## wpiea2019121

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### I. Introduction and objectives
- Republic of Congo is the third largest oil producer in sub-Saharan Africa (SSA).
- Oil production: annual average of 86 million barrels between 1990 and 2018.
- Between 2007 and 2017, oil generated on average around 70 percent of fiscal revenues and accounted for 85 percent of merchandise exports.
- Between 1991 and 2015, oil generated close to US$3 billion in annual rents, or $687 in rents per capita every year.
- Paper objectives:
  - Explore transmission channels between vulnerabilities to corruption and macro-fiscal outcomes in Congo, focusing on oil revenue management and public investment.
  - Use the Debt, Investment, Growth and Natural Resources (DIGNAR) model (a DSGE model) to assess macroeconomic gains from anti-corruption reform in Congo.

### II. Oil revenue trends, public investment, and efficiency
- Oil fiscal receipts collapsed from an average of 51 percent of the value of oil production in 2005–14 to less than 30 percent in 2015.
- The ratio of oil revenues to exports deteriorated from 53 percent in 2014 to 30 percent in 2016-2018, compared with an average of SSA oil exporters around 45 percent.
- Public investment surge: capital spending rose from an average of 29 percent of GDP in the 1990s to a peak of 48 percent in 2014.
- IMF estimates public infrastructure investment efficiency in Congo at 0.35 (well below the 1.00 threshold).

### III. Corruption indicators and socio-economic outcomes
- Corruption perceived as prevalent in Congo per internationally recognized indicators.
- Socio-economic performance highlights:
  - GDP per capita growth remained below other SSA countries with lower or no resource wealth.
  - Symptoms: volatile growth, debt overhang, deep-rooted poverty.
  - Poverty reduced somewhat between 2005 and 2011, but level of poverty remains much higher than in comparable middle-income countries.
  - Gini coefficient estimated at 0.465 in 2011.
- Figure notes (as reported):
  - Corruption Perceptions Index scored from 0 – 100, where 100 = best.
  - TPI indicators may be subject to uncertainty.
  - Debt given as the average debt from 2013–17.

### Box 1. Report on Governance and Corruption (RGC): Summary of Main Findings
- Governance and Rule of Law
  - Implementation deficit: failure to enact implementing regulations, weak institutions, or inaction.
  - Significant shortfall in transparency and public data reporting; central government does not have an official website.
  - Enforcement of claims is a significant challenge; public trust in the legal system, notably the courts, is particularly weak.
- Public Financial Management (PFM) and Corruption Vulnerabilities
  - Revenue side: governance challenges lead to significant leakage of natural resource (oil) revenues before reaching the national budget.
  - Procurement weaknesses: lack of due diligence in contracting and sanctioning; frequent opportunities to circumvent formal processes; significant losses.
  - Excessive spending contributed to debt increase from "20 percent of GDP in 2010" to "118 percent in 2017".
  - Internal control systems are very weak; internal and external audit agencies insufficiently empowered.
  - Poor control of the public-sector wage bill.
- Market Regulation and Business Climate
  - Hurdles and costs to start a business; weakness of public registers of land and companies.
  - Many-layered tax services with potential for abuse.
- AML and Anti-Corruption Frameworks
  - AML framework weak despite laws; enacted laws have significant limitations.
  - Agencies to detect and investigate laundering of proceeds of corruption: not properly staffed or trained, lack coordination, lack necessary powers.
  - Anti-corruption agencies are not independent and lack legal enforcement powers.
  - Congo shows below-average performance on a range of AML indicators with little to no improvement over time (RGC, 2018).

### IV. Key corruption vulnerabilities in oil revenue management
- Three main sources of corruption risks:
  - (i) Production Sharing Agreements (PSAs)
  - (ii) Inadequate budget reporting and misallocation of oil funds
  - (iii) The national oil company, the Société Nationale Pétroliere du Congo (SNPC)

A. Production Sharing Agreements (PSAs)
- 2016 Hydrocarbons Code enacted but lacking implementing regulations; requires Parliament to approve all PSAs and publication in the official gazette.
- Lack of transparency: contractual terms (e.g., signature bonuses) not transparent; exemptions not published; operating costs not audited.
- Authorities offered more generous fiscal terms in 2015 affecting about half of oil production since 2015.
- Government share of production:
  - Reduced from "57 percent in 2012–14" to "43 percent in 2015" and to "around one-third in later years".
  - Simulations: with old fiscal terms, oil price decline would have reduced government share only to an average of "52 percent of total production".
- Upstream market concentration: two international oil companies control more than 70 percent of Congo’s oil production.
- Table of Old and New PSA Terms (as presented):
  - Royalties: Old "12%" → New "15.0%"
  - Cost Stop: "50%" → "50%"
  - TP (US$/bbl): "42" → "56"
  - Excess oil (Government shares): "50%" → "50%"
  - Profit oil (Government shares): "60%" → "50%"
  - Super profit oil (Government shares): "70%" → "66%"
  - Cost oil ($/bbl): "45" → "45"
  - Oil companies' share — Excess oil: "50%" → "50%"
  - Oil companies' share — Profit oil: "40%" → "50%"
  - Oil companies' share — Super profit oil: "30%" → "34%"
- Local content requirements in the 2016 Code:
  - National companies (>50 percent Congolese ownership) must hold a 10 percent share in new joint ventures.
  - Contractors must employ Congolese personnel and prefer Congolese equipment/services if price ≤ 10 percent higher than foreign equivalents.
  - At least 25 percent of development and operational costs must be sourced locally.
  - Non-compliance prevents recovery of additional costs.
  - Risk: rent-seeking if not implemented transparently; potential favoritism toward politically connected local firms.

B. Misallocation of Oil Funds and Inadequate Budget Reporting
- Weak oil revenue forecasting: no clear methodology; inconsistencies between company end-of-year figures and Ministry of Finance data; problematic reconciliation under PSAs.
- Reconciliation with IMF staff (2014–17) identified substantial off-budget oil revenue:
  - SNPC oil-backed pre-financing arrangements: "US$2.3 billion".
  - Special contracts with oil companies repaid with at least "US$ 0.5 billion in annual withholdings of government oil" used largely to finance infrastructure including a power station (EITI, 2014).
  - Additional oil revenue bypassing budget processes: "about US$250 million per year" reportedly used for transfers to the oil refinery and payments of the government’s share in operating costs of five oil fields.
- Lack of enforcement of repatriation and surrender of foreign exchange: export proceeds must be repatriated and surrendered within one month; multinational companies tend to evade.

C. Role of the SNPC
- SNPC (created 1998) has dual mandate: manage its own production share and the state’s oil share.
- SNPC remits proceeds—net of fees—to the Treasury on a quarterly basis (EITI, 2015).
- Accounting and reconciliation between producers, SNPC, and Treasury inadequate; EITI could not reconcile SNPC disclosures with Treasury receipts.
- SNPC vulnerabilities:
  - Political Economy: PEPs can influence SNPC trading decisions including pre-financing and oil-backed infrastructure agreements.
  - Severe lack of published, timely information on tender regulations, buyer lists, volumes, and pricing.
  - Opacity in oil trading raises mispricing concerns; World Bank (2007) reports SNPC sold state crude at prices "5 to 6 percent below market."

### V. Public investment and public service delivery — vulnerabilities and consequences
- Public investment scaled up rapidly in a poorly-managed, non-transparent, inefficient environment with strong perceptions of corruption.
- Planning-phase risks:
  - Limited information on investment plans and PPP strategy; weak programming and budgeting.
  - No clear PPP guidelines or objective criteria for project selection.
  - Projects often lack rigorous appraisal; existing appraisals not independently reviewed or published.
  - Major projects not systematically scrutinized by a central ministry with independent input.
- Allocation-phase risks:
  - Lack of transparency opens opportunities for PEP influence; anecdotal evidence of contracts allocated to governing coalition members.
  - Firm survey: around "75 percent" of firms were expected to give gifts to secure a government contract.
- Execution-phase risks:
  - Discretionary extra-budgetary spending and oil barter agreements.
  - Procurement and PFM weaknesses: excessive discretion in vendor selection, non-transparent processes, weak enforcement, limited procurement audits, exclusion of high-value contracts from audits.
- Consequences:
  - Selected projects often not the most productive, carried out at excessive costs.
  - Projects may not significantly improve access to services.
  - Example inefficient investments: Kintélé National Stadium, Imboulou Dam Project, Congo Power Station.
- Perceptions and access statistics:
  - 10 percent of the population has no access to electricity.
  - Safe water access: poorest quintile ~50 percent vs richest quintile 90 percent.
  - 2009 ICA survey: 65 percent of firms perceive corruption as a major constraint.
  - Close to 40 percent of firms experienced at least one bribe request; expected to give gifts to tax officials; ratio increased to 82 percent for public officials.

### VI. DIGNAR model, baseline calibration, and reform channels
- Model: DIGNAR — real dynamic neoclassical open economy model with traded, non-traded, and natural resource sectors; captures investment inefficiency, limited absorptive capacity, learning-by-doing externalities, Dutch disease.
- Governance-related distortions captured (along IMF (2018a) lines):
  1. Bribes and distortions discouraging firms (κt).
  2. Public investment efficiency εt (only εt ItG translates into productive public capital).
  3. Loss of tax revenues due to inefficiencies ϖt.
  4. Mispricing in oil sector ρt.
- Baseline scenario calibration (ambitious but realistic):
  - Reduction of bribes boosts private investment within ten years from 14 to 16 percent of GDP (advancing Congo by a decile in SSA distribution).
  - Public investment efficiency rises from 0.43 to 0.58 (median SSA).
  - Non-oil revenue increases by 2 percentage points of GDP.
  - Mispricing correction yields an additional 7 percent of total oil revenues.
- Baseline simulation outcomes:
  - Reforms can increase real non-oil output level by 18 percent in 10 years (≈ an additional growth of 1.8 percent per year on average).
  - Anti-corruption reforms would reduce public debt at about 3 percent of GDP per year.
  - 10 percent of the increase in growth and almost one third of the reduction in public debt is attributable to improved oil sector governance.
- Table 2: Average annual effects over a 10-year horizon (percentage points)
  - Additional annual GDP growth, by reform in isolation:
    - Reducing Firms’ distortions: 0.9
    - Enhancing Public investment efficiency: 0.4
    - Enhancing revenue mobilization: 0.2
    - Correction of oil mispricing: 0.2
  - Average annual reduction in the public-debt-to-GDP ratio, by reform in isolation:
    - Reducing Firms’ distortions: 0.8
    - Enhancing Public investment efficiency: 0.6
    - Enhancing revenue mobilization: 0.2
    - Correction of oil mispricing: 0.8

### VII. Alternative scenarios: partial reversal and conservative reform
- Second scenario (partial reversal after three years) assumptions:
  - Private investment declines to 14.5 percent of GDP.
  - Public investment efficiency deteriorates to 0.47.
  - Non-oil revenue declines by 0.5 percentage points of GDP.
  - Oil fiscal revenues decline by 1.75 percent.
- Second scenario outcomes:
  - Average increase in non-oil growth: 0.8 percent per year.
  - Decrease in public debt: 2.25 percent of GDP per year.
- Third scenario (conservative calibration) assumptions:
  - Private sector investment increases from 14 to 15 percent of GDP.
  - Public investment efficiency increases to 0.5375.
  - Non-oil revenue mobilization increases by 2 percentage points of GDP.
  - Oil revenues 3 percent higher.
- Third scenario outcomes:
  - Average increase in non-oil growth: about 1 percent per year.
  - Reduces public debt by 2 percent of GDP per year.
- Robustness: Additional simulations show dividends remain significant even under partial reversal or less ambitious reforms.

### VIII. Policy recommendations and concluding findings
- Priority reform areas:
  - Reduce bribes to public officials and other distortions affecting firms.
  - Improve transparent public investment processes and “invest in investing” to raise public investment efficiency.
  - Reduce tax evasion to widen the tax base and increase non-oil revenue.
  - Improve oil sector governance to correct mispricing and increase oil fiscal revenues.
- Specific measures taken or proposed:
  - Government-approved diagnostic study published to inform governance and anti-corruption strategy.
  - Draft laws to establish an anti-corruption commission with investigative powers and introduce asset declaration requirements for senior political figures.
  - Measures to improve public investment efficiency: publish detailed information on level and composition of public investment; conduct an investment tracking survey; strengthen external controls by adopting a law on the organization and functions of the supreme audit institution (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations; restructure internal audit system and establish coordination between internal and external audit institutions.
  - Oil sector governance steps: 2017 decree revising SNPC statutes (Article 59 of the 2017 Statutes for SNPC); increased transparency of information exchange among Ministry of Finance, Ministry of Hydrocarbons, and SNPC; submission in late 2018 of draft amendments requiring SNPC and subsidiaries to publish audited financial statements; SNPC published online production sharing agreements and agreed to publish oil-backed contracts.
- Additional oil-sector recommendations:
  - State audits of recovery costs claimed by oil companies.
  - SNPC should publish detailed information on oil volumes, prices, sales and buyers.
  - Enhance AML framework to deter and detect illicit transactions related to oil trading.
  - Subject all financial flows between SNPC and the state budget to independent audit and oversight.
- Expected macro-fiscal impact if reforms implemented effectively:
  - Growth could increase by up to 0.8 to 1.8 percent per year over the next 10 years, depending on magnitude of reforms.
  - Debt could decline by 2.25 to 3 percent of GDP every year over the same period.
  - Improvements in oil sector governance alone account for around 10 percent of the increase in growth and one-third of the reduction in public debt.
- Implementation caveats:
  - Benefits depend on quality of implementation and compliance with reporting obligations.
  - Measures should be combined with reform of PSA terms and measures to reduce corruption risks in oil trading.
  - Expiry of some PSAs over the next few years offers opportunity to renegotiate contracts with better terms.
  - Commitment at all levels to the medium-term governance strategy is critical.

### IX. DIGNAR model calibration to the Republic of Congo (initial steady state: 2013–17 averages)
- Targets (Percent of GDP unless otherwise indicated):
  - Average GDP growth rate 1.8
  - Exports 63.0
  - Imports 82.9
  - Government consumption 26.2
  - Government investment expenditures 21.1
  - Private investment 13.6
  - Oil GDP 49.2
  - Government domestic debt 18.0
  - Government external commercial debt 25.6
  - Grant 0.6
  - Concessional debt 38.0
- Remaining parameters not available for Congo set at average LIC values and taken from Melina and others (2016).

*IMF Working Paper excerpt by Giovanni Melina, Hoda Selim, and Concepcion Verdugo-Yepes (content unit wpiea2019121).*

### 2.25 to 3 percent of GDP per year over the same period. These results suggest that macro-

### 2.25 to 3 percent of GDP per year over the same period. These results suggest that macro-

### I. Introduction and objectives
- Republic of Congo is the third largest oil producer in sub-Saharan Africa (SSA).
- Oil production is estimated at an annual average of 86 million barrels between 1990 and 2018.
- Between 2007 and 2017, oil generated on average around 70 percent of fiscal revenues and accounted for 85 percent of merchandise exports.
- Between 1991 and 2015, oil generated close to US$3 billion in annual rents, or $687 in rents per capita every year.
- Paper objectives:
  - Explore transmission channels between vulnerabilities to corruption and macro-fiscal outcomes in Congo, focusing on oil revenue management and public investment.
  - Use the Debt, Investment, Growth and Natural Resources (DIGNAR) model (a DSGE model) to assess macroeconomic gains from anti-corruption reform in Congo.

### II. Oil revenue trends, public investment, and efficiency
- Oil fiscal receipts collapsed from an average of 51 percent of the value of oil production in 2005–14 to less than 30 percent in 2015.
- The ratio of oil revenues to exports deteriorated from 53 percent in 2014 to 30 percent in 2016-2018, compared with an average of SSA oil exporters around 45 percent.
- Public investment surged: capital spending rose from an average of 29 percent of GDP in the 1990s to a peak of 48 percent in 2014.
- IMF estimates public infrastructure investment efficiency in Congo at 0.35, well below the 1.00 threshold.

### III. Corruption indicators and socio-economic outcomes
- Corruption is perceived to be prevalent in Congo as measured by internationally recognized indicators (figures 2a and 2b referenced).
- Socio-economic performance:
  - GDP per capita growth remained below other SSA countries with lower or no resource wealth.
  - Symptoms of weak performance include volatile growth, debt overhang and deep-rooted poverty (figures 2d, 2e, and 2f referenced).
  - Despite some reduction in poverty between 2005 and 2011, cross-country comparisons suggest the level of poverty in Congo is much higher than in comparable middle-income countries.
  - Gini coefficient estimated at 0.465 in 2011, placing Congo among the most unequal societies in the world.
- Figure notes:
  - Corruption Perceptions Index is scored from 0 – 100, where 100 = best.
  - TPI indicators reported in the figures may be subject to uncertainty.
  - Debt is given as the average debt from 2013–17.
- Sources for indicators and figures: Transparency International, World Development Indicators, Worldwide Governance Indicators, IMF World Economic Outlook and staff calculations.

### IV. Model and simulation approach (DIGNAR)
- The paper uses the DIGNAR model (Debt, Investment, Growth and Natural Resources), a DSGE model developed for resource-rich developing economies by Melina and others (2016).
- DIGNAR captures problems that arise during investment surges such as:
  - investment inefficiency,
  - limited absorptive capacity,
  - learning-by-doing externalities affecting total factor productivity in the tradables sector,
  - Dutch disease effects.
- Relative to models by van der Ploeg (2012), Buffie et al. (2012) and Berg et al. (2013), DIGNAR allows simulations where investment is financed with both resource revenue and debt creation.
- Section V of the paper simulates the potential impact of anti-corruption reforms on Congo’s growth and public debt using DIGNAR.

### V. Key findings and policy relevance
- Anti-corruption reforms could generate substantial macro-fiscal gains even under conservative reform scenarios (as summarized by the opening statement: "2.25 to 3 percent of GDP per year over the same period").
- Authorities in the Republic of Congo have prepared and published a Report on Governance and Corruption (RGC) to inform their anti-corruption reform agenda, acknowledging past efforts have not been effective and calling for a new policy of “breaking with the past” (RGC, 2018).
- The RGC identifies governance and corruption vulnerabilities in:
  - rule of law,
  - PFM systems,
  - financial sector oversight,
  - market regulation and the business climate,
  - AML/CFT,
  - the anti-corruption framework.
- The RGC also suggests policy measures to address these challenges.

*IMF Working Paper excerpt by Giovanni Melina, Hoda Selim, and Concepcion Verdugo-Yepes (content unit wpiea2019121).*

### Box 1. Report on Governance and Corruption (RGC): Summary of Main Findings

### Box 1. Report on Governance and Corruption (RGC): Summary of Main Findings

### Governance and Rule of Law
- Implementation deficit: failure to enact implementing regulations, weak institutions, or inaction.
- Significant shortfall in transparency and public data reporting; central government does not have an official website.
- Enforcement of claims is a significant challenge; public trust in the legal system, notably the courts, is particularly weak.

### Public Financial Management (PFM) and Corruption Vulnerabilities
- Revenue side (natural resources, especially oil): governance challenges result in significant leakage of revenues before they reach the national budget.
- Procurement weaknesses: lack of due diligence in contracting and sanctioning systems; frequent opportunities for circumventing formal processes; result in significant losses.
- Excessive spending contributed to debt increase from "20 percent of GDP in 2010" to "118 percent in 2017".
- Internal control systems are very weak; internal and external audit agencies are insufficiently empowered.
- Poor control of the public-sector wage bill.

### Market Regulation and Business Climate
- Hurdles and costs to start a business; weakness of public registers of land and companies.
- Many-layered tax services with potential for abuse.

### Anti-Money Laundering (AML) and Anti-Corruption Frameworks
- AML framework is weak despite laws enacted as a signatory to UNCAC; enacted laws have significant limitations.
- Agencies to detect and investigate laundering of proceeds of corruption: not properly staffed or trained, lack coordination, lack necessary powers.
- Anti-corruption efforts: gaps in the statutory framework and ineffectiveness of implementing institutions (e.g., CNLCCF and regular enforcement agencies).
- Anti-corruption agencies are not independent and lack legal enforcement powers.
- Compared to peers, Congo shows below-average performance on a range of AML indicators with little to no improvement over time (RGC, 2018).

### Literature Review (selected findings)
- Resource curse literature: resource-rich countries often fail to grow as rapidly as those without resources (Sachs and Warner, 1994).
- Mechanisms: Dutch disease, macroeconomic volatility, debt overhang (Corden, 1984; Ploeg and Poelhekke, 2009).
- Oil can generate corruption and rent-seeking (voracity effect) that adversely affects long-run growth (Tornell and Lane, 1999).
- Empirical evidence: Arezki and Brückner (2011) — oil rents increase corruption in oil-exporting countries with high state participation; Arezki and Gylfason (2013) — larger resource rents lead to more corruption.
- Institutional quality matters: checks and balances can limit abuse of political power and misuse of resource rents (Bhattacharyya and Hodler, 2009; Elbadawi and Soto, 2016).
- Corruption leads to collusion between public and private agents, misallocation of public resources, and preservation of poor governance when private agents influence policy design (Rose-Ackerman, 1996; World Bank, 2007; Mauro, 1996; Tanzi, 1998; Kaufmann and Wei, 1999).

### III. Oil Revenue Management — Key Corruption Vulnerabilities
- Three main sources of corruption risks:
  - (i) Production Sharing Agreements (PSAs)
  - (ii) Inadequate budget reporting and misallocation of oil funds
  - (iii) The national oil company, the Société Nationale Pétroliere du Congo (SNPC)

A. Production Sharing Agreements (PSAs)
- PSAs: allow state ownership of resources while granting exploration/production rights to private contractors; contractors recover costs against a share of production.
- 2016 Hydrocarbons Code: enacted by Parliament but lacking implementing regulations; requires Parliament to approve all PSAs and publication in the official gazette.
- Lack of transparency: some contractual terms (e.g., amount of the signature bonus) not transparent; exemptions granted to oil companies are not published annually; operating costs claimed are not audited.
- Negotiations are case-by-case and complex, open to abuse; authorities offered more generous fiscal terms in 2015 affecting about half of oil production since 2015.
- Impact on government share of oil production:
  - Government share reduced from "57 percent in 2012–14" to "43 percent in 2015" and to "around one-third in later years".
  - Simulations: had the government retained old fiscal terms, the oil price decline would have reduced government share only to an average of "52 percent of total production".
- Upstream market concentration: two international oil companies control more than 70 percent of Congo’s oil production.
- Table of Old and New PSA Terms (% of Production) (as presented):
  - Royalties: Old fiscal terms "12%" → New fiscal terms "15.0%"
  - Cost Stop: "50%" → "50%"
  - TP (US$/bbl): "42" → "56"
  - Excess oil (Government shares): "50%" → "50%"
  - Profit oil (Government shares): "60%" → "50%"
  - Super profit oil (Government shares): "70%" → "66%"
  - Cost oil ($/bbl): "45" → "45"
  - Oil companies' share — Excess oil: "50%" → "50%"
  - Oil companies' share — Profit oil: "40%" → "50%"
  - Oil companies' share — Super profit oil: "30%" → "34%"

- Local content requirements in the 2016 Hydrocarbons’ Code:
  - National companies (more than 50 percent of shares held by individuals with Congolese nationality) must hold a 10 percent share in new joint ventures.
  - Contractors must employ Congolese personnel and prefer Congolese equipment/services if price is no more than 10 percent higher than foreign equivalents.
  - At least 25 percent of development and operational costs of oil fields must be sourced locally.
  - Non-compliance prevents recovery of additional costs.
  - Risk: rent-seeking if requirements are not implemented transparently; potential to favor politically connected local firms or conceal kickbacks.

B. Misallocation of Oil Funds and Inadequate Budget Reporting
- Oil revenue forecasting weaknesses: no clear methodology; inconsistencies between company end-of-year production/revenue and Ministry of Finance data; problematic reconciliation of production value under PSAs with Treasury receipts.
- Reconciliation with IMF staff assistance (period 2014–17) identified substantial off-budget oil revenue:
  - Oil-backed pre-financing arrangements contracted by SNPC with oil traders: "US$2.3 billion".
  - Special contracts with oil companies repaid with the equivalent of at least "US$ 0.5 billion in annual withholdings of government oil" used largely to finance infrastructure projects including a power station (EITI, 2014).
  - Additional oil revenue that bypassed budget processes: "about US$250 million per year" reportedly used to finance transfers to the oil refinery and payments of the government’s share in operating costs of five oil fields.
- Lack of enforcement of repatriation and surrender of foreign exchange under AML/CEMAC regulations: export proceeds must be repatriated and surrendered within one month; multinational companies tend to evade this requirement.

C. The Role of the SNPC
- SNPC created in 1998; dual mandate: manage its own share of production from joint ventures and manage the state’s oil share on behalf of the government.
- Regulations governing state oil resources are loosely implemented by SNPC, concealing corruption risks.
- SNPC remits proceeds of oil sales—net of its fees—to the Treasury on a quarterly basis (EITI, 2015).
- Accounting for oil revenue flows and financial transfers between government and SNPC remains inadequate; EITI reconciled quarterly transfers between producers and SNPC but could not reconcile SNPC disclosures with Treasury receipts.
- Reconciliation issues partly due to weak capacity and largely due to corruption vulnerabilities from weak corporate governance in SNPC.
- SNPC vulnerabilities:
  - Political Economy: PEPs can influence SNPC oil trading decisions including pre-financing and oil-backed infrastructure agreements; lack of transparency and oversight may have allowed proceeds to be channeled abroad to companies with obscure beneficial ownership or related to PEPs (Longchamp and Perrot, 2017).
  - Severe lack of published, timely, regular information on:
    - regulations for competitive public tenders for sale of oil,
    - objective criteria for selection of buyers/pre-qualification of suppliers,
    - list of oil buyers and/or traders,
    - volume of oil sales and pricing.
  - Opacity in oil trading raises mispricing concerns; World Bank (2007) reports SNPC sold state crude at prices "5 to 6 percent below market."

### IV. Public Investment and Public Service Delivery
- Public investment program aimed to fill infrastructure gaps in transport, energy, health, education; rapid scaling-up occurred in a poorly-managed, non-transparent, inefficient environment with strong perceptions of corruption (figure 6a) (RGC, 2018).
- Public investment surges risk poor project efficiency, waste, or fraud if not under transparent and adequate PFM systems; corruption opportunities arise across the investment project cycle (initiation, planning, allocation, implementation, procurement).
- Planning-phase risks:
  - Limited information on public investment plans including PPP strategy; programming and budgeting for public investment are weak and poorly coordinated.
  - No clear guidelines or regulatory framework for PPP; no clear and objective criteria for project selection.
  - Projects often lack rigorous technical, economic, and financial appraisal; where appraisals exist they do not undergo independent external review and are not published.
  - Major projects (including those funded by development partners and PPPs) are not systematically scrutinized by a central ministry with input from independent agency or experts prior to budget inclusion.
- Allocation-phase risks:
  - Lack of transparency provides opportunities for PEP influence; anecdotal evidence that construction contracts often allocated to members of governing coalition, especially for projects providing high-value consumption goods to the elite (Bertelsmann Transformation Index (BTI), 2016).
  - Firm survey data: around "75 percent" of firms were expected to give gifts to secure a government contract.
- Execution-phase risks:
  - Discretionary extra-budgetary investment spending has occurred, for example oil barter agreements.

*Source: RGC, 2018.*

### section III. The corruption risk associated with such agreements is that the selected infrastructure

### section III. The corruption risk associated with such agreements is that the selected infrastructure projects have bypassed official budget processes for selection, qualification and monitoring.

### Vulnerabilities of Infrastructure Investment to Corruption
- Planning and allocation vulnerabilities
  - Weak coordination and planning of investment needs.
  - Lack of rigorous project appraisal.
  - Politically driven project selection.
  - Use of extra-budgetary funds.
  - Oil barter investment agreements.
- Implementation vulnerabilities
  - Inefficient and non-transparent procurement.
  - Lack of effective internal control and internal audit.
  - Unreported data on investment activities.
  - Lack of external audit.
  - Uncontrolled and unreported bank accounts.
- Procurement and PFM weaknesses described
  - Public procurement may endow excessive discretion to public officials when selecting private sector vendors or bidders.
  - Processes are often not transparent and legislative, regulatory, and institutional frameworks are weak.
  - Projects sometimes tendered competitively, but the public does not have access to complete, reliable and timely procurement information.
  - No available data on public tendering versus direct procurement.
  - Other risks: insufficient controls of the procurement process; absence of mechanisms to impose sanctions when regulations are breached; weak capacity of civil servants conducting procurement in line ministries.
  - Only a limited number of procurement audits have been conducted in recent years, and these excluded high-value contracts.
- Consequences
  - Selected projects often are not the most productive or efficient and are carried out at excessive costs (RGC, 2018).
  - Projects may not significantly improve access to services (figures 6b–6d referenced).
  - Example investments deemed inefficient by CSOs and other stakeholders: the Kintélé National Stadium, the Imboulou Dam Project, and the Congo Power Station.

### Perceptions of Corruption and Impact on Doing Business and Service Access
- Key statistics on access and perceptions
  - 10 percent of the population has no access to electricity.
  - Only half of those in the poorest quintile have access to safe water compared to 90 percent for the richest quintile (World Bank, 2017a).
  - Findings from the 2009 Investment Climate Assessment (ICA) survey for Congo: 65 percent of firms perceive corruption to be a major constraint to business.
  - Close to 40 percent of firms have experienced at least one bribe request and were expected to give gifts to tax officials; this ratio increased to 82 percent for public officials.
  - Some firms were expected to make informal gifts or payments to apply for electricity or water connection.
- Institutional changes noted
  - Introduction of a new procurement law in 2009, establishment of a complaint’s mechanism review for monitoring and processing appeals, and operationalization of the existing Public Procurement Regulatory Authority.
  - The law requires that procurement complaints be reviewed by an independent body, but it is not known whether such reviews have been carried out or are rigorously enforced.

### DIGNAR Model: Simulating Dividends from Anti-Corruption Reforms
- Model and reform channels incorporated
  - DIGNAR: a real dynamic neoclassical open economy model with traded, non-traded, and natural resource sectors; accounts for investment inefficiency, limited absorptive capacity and learning by doing externalities.
  - Anti-corruption reforms modeled to:
    - (i) reduce bribery/distortions (captured by an implicit tax similar to a bribe rate) to boost private sector investment;
    - (ii) improve public investment processes to raise public investment efficiency and translate into a larger capital stock;
    - (iii) make government bureaucracy more efficient to reduce tax evasion, widen the tax base and increase tax revenues;
    - (iv) improve oil sector governance to correct mispricing of Congolese crude oil exports leading to higher oil fiscal revenues.
- Baseline scenario calibration (ambitious but realistic)
  - Reduction of bribes would boost private sector investment within ten years from 14 to 16 percent of GDP, advancing Congo by a decile in the distribution of SSA countries.
  - Public investment efficiency would rise from 0.43 to 0.58 (the median level of SSA countries).
  - Non-oil revenue would increase by 2 percentage points of GDP.
  - Mispricing correction of Congolese crude oil exports would result in an additional 7 percent of total oil revenues.
- Baseline simulation outcomes
  - Reforms can increase the level of real non-oil output by 18 percent in 10 years, implying approximately an additional growth of 1.8 percent per year on average.
  - Crowding-in effects on private consumption and investment.
  - Anti-corruption reforms would reduce public debt at a rate of about 3 percent of GDP per year.
  - 10 percent of the increase in growth and almost one third of the reduction in public debt is the outcome of improved oil sector governance.
- Table 2: Average annual effects over a 10-year horizon (percentage points)
  - Additional annual GDP growth, by reform in isolation:
    - Reducing Firms’ distortions: 0.9
    - Enhancing Public investment efficiency: 0.4
    - Enhancing revenue mobilization: 0.2
    - Correction of oil mispricing: 0.2
  - Average annual reduction in the public-debt-to-GDP ratio, by reform in isolation:
    - Reducing Firms’ distortions: 0.8
    - Enhancing Public investment efficiency: 0.6
    - Enhancing revenue mobilization: 0.2
    - Correction of oil mispricing: 0.8

### Alternative Scenarios and Their Calibrations and Outcomes
- Second scenario: partial reversal of reforms after three years (assumptions)
  - Private investment declines to 14.5 percent of GDP.
  - Public investment efficiency deteriorates to 0.47.
  - Non-oil revenue declines by 0.5 percentage points of GDP.
  - Oil fiscal revenues decline by 1.75 percent.
- Second scenario outcomes
  - Anti-corruption reforms would yield an average increase in non-oil growth of 0.8 percent per year.
  - Decrease in public debt by 2.25 percent of GDP per year.
- Third scenario: conservative (less ambitious) calibration
  - Private sector investment increases from 14 to 15 percent of GDP.
  - Public investment efficiency increases to 0.5375.
  - Non-oil revenue mobilization increases by 2 percentage points of GDP.
  - Oil revenues would be 3 percent higher.
- Third scenario outcomes
  - Average increase in non-oil growth of about 1 per year.
  - Reduces public debt by 2 percent of GDP per year.
- Robustness
  - Additional simulations show economic dividends remain significant even under partial reversal or less ambitious reforms.

### Policy Recommendations and Concluding Findings
- Priority reform areas identified
  - Reduce bribes to public officials and other distortions affecting firms.
  - Improve transparent public investment processes and “invest in investing” to raise public investment efficiency.
  - Reduce tax evasion to widen the tax base and increase non-oil revenue.
  - Improve oil sector governance to correct mispricing and increase oil fiscal revenues.
- Specific measures already taken or proposed by authorities
  - Published a government-approved diagnostic study on governance informing a governance and anti-corruption strategy.
  - Preparing draft laws to establish an anti-corruption commission with investigative powers and introduce asset declaration requirements for senior political figures.
  - Measures to improve public investment efficiency: publish detailed information on level and composition of public investment; conduct an investment tracking survey; strengthen external controls by adopting a law on the organization and functions of the supreme audit institution (Cour des Comptes et Discipline Budgétaire, CCDB) and its implementing regulations; restructure internal audit system and establish coordination between internal and external audit institutions.
  - Oil sector governance steps: 2017 decree with revised statutes for the SNPC clarifying accountability (Article 59 of the 2017 Statutes for SNPC); increased transparency of information exchange between the Ministry of Finance, the Ministry of Hydrocarbons, and the SNPC; submission in late 2018 of draft amendments requiring the SNPC and its subsidiaries to publish audited financial statements; SNPC published online oil production sharing agreements and agreed to publish oil-backed contracts.
- Additional reform recommendations for the oil sector
  - State audits of recovery costs claimed by oil companies.
  - SNPC should publish detailed information on oil volumes, prices, sales and buyers to reduce corruption risks related to oil trading.
  - Enhanced AML framework to deter and detect illicit transactions related to oil trading.
  - Subject all financial flows between the SNPC and the state general budget to independent audit and oversight.
- Expected macro-fiscal impact if reforms are implemented effectively
  - Growth could increase by up to 0.8 to 1.8 percent per year over the next 10 years, depending on magnitude of reforms.
  - Debt could decline by 2.25 to 3 percent of GDP every year over the same period.
  - Improvements in oil sector governance alone account for around 10 percent of the increase in growth and one-third of the reduction in public debt.
- Implementation caveats
  - Benefits depend on quality of implementation and compliance with reporting obligations.
  - Measures should be combined with reform of PSA terms and measures to reduce corruption risks in oil trading.
  - The expiry of some PSAs over the next few years offers an opportunity to renegotiate contracts with better terms for the government.
  - Commitment at all levels to the medium-term governance strategy is critical for reducing macro-fiscal costs of corruption.

*IMF staff paper: section III and related analysis from the referenced document.*

### REFERENCES

### wpiea2019121 - REFERENCES

### DIGNAR model overview
- The Debt, Investment, Growth and Natural Resources (DIGNAR) model (Melina and others, 2016) is a real dynamic open economy model with traded, non-traded, and natural resource sectors.
- Key modeling features:
  - Neoclassical: abstracts from nominal rigidities and assumes perfectly competitive markets.
  - Integrates the investment-growth nexus, fiscal reaction function, and private sector responses to public investment and fiscal actions.
  - Emphasizes links between public investment, growth, and debt to analyze debt sustainability in developing economies.
- Transition dynamics:
  - While good public investment projects lead to long-run crowding-in of private investment, the transition can feature crowding-out, especially early on and if foreign financing is insufficient.

### Governance extensions in the model
- The model is extended to capture four governance-related distortions along the lines of IMF (2018a):
  1. A reduction in bribes and other distortions that discourage firms from investing and creating jobs (captured as a fraction of output wasted by weak governance, κt).
     - Firm production: Yt = f(Kt, Lt, KtG)
     - Firm profit: Πt = (1−κt) Yt − wt Lt − Rkt Kt
     - Weak governance creates a wedge (1−κt) < 1 between factor prices and marginal products, lowering labor demand, investment, and output.
  2. A reduction in public investment efficiency (εt ∈ (0,1)), so only εt ItG translates into productive public capital.
     - Public capital law of motion: Kt+1G = (1−δG) KtG + εt ItG
     - A fraction 1−εt of public investment spending is wasted under weak governance.
  3. Loss of tax revenues due to inefficiencies (ϖt ∈ (0,1)), capturing tax evasion and revenue leakage.
     - Government debt law of motion (with only public investment and consumption tax): Bt+1 = Rt Bt + ItG − (1−ϖt) τtC Ct
     - Higher ϖt reduces effective revenue, raising debt for a given tax base or requiring higher tax rates to stabilize debt.
  4. Mispricing or pricing practices in the oil sector that reduce government oil revenues (ρt captures the loss).
     - Oil revenue specification: Revt = (1−ρt) st τO ptO yto
     - Revenues are proportional to the value of oil production, adjusted for governance losses.

- Households:
  - DIGNAR assumes two types of households: intertemporal optimizing households with access to capital and financial markets, and rule-of-thumb households that consume all disposable income each period.

### Model mechanics emphasized
- Investment-growth nexus:
  - Public investment increases public capital, which raises marginal productivity of private capital and labor, stimulating private investment.
  - Inefficiencies and absorptive capacity constraints limit effective public capital accumulation.
- Fiscal reaction function:
  - Government financing options include grants and concessional borrowing (exogenous) and external commercial/domestic borrowing (endogenous).
  - Taxes and transfers respond to stabilize debt over time.
- Private sector response:
  - Private investment and consumption respond to public investment and fiscal adjustments, generating crowding-in and crowding-out effects depending on project quality and financing.

### Calibration to the Republic of Congo (initial steady state: 2013–17 averages)
- Targets (Percent of GDP unless otherwise indicated):
  - Average GDP growth rate 1.8
  - Exports 63.0
  - Imports 82.9
  - Government consumption 26.2
  - Government investment expenditures 21.1
  - Private investment 13.6
  - Oil GDP 49.2
  - Government domestic debt 18.0
  - Government external commercial debt 25.6
  - Grant 0.6
  - Concessional debt 38.0
- Remaining parameters not available for Congo are set at average values for LICs and taken from Melina and others (2016).
- The choice of governance parameters is discussed in Section IV (referenced in source content).

*Source: wpiea2019121 - REFERENCES (IMF PDF chapter).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019121.pdf_