Getting the Regulations Right: Oil in Liberia and the Democratic Republic of the Congo

October 11th, 2013

The Democratic Republic of the Congo is widely considered one of the world’s nations with the highest levels of natural resource wealth. In particular, the nation is richly endowed with many types of mining industries—including copper, cobalt, gold, diamonds, and tin—and timber. In fact, DRC accounts for 51% of the world’s extraction of cobalt and is the world’s fourth largest producer of diamonds.

Despite this wealth, and in part because of it, the country also has experienced conflict, economic instability, and systematic corruption since its independence in 1960. These dynamics have contributed to its status as the world’s poorest nation in terms of per capita GDP. In particular, DRC suffers from an uncertain legal framework and a paucity of transparency in government. As I explained in a recent series of blog posts, nations that have vast natural resource wealth, but do not take the necessary steps to keep the extractive industries accountable, transparent, and honest, are likely to suffer from corruption and, ultimately, the resource curse. DRC’s policies and dynamics fall squarely in these criteria.

Given these existing dynamics, it is difficult to see that expanding oil production—as the government now hopes to do—will stimulate economic growth. In 2012, oil revenues contributed $325 million to DRC’s GDP, but according to Nathaniel Dyer, a campaigner for Global Witness, these revenues are expected to “rise sharply,” particularly given the DRC’s recent deal with Angola to exploit offshore fields.

Specifically, the DRC parliament is considering a controversial bill that would manage the expansion of oil production within the nation. The bill itself is quite opaque. First, it allows the oil minister to bypass the tender process by accepting the first “acceptable” bid and keep the process opaque. Second, the bill would allow contracts with oil companies to remain secret. Third, the bill would allow the beneficial owners of oil rights to remain anonymous by using offshore companies. In addition to the content itself, the process of designing the bill has been opaque and unaccountable, as well. According to Global Witness, there has been no public consultation on the bill.

Liberia—half a continent away from the DRC—has thrust its future oil sector into the limelight. We can use the historic and recent experiences of the DRC as context to this nation, and others, which are struggling with the question of how to manage oil resources without falling victim to the resource curse. Liberia’s economy is primarily based in agriculture, not mineral extraction. In fact, Liberia isn’t even expected to start producing oil and gas for another five to seven years.

Yet Liberia has also suffered from corruption in other sectors, so the nation has committed to staying ahead of the curve and minimizing its risk of the resource curse by laying the regulatory and policy framework to maximize social and economic benefits for the Liberian people. To that end, in recent weeks, the government has proposed two new bills that would reform the oil sector. In some of their more important aspects, the bills would (1) reform the National Oil Company of Liberia so that it is strictly a commercial company operating on behalf of the state; (2) create a separate body to manage bidding; and (3) require companies to disclose their beneficial owners before allocating contracts.

If either of these countries’ experiences can teach us anything, it’s that the process of reform is nearly as important as the content of the reform itself. Timing is critical, but in opposing ways. First, countries with extractive industries—particularly those still in the exploration phase—must anticipate the challenges posed by these industries years in advance. They should then address these industries with comprehensive regulatory frameworks that emphasize accountability, transparency, and integrity. A prospective framework, established before industry interests are able to strongly entrench themselves in the political process, will ultimately yield a much better framework than a retrospective one. Yet, second, these nations must be careful not to rush through this process. To that end, legislators must be careful to consider all of the downsides of oil exploration, anticipate their challenges, and find meaningful solutions with broad input through a public review process. When it comes to these regulations, slower (and earlier) is nearly always better.

Written by Ann Hollingshead

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