Bank and to giant multilateral companies.
A further compelling reason for change in traditional practices was the emergence of coalitions of militant anti-globalization, pro-environment and pro-debt forgiveness activists. Rather than simply lobbying for a voice in economic policy discussions, as in the past, these coalitions took to the streets. Instead of waving flags, the demonstrators assaulted their "adversaries," e.g., delegates to annual World Bank meetings, and confronted the police with the aim of disrupting proceedings.
The northernmost region, bordering on Libya, is a virtual vacuum marked by mountain ranges and largely empty deserts, dominated by several hundred thousand lighter-skinned Moslem, Arabic-speaking nomads.
By contrast, Chads more densely-populated middle region, the sahel, is flat, well-watered and able to sustain farmers and cattle ranchers. The people are predominantly Arab-speaking and Islamic.
The great majority of Chads 8.2 million people in-habit the south; they are black, French-speaking and non-Moslem, i.e., either Christian or followers of indigenous religions. The French influence is the natural legacy of French conquest which, beginning in the south of the country, resulted in some 75 years of colonial rule which ended (formally) in August 1960 when Chad acquired its independence.
In reality, French influence remains deeply entrenched, especially in Chads business circles, its education system and political institutions. It was in no small measure a reaction to continued French influence that accounted for the emergence of northern-based rebellions in the mid-l960srebellions which, in lesser measure, continue to trouble the country today.
Sustained by their respective ethnic supporters (and in the north by Libya) this north-south rivalry underlies Chads endemic political instabilityan instability that became one of the standard arguments used by critics in their opposition to the Chad/Cameroon oil project.
The counter argument was that the project was Chads only hope. As the fifth poorest country in the world, its people had little hope of escaping poverty and misery. Because of their deprived state, there arose the conviction that the Chadian people and government might be sufficiently eager to end 30 years of civil war and rebellion to make the concessions required to facilitate the exploitation of its oil resources. Chadians were well aware that there was no other marketable resource they could rely on. It was the oil projecta possible oil bonanzaor continued economic decline.
Thus emerged the largest private investment project of its time in Africa.
The situation faced by negotiators when they met in the early 1990s to draft the agreements was fraught with problems. It took years of negotiations before the "Chad/Cameroon Petroleum Development and Pipeline Project" emerged. Reflecting the determinationindeed the obligationof all parties to find a new model of coop-eration, its not surprising that it took negotiators nearly a decade to reach a consensus.
Among the primary innovations agreed upon was the creation of a unique trilateral public-private partnership: the World Bank, the consortium of oil companies and the government of Chad.
It is new in several important respects. Thus, for example, while the World Banks financial participation was in the form of loans totaling only three per cent of the $3.7 billion in capital, it agreed to be a full partner in this private, profit-making investment. In addition, the Bank assumed another key role, i.e., to "mitigate the risk" of the Consortiums $3.4 billion investment.
The Banks participation was indispensable for other reasons. The consortium asked the Bank to take the lead in inducing the government of Chad to make the essential concession, namely sovereignty over its oil revenues. After initially resisting the role, the Bank agreed (privately) to inform Chadian authorities that without that concession it would not participate in the Project. The consortium similarly made known to the Chadians that it would not invest in the Project without World Bank participation.
To illustrate the challenges, one only has to recall that ExxonMobil is one of the worlds largest and wealthiest multinational oil companies. Relying on its power and wealth, it had a fearsome reputation in some quarters for its alleged willingness to run roughshod over obstacles it might encounter. In the Chad project it would have a poor, weak unstable and undeveloped partner that would test its patience.
For the World Bank Group, the worlds most powerful financial institution, assumption of its role as "moral guarantor" of a private sector investment required an unprecedented degree of responsibility and engagement, specifically in "capacity building," i.e., training Chadians in the full range of functions necessary to manage the countrys oil resources. The consensus among observers is that never had the Bank agreed to assume a comparable commitment to human resource development.
As for Chad, the third partner, it could offer little more than its oil resources. Its infrastructure was basic, with only 300 kilometers of paved roads, no railroad, poor to non-existent telecommunications services, sporadic supplies of electricity and a population with less than fifty per cent literacy.
A second basic challenge of the project was to reconcile the partners contrasting objectives. For the Consortium, the project was a for-profit investment in Chads oil resources that, like others, would be judged by the only standard that mattered, profits and dividends to stockholders.
On the other hand, for the government of Chad and the World Bank, the aim of the project was quite different, namely an economic development/poverty reduction project.
Finally, there was the challenge to convince the host government of Chad of its responsibility to address the problem of corruption. The underlying issue was seen to be one of governance. The Chadian National Assembly would have to address it by passing legislation that would significantly mitigateif not eliminatecorruption. In fact, of course, corruption is ubiquitous and pervasiveand not by any means confined to developing countries. Its also well shielded by the fundamental principle of international law embodied in the word sovereignty. For decades, indeed centuries, anti-corruption efforts have foundered despite laws, threats, and exhortations, including efforts by international financial institutions and bilateral donors alike.
For the government and people of Chad, the Project is calculated to bring in revenues over the next twenty-five years that will double its current gross domestic product. An estimated one billion barrels of oil will be drilled, raised and shipped from the wells in southern Chad to the off-loading facility on the Atlantic at Kribi (near Douala). Production is expected to reach a maximum of 225,000 barrels per day.
When the Project was approved in 2000, revenue per barrel was conservatively estimated at $15.25, with revenues for Chad calculated as $100 million per year or $2.5 billion over the life of the project. As noted earlier, according to the Economist Intelligence Unit report of August 2003, the price of oil had almost doubled to $26.79 per barrel. That same report (page 8) predicts that, as a consequence, Chads real GDP growth will reach the astronomical figure of forty per cent in 2004, "making Chad the fastest growing country in the world."
This extraordinary economic growth is a direct result of the impact of a) the investment in building the pipeline, especially the hiring of some 11,000 laborers (eighty-six per cent of the work force was Chadian and Cameroonian) who earned about $11 million per quarter, b) the purchase of local goods and services totaling $340 million by mid-2002, averaging $92 million per quarter, and c) the broader economic spinoff from these two figures.
The stake of the consortium of oil companies is not just profit from the $3.4 billion in capital, its also a test of its experiment of partnership with the World Bank. Meanwhile, the World Bank has gambled heavily on its ability (through training) to empower Chadians to monitor and manage the countrys oil resources and thereby achieve its overarching raison detre, namely poverty reduction, in which the Chad project is a leading test case.
As for the government of Chad, the project offers the bestpossibly onlyhope of emerging from its desperate condition of poverty and underdevelopment. Chad also stands to gain the prestige and further private investment that could come if the Project succeeds and becomes a model for other extractive industries and programs. For example, the conditions that Chad has (at least in principle) agreed to in the Chad project closely resemble the qualifications for receiving receive assistance under the new U.S. Millennium Challenge Account. In addition, the project provides an example of the very kind of partnerships called for by the "New Partnership for African Development" (NEPAD) and by a number of African leaders.
The language of the law is: "Direct income [dividends and royalties] shall be deposited in an offshore escrow account" which "shall be allocated primarily to...public health and social affairs, education, infrastructure, rural development (agriculture and livestock), environment and water resources." (Articles 3 and 7 of Act No. 001/PR/99 dated January 1999.)
In view of the RMOCs key role, and the widespread cynicism regarding its ability to curb and control corruption, lets examine its membership, mandate, authority, and staffing.
The report recalls the two key aspects of the Committees mandate. First, "to verify that the actions of the special [off shore revenue] accounts are in conformity with the [national] budget law," and second, "to authorize and monitor the expenditures of the special [off shore] accounts and the actual destination of the funds."
The law elaborates on the RMC mandate by noting that it is expected to ensure that the "appropriate amount of oil revenues has been credited to the Government bank accounts in accordance with the convention signed with the petroleum Consortium;" second, to make certain that budget allocations are "in accordance with" decrees that govern revenue management; third, to guide procurement decisions by seeing that expenditures are "transparent and awarded to the lowest evaluated bidders,"and fourth, to guarantee that the "Fund for Future Generations" (ten per cent of revenues to be set aside for future needs) is managed in accordance with "best international practices."
A decree implementing the Revenue Management law states that the RMC is to participate fully in the preparation and implementation of the Chads national budget, specifically in the process of "budgeting and allocating oil revenues."
This task assumed special importance because of the notoriety (and severe criticism) generated as a result of the Chadian Governments decision to use $4.5 million of the bonus to purchase military equipment (reportedly two helicopters.) This "diversion" of the bonus has been repeatedly cited by skeptics of the Project as evidence that the Chadian Government cant be trustedthat the Project will result in the usual misuse of funds that characterizes such projects.
In response, the government justified its action on two grounds: first, that the signing bonus was not clearly covered by the terms of agreements on oil revenues, and second, that the government faced an armed rebellion in the north and needed to replace two helicopters destroyed by the rebels.
Nevertheless, the World Bank reprimanded Chadian authorities for what it felt was a violation of the spirit, if not the letter, of project agreements. It also exacted a pledge that Chad would never use any oil revenues for non-economic development purposesand that it would provide a detailed accounting of the use of the remaining $20.5 million. Hence the accounting on pages 3-6 of the 2002 rapport dactivités.
RMC Committee Staff
Prime Minister and President of Chad Meet the RMC
The Committees meeting with President Deby on September 19, 2002, is significant as a measure of high level political support. After congratulating the RMC for its work, the president "recalled that the Committee is a creation of the government and that it is a source of pride for Chad because there exists nowhere else a comparable entity for monitoring and management of petroleum resources. (Emphasis added.) He [the president] emphasized that the management of the remainder of the signing bonus will be a test of how well the Committee is prepared to assume the management of future oil resources."
The president recognized the importance of publicizing the RMCs work by asking its members "to work transparently and in collaboration with the Government, which is charged with establishing investment projects."
The overarching question now, to quote U.S. Ambassador to Chad Christopher Goldthwaite, is "...whether the law will be adhered to."
July 15, 2003, marks a major step in testing the new arrangements for managing petroleum revenues. It was on that date that oil began to flow from wells in southern Chad through the newly constructed 650 mile pipeline across Cameroon to the port of Kribi on the Atlantic coast.
However, the ideaindeed the requirement embedded in legislationthat the nations resources are to be invested in economic development projects is so contrary to the experience of recent decades that there remains widespread skepticism and disbelief. One prominent voice reflecting this skepticism is that of Professor Terry Karl of Stanford University whose academic research, focused on Latin American countries, but including Asian and African examples, leads her to conclude that oil revenues inevitably lead to a decline in GDP per capita and of a nations economic growth. Her reasoning stems from what is perceived to be the unstoppable diversion of a nations work force to employment in oil projectsat the expense of agriculture and traditional productive endeavors. Professor Karl goes so far as to affirm that oil-producing countries actually become poorer, that oil revenues are tainted.
In so stating, she overlooks the fact that no combination of resourceswhether ODA, World Bank loans or regional bank supporthas succeeded in raising African countries out of poverty despite fifty years of unremitting effort.
On balance, scrutiny of the project by non-governmental organizations, particularly those concerned with the environment, human rights and health, results in benefit to all the parties. It also makes this project one of the most extensively studied, painstakingly planned and intensively monitored of any investment.
Thus within the World Bank there are still concerns about the desirability of making a commitment to providing "political risk insurance" for a private oil consortium of profit-making companies. Or the dangers of changing its traditional policy, outlined in its charter (the Bretton Woods agreement of 1945) that prohibited it from interfering in a countrys internal affairs.
The significance of the Banks change of policy is evident in the comment of the U.S. representative at the World Bank Board session of June 6, 2000, approving the project. He described it as "a defining moment in World Bank history...[The project] provides a unique opportunity for the IFC [International Finance Corporation] and Bank to play a significant complementary role in reducing poverty in one of Africas poorest regions."
The answers will be determined by the willingness and resolve of Chadians to see beyond the traditions and practices that remain deeply rooted in Chadian history and societypractices difficult to overcome in even the most advanced societies (witness Enron, WorldCom and other companies.) Several basic considerations condition Chads decisions and future options and its responses to such questions.
As the fifth poorest country in the world, Chad has every incentive to see that the project succeeds. Oil revenues offer the sole prospect of transcending the countrys debilitating and divisive regional, religious, racial and ethnic tensions. The projects success would be the best inducement to further private investment in other resources and sectors of the economy. The project, in effect, offers the long term promise of emerging from isolation and into the global economic mainstream.
Prospects for Replication
The delays in implementing the Millennium Challenge Account and in attracting private investment under NEPAD illustrate the difficulties of introducing new ideas.
First, the project has captured the attention of numerous NGOs that monitor developments and help Chad to emerge from its isolation and obscurity. These activities also constitute the essence of scrutiny which in turn is the key to transparency.
Second, the project has, through the World Banks deep commitment to "capacity building," accelerated education programs and policy reforms and adding momentum to privatization of such sectors as telecommunications and energy.
Third, the project has resulted in exponential growth in the countrys GDP, increasing from 0.8 per cent in 1999 to 8.9 per cent in 2002, and anticipating an increase to 10.6 per cent in 2002. The Economist Intelligence Units August 2003 report predicts "real GDP growth will...make Chad the fastest growing country in the world." (Page 8, August 2003 EIU Country report.) Equally notable is the sharp rise in U.S. exports to Chad, from $10.8 million in 2000 to $137 million in 2001, increases largely reflecting the sale of U.S. oil drilling equipment.
Fourth, thanks to the project the country has made giant strides toward entering the global economic mainstream and raising its profile and potential for foreign direct investment.
Fifth, although Chads oil production will be relatively insignificant in terms of global demand or U.S. needs, it contributes marginally to the desired diminution of U.S. reliance on Middle East sources and to U.S. energy security.
Sixth, the project has revived hope among the Chadian people, a critical psychological factor in helping the country maintain its role as a secular barrier against the regions militant Islamists and becoming a recruiting ground for terrorists. These clearly identifiable benefits are direct benefits of the Chad project. The key tests are still to come, but these achievements justify the hope that the project will improve life for the people of Chad while, at the same time, offering the world a paradigm for responsible resource management leading to the elusive goal of economic growth and development.