## _pdp02

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---

### Institutional Arrangements in the Oil Sector (Box 1)

- Structure of the oil sector and contractual framework:
  - Main oil-producing companies and shares of total production:
    - Total: 68 percent
    - Pecten/Shell Cameroon: 23 percent
    - Perenco: 9 percent
  - Government representation:
    - Société Nationale des Hydrocarbures (SNH) is the national oil company under the aegis of the secretary general at the presidency.
    - SNH roles:
      - Assist the authorities in their financial relations with the private oil companies.
      - Sell the government’s share of oil output (both in the international market and to the national oil refinery).
      - Transfer resulting oil revenue (after accounting for expenditures) to the treasury.
    - SNH operational involvement:
      - Marginally involved in oil production; exploits jointly with Perenco an oil field that accounted for 1 percent of the country’s output in 2004.
      - Holds a 20 percent stake in Total, Pecten, and Perenco and other stakes in downstream and non-oil activities.
  - Contractual arrangements:
    - Relations between private oil companies and SNH, including the tax regime, are contractually defined in the Production Sharing Agreements (PSAs).

- Production, reserves, and price dynamics:
  - Cameroon’s crude quality and pricing:
    - Cameroon’s crude is heavy and was sold at prices on average US$2/barrel below the World Economic Outlook (WEO) price (a composite of three types of crude) over the two last decades.
    - The price differential recently widened due to an increase in world demand for higher-quality crude.
  - Reserve revisions and production outlook:
    - Proven reserves have been revised upward by 13 percent in the past two years due to intensified deeper drilling in exploited fields.
    - Oil experts project that production will continue to decline over the medium to long term, but at an uncertain and likely slower pace.
  - Exploration prospects:
    - Several new exploration contracts were signed; no major new field discovered, but technology upgrades and rising international oil prices are expected to stimulate continued exploration.

- Pipeline activities and the Chad-Cameroon pipeline economic impact (Box 2):
  - Upstream composition:
    - Upstream activities mainly consist of off-shore production and pipeline services for transit of Chad’s oil production (about 200,000 barrels a day).
    - Pipeline activities do not provide significant value added.
  - Economic effects of the Chad-Cameroon pipeline project:
    - Temporary construction contribution in 2001–03:
      - Local spending from project inception (October 2000) to completion (December 2003) amounted to CFAF 264 billion, or 3.8 percent of 2002 GDP.
      - Local employment peaked at almost 6,000 in 2002; permanent employment stabilized at around 700 local workers.
      - Total pipeline-related investment in Cameroon in 2001–03 amounted to 3 to 5 percent of GDP per year; net impact excluding spillovers was 0.5 to 2 percent per year.
      - Incremental effect on economic growth was relatively important, as evidenced by a slower rate of GDP growth in 2004–05 after project completion.
    - Transit fee revenue:
      - Transit fee: US 41 cents per barrel.
      - With a projected flow of 200,000 barrels a day, government revenue from the transit fee amounted to about 0.8 percent of total revenue in 2005 (0.2 percent of GDP).

- Fiscal significance and volatility of oil revenue:
  - Oil’s macroeconomic shares:
    - Oil output accounted for 7.5 percent of total GDP in 2004.
    - On a value basis, oil’s share in GDP in 2004 was close to its level 15 years earlier despite output decline, due to favorable oil prices and exchange rate effects.
  - Oil revenue time series and projections:
    - Oil revenue collection averaged 4.2 percent of GDP since 1990.
    - Historical extremes: low of 2.2 percent in 1994; high of 6.9 percent in 2001.
    - Based on current projections, oil revenue contribution is expected to remain within the range of 3–5.5 percent of GDP through the end of the decade.
  - Share of overall revenue and export “oil take”:
    - Oil revenue has accounted for an average of about one-fourth of overall revenue since 1990.
    - That share has fluctuated between 16 and 35 percent, underscoring oil revenue volatility for fiscal policy.
    - The oil revenue accruing to the government accounts for almost two-thirds of the value of oil exports (the “oil take”), compared with an average of 53 percent in other sub-Saharan African oil-producing countries.
  - Exchange rate and price level context:
    - Oil prices in CFA francs were, in nominal terms, 3½ times higher in 2004 than in 1990 and, in real terms (CPI adjusted) twice as high.
    - Drivers: world oil prices doubled; the CFA franc depreciated against the U.S. dollar, mostly due to the 1994 devaluation of the CFA franc against the French franc by 50 percent (and some appreciation since the CFA franc was pegged to the euro in 1999).

- Transparency, intergenerational considerations, and policy implications:
  - Importance of transparency:
    - Empirical work indicates transparency and good governance are important to effective policymaking, economic growth, and poverty reduction.
    - The oil sector is particularly vulnerable to mismanagement and abuse because of the magnitude of revenues, enclave-sector nature, and complexity of fiscal arrangements.
    - Strengthening transparency in the oil sector can help change overall perceptions about governance in the country.
  - Exhaustibility and intergenerational equity:
    - Oil is nonrenewable national wealth; principle of intergenerational distribution of government income flows should apply.
    - Given the relatively modest level of government revenue from oil and Cameroon’s capacity for quality spending, immediate use of oil revenue is considered appropriate rather than saving a share for financial income.
    - Quality spending (productivity-enhancing expenditures) is essential to ensure future generations benefit equally; oil resources should be used in line with medium to long-term priorities set out in the Poverty Reduction Strategy Paper (PRSP), drafted in 2003 and annually updated thereafter.

- Identified institutional gaps:
  - Despite earlier efforts to improve transparency in the oil sector, the report finds substantial scope for further improvements in four main areas (the source identifies the existence of these four main areas but does not enumerate them in this box).

### Efforts to Promote Transparency in the 1990s (Box 3)

- Early efforts and data improvements:
  - The first independent audit of SNH was conducted in 1991 by an international accounting firm and was made available to Fund staff.
  - SNH began routinely to provide Fund staff with data on oil production, exports, prices, revenues, and costs.
  - Regular information on budgetary payments directly made by SNH through cash advances has been made available to Fund staff beginning only in 2005.
  - SNH adopted a new accounting system in line with international standards in 2000.
  - An operational and managerial audit conducted in 2000 raised the issue of whether SNH should maintain activities beyond its initial mandate; authorities agreed to a review of the respective roles of SNH and the private sector but have not yet initiated it.
  - A coordination mechanism was established in the late 1990s, including monthly meetings between SNH and the government’s Technical Monitoring Committee (CTS) to review SNH’s cash payments on the basis of effective production/revenue data.

- Perception and causes of limited transparency:
  - Broad perception of lack of transparency in oil earnings and revenue attributed to:
    - Complexity of the production-sharing agreements (PSAs), limiting understanding of institutional arrangements.
    - Limited publication of basic information regarding PSAs; publishing key parameters would support better public understanding of oil sector flows.
  - Specific allocation example:
    - Oil companies receive between 13 and 22 percent of the oil profit, with the remaining portion accruing to the government either through corporate taxes paid by the private oil companies or through transfer by SNH of the oil profit generated by the sales of the government’s share of oil output.
    - Note: "Oil profit is defined here as production minus operating costs. The oil profit percentage per field will be higher for fields that are more difficult to access and carry higher exploration risks (which are not reimbursed if unsuccessful)."

- Distribution of oil resources (Table 1: Cameroon: Distribution of Oil Resources, 2003–04; in percent):
  - Sales: 100 100
  - Operating costs: 27 29
  - Government revenues: 59 57
  - Oil companies' earnings 1/: 14 14
  - Note: "1/ This corresponds broadly to the net profit after tax of the private oil companies, mostly allocated to dividends; 20 percent of the dividends are redistributed to SNH as a shareholder."

- Key transparency problems in transfers of oil revenue:
  1. Government does not always receive the full revenue amount it should receive.
     - Theoretically SNH should transfer its oil profit to the budget at month-end with deductions only for operating costs shared with private oil companies. In practice SNH makes additional deductions.
     - Some deductions are directly related to oil activities (e.g., provisions for decommissioning), others are not (e.g., administrative costs related to the construction of the Chad-Cameroon pipeline or fuel purchases for the government).
     - Corporate tax payments to the treasury (made by private oil companies in three equal installments based on the profits earned in the previous year) and the amount of dividends to be transferred to SNH are difficult to check for consistency because the companies are not legally required to disclose them publicly.
     - Footnote: "These additional costs reduced the actual revenue transferred to the government by nearly 10 percent during 2003–04."
  2. SNH cash advances reduce the payments the government receives.
     - Cash advances are made in response to pressing government payment requests (typically national security, sovereign entities, or public enterprises).
     - The corresponding expenditures and revenues are imputed ex-post in budget execution, circumvent normal budgetary procedures and (until end-2004) could be made without the minister of finance’s authorization.
     - The system of cash advances distorts budget law elaboration and functional reporting of actual composition of spending.
  3. Lack of clarity in the transfer and use of dividends received by SNH.
     - SNH separates activities it conducts on behalf of the government from commercial activities (direct but marginal involvement in production and holdings in mostly oil-related companies).
     - Questions raised:
       - Should SNH be directly involved in oil production activities?
       - How should dividends received from SNH’s stakes in oil companies be used?
     - Recent practice: SNH Board has only partly redistributed these dividends; some allocated to investment in oil production, others held as unused liquidity.
     - "Amounting to 0.7 percent of GDP at end-2003."
     - Recommendation: SNH should adopt a clear and publicly-stated policy on the use of dividends received from private oil companies, including their systematic and complete transfer to the government, or any alternative uses.
     - SNH officials: savings are needed to finance a possible (but yet unspecified) expansion of the company’s commercial activities.

- Cash advances by SNH (Table 2: Cameroon: Cash Advances by SNH; in percent):
  - Distribution by recipient (2003, 2004, 2005 (Jan.-July)):
    - Presidency: 21.7, 37.5, 24.8
    - Ministry of Defense: 34.1, 32.8, 63.5
    - Cameroon Airlines: 32.0, 15.0, 5.7
    - Others: 12.2, 14.6, 6.0
    - Total: 100.0, 100.0, 100.0
  - In percent of SNH's revenue: 24.6, 23.0, 19.3
  - In percent of total government revenue: 5.1, 4.9, 5.0
  - In percent of budget expenditures 1/: 13.1, 10.8, 14.4
  - Memorandum items — In percent of budgetary allocation 2/:
    - Presidency: 44.5, 71.1, 70.2
    - Ministry of Defense: 59.7, 54.0, 92.6
  - Notes:
    - "1/ Total expenditures excluding interest, salaries and pensions, foreign-financed expenditure, and restructuring expenditures."
    - "2/ Excluding salaries and pensions."

- Fiscal rule, variability of oil revenue, and implications for fiscal policy:
  - Principle: All government revenues, including those deriving from oil, should be accounted for in the budget unless well-specified and monitorable alternative arrangements are in place.
  - Oil revenue volatility impact:
    - Oil revenue accounted on average for one-fourth of total revenue over the last 20 years.
    - Price- or volume-driven variations in oil revenue can disrupt fiscal and macroeconomic balances and complicate budgetary planning and prioritization.
  - Past rule implementation weaknesses:
    - In the second Fund-supported PRGF arrangement (2000–04), the implicit rule targeted broadly the overall balance at zero and the nonoil balance negative by the amount of oil revenue; the nonoil primary balance was contingent on the level of oil revenue.
    - Implementation required strict monitoring and strong ownership, which proved weak; the rule was applied on a cash basis while Cameroon accumulated large domestic arrears in 2003–04, undermining the approach.
    - Footnote: "Net domestic arrears rose by about 5 percent of GDP, resulting in an increase of domestic debt to about 18 percent of GDP (excluding sizable contingent government liabilities in ailing public enterprises)."

- Progress by 2005 to address key gaps (highlights):
  - Measures implemented in 2005 aimed to strengthen budgetary process and data dissemination.
  - Fiscal program for 2005–08 designed to free policymakers from ongoing major adjustments in core fiscal operations and to allow focus on overall fiscal strategy:
    - Overall balance target set so that if oil revenue fluctuates, primary expenditure does not need adjustment as long as changes do not put at risk fiscal sustainability over the medium term.
    - If oil revenue declines more than projected, primary expenditures are not adjusted but initially projected domestic debt/arrears repayments is/are (i.e., lower net repayment of domestic debt/arrears offsets deterioration of overall balance).
    - If oil revenue is higher than programmed, windfall used to accelerate domestic debt/arrears payments.
  - Forecasting approach:
    - Oil price projected on basis of the WEO but includes a safety margin and a discount to reflect Cameroon’s lower crude quality.
    - Program includes a sensitivity scenario indicating implications of a possible decline of oil prices assumed at € 25/barrel.
    - "Cameroon’s crude averaged €19/barrel over the past 20 years. It is projected to average €37/barrel during the program period."
    - Based on projections in September 2005, the outstanding stock of domestic debt would decline from 18 percent of GDP in 2004 to about 10 percent in 2010 at program prices; the stock would increase to 23 percent if prices were instead at €25/barrel.
    - Footnotes reference empirical volatility of oil prices and the characterization of oil-price behavior.

- Limitations in information dissemination and public scrutiny:
  - Publication of oil sector data had been very limited, preventing effective public scrutiny and debate.
  - Public (parliament and civil society) needs information on how oil resources are generated and spent to hold policymakers accountable.
  - Involving experts and nongovernmental organizations can help explain complex issues and promote public debate.
  - Encouraging active parliamentary engagement at the time of the budget law and the loi de règlement can support oversight.

- Steps taken in 2005 (summarized actions):
  - Commitments under programs agreed with the IMF included:
    - Limiting the level of SNH’s additional costs related to oil production activities to a fixed annual amount.
    - Limiting SNH’s cash advances only to sovereign spending sector in the second half of 2005 and eliminating them in 2006.
    - Undertaking cash advances only after prior approval by the minister of finance and within remaining budgetary allocations.
    - A September 2005 decree increased budgetary allocations for ministries that had relied on advances above existing authorization levels to reflect SNH’s advances in proper expenditure categories; intended to serve as benchmark for 2006 budget law allocations.
  - Data dissemination and public scrutiny measures in 2005:
    - Oil sector data published on the website of SNH and of the prime minister’s office, including quarterly production and revenues, and SNH’s annual audits up to 2003.
    - Cameroon participating in the Joint Oil Data Initiative (JODI).
    - Establishment (since July 2005) of a committee and technical secretariat to monitor implementation of EITI principles; draft EITI action plan sent in October 2005 for discussions with civil society and oil companies.
    - Authorities approached oil companies to seek approval to publish key parameters of the PSAs.

- Policy recommendations and directions going forward:
  - Provide information on production-sharing agreements (PSAs):
    - Publish key parameters to illustrate allocation between oil companies, SNH, and the government while recognizing contractual confidentiality concerns.
  - Strengthen budget transparency:
    - Full and timely transfer of oil revenues to the treasury.
    - Gradually shift to a classification by economic nature.
    - Ensure SNH avoids cash advances from 2006 and limits “additional costs” to strictly oil-related activities; compliance is key.
    - Formulate and publish clear rules on the use of dividends collected by SNH on behalf of the government, including systematic transfer or alternative uses.
    - Consider presenting oil sector budget data based on the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001) provided budget reporting is sufficiently developed.
  - Facilitate further public scrutiny:
    - Make the technical secretariat of the EITI committee fully operational quickly.
    - Proceed with consultations with private sector and civil society and finalize and implement a consensus-based action plan.
    - Improve timeliness of SNH’s audits and their publication.
    - Routinely publish on a quarterly (or monthly) basis information on total oil production, prices, and revenue to the government.
  - Implement EITI principles beyond progress already made to indicate full compliance with international standards on oil transparency.

### Implementing EITI Principles (Box 5)

- Overview of EITI implementation:
  - EITI mainly consists of entrusting an independent administrator to compare oil sales and revenue as declared by oil companies and as recorded by the government.
  - Out of some 20 countries that have signed up to the EITI, eight were recognized at an EITI conference in March 2005 to be actively implementing the initiative: Azerbaijan, Ghana, Kyrgyz Republic, Nigeria, Republic of Congo, São Tomé and Principe (STP), Timor Leste, Trinidad and Tobago.
  - So far only Azerbaijan is regularly publishing oil revenue information consistent with the EITI principles.

- Implementation measures reported on the EITI website:
  - (i) publishing data on production and oil revenues (Azerbaijan, Timor Leste, Republic of Congo, Ghana)
  - (ii) publishing the main fiscal parameters from production sharing/concession agreements (Timor Leste, Republic of Congo, STP)
  - (iii) conducting external audits of public oil companies on an annual basis and publishing them (Republic of Congo, Nigeria)

- Additional country action and progress:
  - Cameroon established an EITI committee and secretariat in October 2005.
  - Significant progress in Cameroon has already been achieved on (i) publishing data on production and oil revenues and (iii) conducting external audits of public oil companies and publishing them.
  - If efforts to strengthen transparency are consistently pursued in Cameroon, expected outcomes include:
    - more effective economic and fiscal policymaking;
    - improved business environment;
    - more resources freed for investment in social sectors and basic infrastructure;
    - support for economic growth and poverty reduction efforts in Cameroon.

- Appendix — Production Sharing Agreements (PSAs) in Cameroon: key elements:
  - The PSAs consist of the following arrangements:
    - Sharing production between the SNH and the private oil companies. Private oil companies receive from the government the right to explore/exploit a specific field, but have to share any production generated from the field with the SNH. The split varies from 70/30 in favor of SNH to 50/50.
    - On average, the split is 63/37 in favor of SNH.
    - Sharing operating costs (i.e., depreciated development costs, depreciated exploration costs, and financial charges). In most cases, the split is 50/50.
    - Ensuring a minimum income for the oil companies. In the majority of the fields, the guaranteed fixed income is equivalent to 13 percent of the mining return (rente minière). The mining return is defined as the difference between total oil receipts (the sum of the sales by SNH and the private oil companies) and operating costs. However, to encourage oil companies to explore in areas within their field that require higher exploration costs (deeper funds), the guaranteed fixed income rate can go up to 22 percent.
    - Applying corporate taxation and royalties. Corporate tax is 57.5 percent. Given the specific U.S. regulations on dividends abroad, the rate is exceptionally set at 48.65 percent for U.S. companies. The guaranteed fixed income rate, however, remains identical for both U.S. and non-U.S. companies. A royalty (redevance) is paid either by the private oil company to the SNH or by the SNH to the private oil company to ensure that the guaranteed income is attained precisely.

- Operational and fiscal safeguards in PSAs:
  - SNH is associated with Perenco for the exploitation of a small field (EBOME) where the split is 85/15 in favor of Perenco.
  - Since SNH is not a direct producer (with the exception of EBOME), SNH needs to reimburse oil companies operating in the field. However, a reimbursement limit is set on operating costs for any fiscal year. Total reimbursements by SNH are limited to the difference between the value of SNH’s share of production and the value of 40 percent of the total production.
    - Example: if the production split is 70 percent in favor of SNH, SNH retains at least 40 percent and the reimbursement limit amounts to 30 percent of field production. This would imply that operating costs would amount to 60 percent of field production with a cost split of 50/50, which is an unlikely situation for a “profitable” field.

*Source: _pdp02 - Box 1; Box 3; Box 5 (as supplied).*

### Box 1. Institutional Arrangements in the Oil Sector

### Box 1. Institutional Arrangements in the Oil Sector

### Structure of the oil sector and contractual framework
- Main oil-producing companies and shares of total production:
  - Total: 68 percent
  - Pecten/Shell Cameroon: 23 percent
  - Perenco: 9 percent
- Government representation:
  - Société Nationale des Hydrocarbures (SNH) is the national oil company under the aegis of the secretary general at the presidency.
  - SNH roles:
    - Assist the authorities in their financial relations with the private oil companies.
    - Sell the government’s share of oil output (both in the international market and to the national oil refinery).
    - Transfer resulting oil revenue (after accounting for expenditures) to the treasury.
  - SNH operational involvement:
    - Marginally involved in oil production; exploits jointly with Perenco an oil field that accounted for 1 percent of the country’s output in 2004.
    - Holds a 20 percent stake in Total, Pecten, and Perenco and other stakes in downstream and non-oil activities.
- Contractual arrangements:
  - Relations between private oil companies and SNH, including the tax regime, are contractually defined in the Production Sharing Agreements (PSAs).

### Production, reserves, and price dynamics
- Cameroon’s crude quality and pricing:
  - Cameroon’s crude is heavy and was sold at prices on average US$2/barrel below the World Economic Outlook (WEO) price (a composite of three types of crude) over the two last decades.
  - The price differential recently widened due to an increase in world demand for higher-quality crude.
- Reserve revisions and production outlook:
  - Proven reserves have been revised upward by 13 percent in the past two years due to intensified deeper drilling in exploited fields.
  - Oil experts project that production will continue to decline over the medium to long term, but at an uncertain and likely slower pace.
- Exploration prospects:
  - Several new exploration contracts were signed; no major new field discovered, but technology upgrades and rising international oil prices are expected to stimulate continued exploration.

### Pipeline activities and the Chad-Cameroon pipeline economic impact (Box 2)
- Upstream composition:
  - Upstream activities mainly consist of off-shore production and pipeline services for transit of Chad’s oil production (about 200,000 barrels a day).
  - Pipeline activities do not provide significant value added.
- Economic effects of the Chad-Cameroon pipeline project:
  - Temporary construction contribution in 2001–03:
    - Local spending from project inception (October 2000) to completion (December 2003) amounted to CFAF 264 billion, or 3.8 percent of 2002 GDP.
    - Local employment peaked at almost 6,000 in 2002; permanent employment stabilized at around 700 local workers.
    - Total pipeline-related investment in Cameroon in 2001–03 amounted to 3 to 5 percent of GDP per year; net impact excluding spillovers was 0.5 to 2 percent per year.
    - Incremental effect on economic growth was relatively important, as evidenced by a slower rate of GDP growth in 2004–05 after project completion.
  - Transit fee revenue:
    - Transit fee: US 41 cents per barrel.
    - With a projected flow of 200,000 barrels a day, government revenue from the transit fee amounted to about 0.8 percent of total revenue in 2005 (0.2 percent of GDP).

### Fiscal significance and volatility of oil revenue
- Oil’s macroeconomic shares:
  - Oil output accounted for 7.5 percent of total GDP in 2004.
  - On a value basis, oil’s share in GDP in 2004 was close to its level 15 years earlier despite output decline, due to favorable oil prices and exchange rate effects.
- Oil revenue time series and projections:
  - Oil revenue collection averaged 4.2 percent of GDP since 1990.
  - Historical extremes: low of 2.2 percent in 1994; high of 6.9 percent in 2001.
  - Based on current projections, oil revenue contribution is expected to remain within the range of 3–5.5 percent of GDP through the end of the decade.
- Share of overall revenue and export “oil take”:
  - Oil revenue has accounted for an average of about one-fourth of overall revenue since 1990.
  - That share has fluctuated between 16 and 35 percent, underscoring oil revenue volatility for fiscal policy.
  - The oil revenue accruing to the government accounts for almost two-thirds of the value of oil exports (the “oil take”), compared with an average of 53 percent in other sub-Saharan African oil-producing countries.
- Exchange rate and price level context:
  - Oil prices in CFA francs were, in nominal terms, 3½ times higher in 2004 than in 1990 and, in real terms (CPI adjusted) twice as high.
  - Drivers: world oil prices doubled; the CFA franc depreciated against the U.S. dollar, mostly due to the 1994 devaluation of the CFA franc against the French franc by 50 percent (and some appreciation since the CFA franc was pegged to the euro in 1999).

### Transparency, intergenerational considerations, and policy implications
- Importance of transparency:
  - Empirical work indicates transparency and good governance are important to effective policymaking, economic growth, and poverty reduction.
  - The oil sector is particularly vulnerable to mismanagement and abuse because of the magnitude of revenues, enclave-sector nature, and complexity of fiscal arrangements.
  - Strengthening transparency in the oil sector can help change overall perceptions about governance in the country.
- Exhaustibility and intergenerational equity:
  - Oil is nonrenewable national wealth; principle of intergenerational distribution of government income flows should apply.
  - Given the relatively modest level of government revenue from oil and Cameroon’s capacity for quality spending, immediate use of oil revenue is considered appropriate rather than saving a share for financial income.
  - Quality spending (productivity-enhancing expenditures) is essential to ensure future generations benefit equally; oil resources should be used in line with medium to long-term priorities set out in the Poverty Reduction Strategy Paper (PRSP), drafted in 2003 and annually updated thereafter.

### Identified institutional gaps
- Despite earlier efforts to improve transparency in the oil sector, the report finds substantial scope for further improvements in four main areas (the source identifies the existence of these four main areas but does not enumerate them in this box).

*Source: _pdp02 - Box 1. Institutional Arrangements in the Oil Sector*

### Box 3. Efforts to Promote Transparency in the 1990s

### Box 3. Efforts to Promote Transparency in the 1990s

### Early efforts and data improvements
- The first independent audit of SNH was conducted in 1991 by an international accounting firm and was made available to Fund staff.
- SNH began routinely to provide Fund staff with data on oil production, exports, prices, revenues, and costs.
- Regular information on budgetary payments directly made by SNH through cash advances has been made available to Fund staff beginning only in 2005.
- SNH adopted a new accounting system in line with international standards in 2000.
- An operational and managerial audit conducted in 2000 raised the issue of whether SNH should maintain activities beyond its initial mandate; authorities agreed to a review of the respective roles of SNH and the private sector but have not yet initiated it.
- A coordination mechanism was established in the late 1990s, including monthly meetings between SNH and the government’s Technical Monitoring Committee (CTS) to review SNH’s cash payments on the basis of effective production/revenue data.

### Perception and causes of limited transparency
- A broad perception of a lack of transparency in oil earnings and revenue exists, attributed to:
  - Complexity of the production-sharing agreements (PSAs), limiting understanding of institutional arrangements.
  - Limited publication of basic information regarding PSAs; publishing key parameters (as in Table 1) would support better public understanding of oil sector flows.
- Specific allocation example from the text:
  - Oil companies receive between 13 and 22 percent of the oil profit, with the remaining portion accruing to the government either through corporate taxes paid by the private oil companies or through transfer by SNH of the oil profit generated by the sales of the government’s share of oil output.
  - Note: "Oil profit is defined here as production minus operating costs. The oil profit percentage per field will be higher for fields that are more difficult to access and carry higher exploration risks (which are not reimbursed if unsuccessful)."

### Distribution of oil resources (Table 1: Cameroon: Distribution of Oil Resources, 2003–04; in percent)
- Sales: 100 100
- Operating costs: 27 29
- Government revenues: 59 57
- Oil companies' earnings 1/: 14 14
- Note: "1/ This corresponds broadly to the net profit after tax of the private oil companies, mostly allocated to dividends; 20 percent of the dividends are redistributed to SNH as a shareholder."

### Key transparency problems in transfers of oil revenue
- Three main issues undermining transparency and assessment of budgetary resources:
  1. Government does not always receive the full revenue amount it should receive.
     - Theoretically SNH should transfer its oil profit to the budget at month-end with deductions only for operating costs shared with private oil companies. In practice SNH makes additional deductions.
     - Some deductions are directly related to oil activities (e.g., provisions for decommissioning), others are not (e.g., administrative costs related to the construction of the Chad-Cameroon pipeline or fuel purchases for the government).
     - Corporate tax payments to the treasury (made by private oil companies in three equal installments based on the profits earned in the previous year) and the amount of dividends to be transferred to SNH are difficult to check for consistency because the companies are not legally required to disclose them publicly.
     - Footnote: "These additional costs reduced the actual revenue transferred to the government by nearly 10 percent during 2003–04."
  2. SNH cash advances reduce the payments the government receives.
     - Cash advances are made in response to pressing government payment requests (typically national security, sovereign entities, or public enterprises).
     - The corresponding expenditures and revenues are imputed ex-post in budget execution, circumvent normal budgetary procedures and (until end-2004) could be made without the minister of finance’s authorization.
     - The system of cash advances distorts budget law elaboration and functional reporting of actual composition of spending.
  3. Lack of clarity in the transfer and use of dividends received by SNH.
     - SNH separates activities it conducts on behalf of the government from commercial activities (direct but marginal involvement in production and holdings in mostly oil-related companies).
     - Questions raised:
       - Should SNH be directly involved in oil production activities?
       - How should dividends received from SNH’s stakes in oil companies be used?
     - Recent practice: SNH Board has only partly redistributed these dividends; some allocated to investment in oil production, others held as unused liquidity.
     - "Amounting to 0.7 percent of GDP at end-2003."
     - Recommendation: SNH should adopt a clear and publicly-stated policy on the use of dividends received from private oil companies, including their systematic and complete transfer to the government, or any alternative uses.
     - SNH officials: savings are needed to finance a possible (but yet unspecified) expansion of the company’s commercial activities.

### Cash advances by SNH (Table 2: Cameroon: Cash Advances by SNH; in percent)
- Table rows (2003, 2004, 2005 (Jan.-July)) — distribution by recipient:
  - Presidency: 21.7, 37.5, 24.8
  - Ministry of Defense: 34.1, 32.8, 63.5
  - Cameroon Airlines: 32.0, 15.0, 5.7
  - Others: 12.2, 14.6, 6.0
  - Total: 100.0, 100.0, 100.0
- In percent of SNH's revenue: 24.6, 23.0, 19.3
- In percent of total government revenue: 5.1, 4.9, 5.0
- In percent of budget expenditures 1/: 13.1, 10.8, 14.4
- Memorandum items — In percent of budgetary allocation 2/:
  - Presidency: 44.5, 71.1, 70.2
  - Ministry of Defense: 59.7, 54.0, 92.6
- Notes:
  - "1/ Total expenditures excluding interest, salaries and pensions, foreign-financed expenditure, and restructuring expenditures."
  - "2/ Excluding salaries and pensions."

### Fiscal rule, variability of oil revenue, and implications for fiscal policy
- Principle: All government revenues, including those deriving from oil, should be accounted for in the budget unless well-specified and monitorable alternative arrangements are in place.
- Oil revenue volatility impact:
  - Oil revenue accounted on average for one-fourth of total revenue over the last 20 years.
  - Price- or volume-driven variations in oil revenue can disrupt fiscal and macroeconomic balances and complicate budgetary planning and prioritization.
- Past rule implementation weaknesses:
  - In the second Fund-supported PRGF arrangement (2000–04), the implicit rule targeted broadly the overall balance at zero and the nonoil balance negative by the amount of oil revenue; the nonoil primary balance was contingent on the level of oil revenue.
  - Implementation required strict monitoring and strong ownership, which proved weak; the rule was applied on a cash basis while Cameroon accumulated large domestic arrears in 2003–04, undermining the approach.
  - Footnote: "Net domestic arrears rose by about 5 percent of GDP, resulting in an increase of domestic debt to about 18 percent of GDP (excluding sizable contingent government liabilities in ailing public enterprises)."

### Progress by 2005 to address key gaps (highlights)
- Measures implemented in 2005 aimed to strengthen budgetary process and data dissemination (summarized in Box 4).
- Fiscal program for 2005–08 designed to free policymakers from ongoing major adjustments in core fiscal operations and to allow focus on overall fiscal strategy:
  - Overall balance target set so that if oil revenue fluctuates, primary expenditure does not need adjustment as long as changes do not put at risk fiscal sustainability over the medium term.
  - If oil revenue declines more than projected, primary expenditures are not adjusted but initially projected domestic debt/arrears repayments is/are (i.e., lower net repayment of domestic debt/arrears offsets deterioration of overall balance).
  - If oil revenue is higher than programmed, windfall used to accelerate domestic debt/arrears payments.
- Forecasting approach:
  - Oil price projected on basis of the WEO but includes a safety margin and a discount to reflect Cameroon’s lower crude quality.
  - Program includes a sensitivity scenario indicating implications of a possible decline of oil prices assumed at € 25/barrel.
  - "Cameroon’s crude averaged €19/barrel over the past 20 years. It is projected to average €37/barrel during the program period."
  - Based on projections in September 2005, the outstanding stock of domestic debt would decline from 18 percent of GDP in 2004 to about 10 percent in 2010 at program prices; the stock would increase to 23 percent if prices were instead at €25/barrel.
  - Footnotes reference empirical volatility of oil prices and the characterization of oil-price behavior.

### Limitations in information dissemination and public scrutiny
- Publication of oil sector data had been very limited, preventing effective public scrutiny and debate.
- Public (parliament and civil society) needs information on how oil resources are generated and spent to hold policymakers accountable.
- Involving experts and nongovernmental organizations can help explain complex issues and promote public debate.
- Encouraging active parliamentary engagement at the time of the budget law and the loi de règlement can support oversight.

### Steps taken in 2005 (summarized actions)
- Commitments under programs agreed with the IMF included:
  - Limiting the level of SNH’s additional costs related to oil production activities to a fixed annual amount.
  - Limiting SNH’s cash advances only to sovereign spending sector in the second half of 2005 and eliminating them in 2006.
  - Undertaking cash advances only after prior approval by the minister of finance and within remaining budgetary allocations.
  - A September 2005 decree increased budgetary allocations for ministries that had relied on advances above existing authorization levels to reflect SNH’s advances in proper expenditure categories; intended to serve as benchmark for 2006 budget law allocations.
- Data dissemination and public scrutiny measures in 2005:
  - Oil sector data published on the website of SNH and of the prime minister’s office, including quarterly production and revenues, and SNH’s annual audits up to 2003.
  - Cameroon participating in the Joint Oil Data Initiative (JODI).
  - Establishment (since July 2005) of a committee and technical secretariat to monitor implementation of EITI principles; draft EITI action plan sent in October 2005 for discussions with civil society and oil companies.
  - Authorities approached oil companies to seek approval to publish key parameters of the PSAs.

### Policy recommendations and directions going forward
- Provide information on production-sharing agreements (PSAs):
  - Publish key parameters to illustrate allocation between oil companies, SNH, and the government while recognizing contractual confidentiality concerns.
- Strengthen budget transparency:
  - Full and timely transfer of oil revenues to the treasury.
  - Gradually shift to a classification by economic nature.
  - Ensure SNH avoids cash advances from 2006 and limits “additional costs” to strictly oil-related activities; compliance is key.
  - Formulate and publish clear rules on the use of dividends collected by SNH on behalf of the government, including systematic transfer or alternative uses.
  - Consider presenting oil sector budget data based on the IMF’s Government Finance Statistics Manual 2001 (GFSM 2001) provided budget reporting is sufficiently developed.
- Facilitate further public scrutiny:
  - Make the technical secretariat of the EITI committee fully operational quickly.
  - Proceed with consultations with private sector and civil society and finalize and implement a consensus-based action plan.
  - Improve timeliness of SNH’s audits and their publication.
  - Routinely publish on a quarterly (or monthly) basis information on total oil production, prices, and revenue to the government.
- Implement EITI principles beyond progress already made to indicate full compliance with international standards on oil transparency.

*Source: Box 3. Efforts to Promote Transparency in the 1990s (from the supplied IMF content).*

### Box 5–Implementing EITI Principles

### Box 5–Implementing EITI Principles

### Overview of EITI implementation
- EITI mainly consists of entrusting an independent administrator to compare oil sales and revenue as declared by oil companies and as recorded by the government.
- Out of some 20 countries that have signed up to the EITI, eight were recognized at an EITI conference in March 2005 to be actively implementing the initiative: Azerbaijan, Ghana, Kyrgyz Republic, Nigeria, Republic of Congo, São Tomé and Principe (STP), Timor Leste, Trinidad and Tobago.
- So far only Azerbaijan is regularly publishing oil revenue information consistent with the EITI principles.

### Implementation measures reported on the EITI website
- (i) publishing data on production and oil revenues (Azerbaijan, Timor Leste, Republic of Congo, Ghana)
- (ii) publishing the main fiscal parameters from production sharing/concession agreements (Timor Leste, Republic of Congo, STP)
- (iii) conducting external audits of public oil companies on an annual basis and publishing them (Republic of Congo, Nigeria)

### Additional country action and progress
- Cameroon established an EITI committee and secretariat in October 2005.
- Significant progress in Cameroon has already been achieved on (i) publishing data on production and oil revenues and (iii) conducting external audits of public oil companies and publishing them.
- If efforts to strengthen transparency are consistently pursued in Cameroon, expected outcomes include:
  - more effective economic and fiscal policymaking;
  - improved business environment;
  - more resources freed for investment in social sectors and basic infrastructure;
  - support for economic growth and poverty reduction efforts in Cameroon.

### Appendix — Production Sharing Agreements (PSAs) in Cameroon: key elements
- The PSAs consist of the following arrangements:
  - Sharing production between the SNH and the private oil companies. Private oil companies receive from the government the right to explore/exploit a specific field, but have to share any production generated from the field with the SNH. The split varies from 70/30 in favor of SNH to 50/50.
  - On average, the split is 63/37 in favor of SNH.
  - Sharing operating costs (i.e., depreciated development costs, depreciated exploration costs, and financial charges). In most cases, the split is 50/50.
  - Ensuring a minimum income for the oil companies. In the majority of the fields, the guaranteed fixed income is equivalent to 13 percent of the mining return (rente minière). The mining return is defined as the difference between total oil receipts (the sum of the sales by SNH and the private oil companies) and operating costs. However, to encourage oil companies to explore in areas within their field that require higher exploration costs (deeper funds), the guaranteed fixed income rate can go up to 22 percent.
  - Applying corporate taxation and royalties. Corporate tax is 57.5 percent. Given the specific U.S. regulations on dividends abroad, the rate is exceptionally set at 48.65 percent for U.S. companies. The guaranteed fixed income rate, however, remains identical for both U.S. and non-U.S. companies. A royalty (redevance) is paid either by the private oil company to the SNH or by the SNH to the private oil company to ensure that the guaranteed income is attained precisely.

### Operational and fiscal safeguards in PSAs
- SNH is associated with Perenco for the exploitation of a small field (EBOME) where the split is 85/15 in favor of Perenco.
- Since SNH is not a direct producer (with the exception of EBOME), SNH needs to reimburse oil companies operating in the field. However, a reimbursement limit is set on operating costs for any fiscal year. Total reimbursements by SNH are limited to the difference between the value of SNH’s share of production and the value of 40 percent of the total production.
  - Example provided: For instance, if the production split is 70 percent in favor of SNH, SNH retains at least 40 percent and the reimbursement limit amounts to 30 percent of field production. This would imply that operating costs would amount to 60 percent of field production with a cost split of 50/50, which is an unlikely situation for a “profitable” field.

*Source: Box 5–Implementing EITI Principles, _pdp02 - Box 5–Implementing EITI Principles_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/pdp/2006/_pdp02.pdf_