## _cr16275 ## Source details **Canonical URL:** [_cr16275](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16275.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16275.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16275.pdf.json) --- ### Financial sector overview - Underdeveloped banking sector dominated by a few commercial banks: eight commercial banks with CFAF 1,034 billion in assets as of December 2015 (US$1.8 billion, 16 percent of GDP), equivalent to 7 percent of CEMAC banks’ assets. - Concentration: three banks hold close to two thirds of total assets. - Ownership: two largest banks are subsidiaries of foreign banks; four banks include state participation ranging from 20 to 62 percent of total equity. - Weak intermediation: credit to the private sector was 8.4 percent of GDP in 2015; minimal interbank transactions; no established secondary market for government debt. - Microfinance institutions (MFIs): more than 100 MFIs operating in network, mostly cooperatives; end-2015 estimates: >200,000 beneficiaries, stock of credit about CFAF 18 billion and CFAF 12 billion in savings (2.8 and 1.9 percent of GDP, respectively). - Other institutions: two small pension funds and three insurance companies; less than 5 percent of employees pay contributions to CNPS. ### Financial soundness indicators (selected figures) - Capital Adequacy (Regulatory capital / Risk-weighted assets): 12.5 (2010), 20.0 (2011), 18.1 (2012), 22.0 (2013), 13.4 (2014), 14.6 (2015). - Asset Quality: - Gross nonperforming loans/Gross banking loans: 9.9 (2010), 7.6 (2011), 7.4 (2012), 9.8 (2013), 11.7 (2014), 16.5 (2015). - Provisions / Nonperforming loans: 81.1 (2010), 89.0 (2011), 64.5 (2012), 65.3 (2013), 68.3 (2014), 56.1 (2015). - Net nonperforming loans / Gross banking loans: 1.9 (2010), 0.8 (2011), 2.6 (2012), 3.4 (2013), 3.7 (2014), 7.3 (2015). - Profitability: - Return on assets: 3.2 (2010), 2.1 (2011), 2.0 (2012), 2.3 (2013), 1.8 (2014), 1.6 (2015). - Return on equity: 32.0 (2010), 19.2 (2011), 15.5 (2012), 21.1 (2013), 19.4 (2014), 13.1 (2015). - Liquidity: - Liquid assets / Total assets: 29.4 (2010), 24.3 (2011), 28.1 (2012), 24.0 (2013), 25.7 (2014), 26.0 (2015). - Liquid assets / Short term liabilities: 148.3 (2010), 149.3 (2011), 146.6 (2012), 139.3 (2013), 152.9 (2014), 142.1 (2015). - Source for table figures: COBAC. ### Macroeconomic shocks, fiscal response, and macro-financial linkages - External shocks since mid-2014: persistent decline in oil prices and regional security shocks (notably Boko Haram). - Oil revenue impact: fiscal oil revenues expected to fall by almost 70 percent in nominal terms between 2014 and 2017. - Security costs: operations against Boko Haram estimated at least CFAF 10 billion (US$ 16.5 million) per month, i.e., more than 2 percent of non-oil GDP in 2015. - Authorities’ response: sizable fiscal adjustment; mobilization of domestic and external (concessional) financing; BEAC support via statutory and exceptional advances. - Outcome: accumulation of domestic payment arrears that could not be settled by end-2015. - Real non-oil GDP: estimated contraction of 2.9 percent in 2015 (compared to 7.1 percent growth in 2014). - Sectoral impact: construction contracted by estimated 12.5 percent in 2015. - Banking direct exposure to oil limited: extractive industries accounted for less than 4 percent of banks’ stock of loans to the private sector at end-2015; only one oil sector company among largest exposures of one Chadian bank. - Indirect linkages: prolonged low oil prices → slow asset growth, weakening asset quality, declining profitability, capital erosion; NPLs rose from 9.5 percent of total banks’ loans in June 2014 to 16.5 percent in December 2015. - Public sector credit and deposits: - Central government, public agencies, and nonfinancial public enterprises accounted for about 28 percent of banks’ total credit as of December 2015 (CFAF 211.2 billion; US$353 million; 4 percent of non-oil GDP). - Public sector deposits averaged >30 percent of total deposits between 2008 and 2015, max 44 percent in 2013. - Public sector deposits decreased from CFAF 149 billion at end-2014 to CFAF 124 billion at end-2015, representing 20.6 percent of total deposits in commercial banks at end-2015. ### Domestic payment arrears: scope and bank risks - Government accrued around CFAF 148 billion or 3 percent of non-oil GDP in domestic payment arrears in 2015, bringing stock to CFAF 200 billion or 4 percent of non-oil GDP. - Arrears contributed to increase in banks’ NPLs to 16.5 percent of total banks’ loans as of end-2015. - Firms awaiting government settlement likely used short-term bank financing supporting private sector credit growth in H1 2015. - Decentralized public entities withdrew deposits and resorted to overdrafts amid reduced/delayed transfers. - Government plan to gradually clear arrears to ease conditions for private sector and limit damage to banks’ credit portfolios. ### Liquidity, maturity transformation, and refinancing - Sight deposits proportion: 85 percent of total deposits (highest ratio among CEMAC members). - Liquid assets: 26 percent of total assets for banking sector at end-2015. - Banks’ excess reserves: >CFAF 64 billion or 6.2 percent of total assets at end-2015. - Short-term loans: 75 percent of total commercial banks’ loans at end-2015. - Deposits-to-loans ratio: 94 percent in December 2015 and declining. - Treasury bonds average maturity close to 3 years, increasing maturity mismatches given short-term deposit structure. - BEAC statutory and exceptional advances to Chad in 2015: CFAF 232 billion. - Net issuances of Treasury bills and bonds in 2015: CFAF 190 billion (Chad); several issuances swapped against existing banks’ loans. - Authorities intend to issue at least CFAF 150 billion (2.5 percent of non-oil GDP) in Treasury bills and bonds in 2016. - As part of arrears-clearance, two Treasury bonds issued end-March 2016 for CFAF 65 billion with a 7 percent discount on arrears’ claims to be kept by the bank involved. - BEAC regional measures (late March / early April 2016): raised ceiling for Chadian commercial banks’ refinancing at BEAC from CFAF 200 billion to CFAF 300 billion; halved required reserves at central banks → ~CFAF 25 billion in additional liquidity for Chadian banks. ### Systemic risks, crowding-out, and stress-test scenarios - Systemic risk drivers: increasing NPLs; reduction in deposits (notably public sector); crowding-out of private credit if banks accommodate government financing; accumulation/securitization of arrears burdening banks. - Regional policy constraints: monetary policy and supervision set at BEAC/COBAC level. - Stress-test outcomes and vulnerability thresholds: - Solvency ratio at end-2015: 14.6 percent. - Scenario: NPLs rising by 25 percent (bringing them to more than 20 percent of total loans) → some commercial banks would not meet minimum risk-weighted capital adequacy ratio; solvability ratio could fall under regulatory threshold of 8 percent. - Scenario: further 25 percent decline in total deposits (e.g., 50 percent decline in government deposits combined with 20 percent decline in deposits from non-financial enterprises) → most Chadian banks would fall below regulatory liquidity ratio. - Liquidity ratio at end-2015: 142 percent vs regulatory threshold 75 percent; deposits would need to decline by ~25 percent for liquidity ratio to fall below threshold. - Recommendation: close monitoring of banking system by authorities in coordination with regional regulator to minimize potential fiscal costs, including potential recapitalizations of government-owned banks. ### Microfinance, financial inclusion, and mobile banking - Financial development gap: ratio between benchmark and actual private credit to GDP nearly 3 percent in Chad in 2012 (SSA: 1.7 percent). - Physical banking presence (2004–2014): number of branches of eight commercial banks doubled to 58 in 2014; ATMs per 100,000 adults increased. - Household financial access (2014): - Households’ deposit accounts with commercial banks: 23.82 per 1,000 adults. - Household loan accounts with commercial banks: 10.93 per 1,000 adults. - Outstanding deposits of households with commercial banks: 4.11 percent of GDP. - Outstanding loans from commercial banks to households: 2.33 percent of GDP. - Low usage relative to peers (2014): only 12 percent of adults reported having an account in Chad; 7 percent reported having an account with a financial institution (SSA averages: 35 percent and ~30 percent respectively). - Gender disparity (2014): 8 percent of adult women have an account (4 percent in a financial institution) vs 18 percent of adult men (about 12 percent in a financial institution). - Payment methods and formal borrowing (2013–2014): cash dominant; 2.8 percent of population aged 15+ had a debit card in 2014 (SSA: 17.9 percent); 0.5 percent used it to make payments (SSA: 8.7 percent); ~41 percent of adults reported borrowing any money in 2013, <3 percent borrowed from a financial institution. - MFIs evolution and figures: - Time series: 2000 MFIs 76, clients 31,300, outstanding savings CFAF 0.61 billion, outstanding loans CFAF 1.38 billion. - 2004: MFIs 214, clients 97,318, savings CFAF 4.42 billion, loans CFAF 3.67 billion. - 2013: MFIs 170, clients 190,109, employees 880, savings CFAF 8.51 billion, loans CFAF 10.64 billion. - 2014: MFIs 113, clients 197,262, employees 900, savings CFAF 10.29 billion, loans CFAF 16.04 billion. - 2015e: clients >200,000, outstanding savings CFAF 12.00 billion, outstanding loans CFAF 18.00 billion. - MFI market shares end-2015: deposits at MFIs 1.6 percent of total deposits in the financial system; loans by MFIs 2.3 percent of total loans. - MFI constraints: weak management, high administrative costs, poor internal controls; lending rates generally at a minimum of 2 percent per month. - Mobile banking (2014): Chad mobile account penetration 5.7 percent of adults (LICs average 10 percent; SSA average 11.5 percent). ### Policy recommendations for financial inclusion and microfinance - Government should: - Dismantle obstacles to financial inclusion through laws protecting property and creditor rights and ensure enforcement. - Set standards for disclosure and transparency; promote credit information-sharing systems and collateral registries; educate and protect consumers. - Grant exemptions from onerous documentation requirements; allow correspondent banking; shift to electronic payments into bank accounts for government payments. - Institutional resources: dedicated Ministry/technical unit for microfinance created 2006 (replaced in 2014 by a low-resourced unit in Ministry of Finance and Budget); sector support mainly from development partners (e.g., Support Program for Inclusive Finance of Chad, Microfinance Project in Chad). ### Public securities market participation and market development (Chad and CEMAC) - CEMAC regional market development: - Gross yearly issuances (CFAF Billion): 2011 52; 2012 109; 2013 221; 2014 217; 2015 451 (text also cites 608 when including further detail). - Stock of auctioned public securities end-year (CFAF Billion): 2011 49; 2012 66; 2013 133; 2014 157; 2015 303 (text states stock more than doubled in 2015 to reach CFAF 532 billion). - Stock of BEAC statutory advances to CEMAC countries end-2015: CFAF 1,984 billion; stock of public securities: CFAF 330 billion. - Chad’s activity: - Prior syndications: CFAF 107 billion in 2011 and CFAF 85 billion in 2013. - 2014 auction debut: mobilized CFAF 27.5 billion via four 3-month T-bills at weighted average annual interest rate 2.8 percent. - 2015 placements: Treasury bills placed gross CFAF 156 billion; Treasury bonds placed gross CFAF 139.3 billion; net placements around CFAF 190 billion (net domestic financing negative as several issuances used to swap/roll-over existing bank loans). - 2015 details: six 6-month T-bills March–July 2015 totaling CFAF 71 billion, average annualized interest rate 3.05 percent; five 1-year T-bills Sept–Dec 2015 totaling CFAF 64 billion, average interest rate 3.4 percent; Treasury bonds CFAF 139.3 billion with maturities 2, 3 and 5 years, effective average interest rate 4.3 percent. - Market pricing observations: - Chad paid roughly 100 basis points more than Cameroon on short-term T-bills: 104 bps spread for 3-month, 110 bps for 6-month versus Cameroon. - One-year yields anomalies: Gabon 1-year late-2015 average 4 percent; Chad five 1-year issuances average 3.4 percent; same-day auctions Dec 23, 2015: Cameroon 3.9 percent vs Chad 3.5 percent. - Yield curve inversion in Chad: Chad 5-year Treasury bonds 4.1 percent (2015) vs Gabon 2-year Treasury bonds 4.6 percent (2015). - TIAO (Taux d’Intérêt des Appels d’Offres): 2.45 percent per year. - Market structure and constraints: - SVTs dominance: 95 percent of Treasury bills in CEMAC owned by SVTs (92 percent for Chad); Treasury bonds 88 percent SVTs. - Secondary market thin: about twenty transactions on BTA and OTA between 2011–2014; syndicated bonds somewhat more active. - Planned legal framework for repo market (Sale and Repurchase Agreements) in 2016 expected to support secondary market. - Recommendations to develop market: - Correct mispricing to attract non-SVT investors and foster secondary market; attract retail and non-resident investors; strengthen SVT network and dialogue. - Unify treatment of auctioned and syndicated Treasury bonds; respect issuance calendars and improve pre- and post-auction communication. - Strengthen debt management and decision-making transparency; better issuance planning and integrate issuances into cash management. ### Public investment, PIM performance, and recommendations - Historical investment: 1960–2000 public investment flows never exceeded 1.5 percent of GDP, averaging 1.2 percent; private investment averaged 2.8 percent. - Early 2000s oil era: private investment flows peaked (10.9 percent in 2001, 19.5 percent in 2002, 14.2 percent in 2003); public investment averaged 9 percent of non-oil GDP between 2000 and 2013. - By 2013 investment stock reached 100 percent of GDP (of which 30 percent of GDP in public investment). - Infrastructure indicators improved (GCI infrastructure index 1.55 in 2007 → 2.43 in 2016; mobile subscriptions ~40 per 100 in 2016 vs 1.4 in 2007) but remain below SSA averages. - PIM inefficiencies: IMF PIMA suggests ~40 percent of potential benefits lost on average in LIDCs; strengthening institutions could close up to two-thirds of efficiency gap. - Specific Chad weaknesses: poor project appraisal and selection; budget presentation weak (global credit lines without detailed project lists); limited ex-post evaluation; heavy/complex expenditure chain; risk of unrecognized spending commitments competing with planned investments. - Recommendations: - Strengthen institutional arrangements for planning, allocation, implementation, monitoring, evaluation, procurement openness, and cash management. - Publish a multi-year public investment program; move toward multiyear budgeting for investments. - Simplify and formalize expenditure chain; create a procedures handbook; protect investment appropriations at project commencement; allow carryover of unspent appropriations. - Reassess government role in infrastructure; foster private participation where appropriate. - Promote regional coordination among CEMAC countries. ### Oil sector: production, institutions, fiscal regimes, RIK, SHT, and transparency - Production and companies (2015): - Doba Consortium (Esso-led): ~70 K bbl/d. - CNPCI: 48 K bbl/d. - Glencore: 21 K bbl/d. - SHT sales (government RIK): 36 K b/d in 2015 (one quarter of Chad’s total production). - Historical revenue trajectory: - Oil revenue peaked in 2011 at US$2 billion (76 percent of government revenue). - As prices fell to US$43 in 2015, revenues dropped to ~US$200 million in 2015 (24 percent of government revenue). - Over 2004–15 Chad collected cumulatively US$13 billion in oil revenue. - Institutional arrangements: - 2014 PRMS maintained offshore account with Citibank London; CCSRP produces annual reports (last covering 2013). - SHT created in 2006 to manage government participations; SHT does not publish activity report or financial statements (website under construction). - Increasing complexity and risks: - Multiple producers and exploration permits; two fiscal regimes (concessionary and PSC); RIK shifted in 2012 to in-kind payments accounting for two-thirds of oil revenue in 2015. - Oil-collateralized borrowing: 2013 Government borrowed US$600 million; 2014 SHT borrowed US$1.45 billion (government-guaranteed) to purchase 25 percent share in Doba Consortium. - Badoit purchase summary: - June 2014 Government purchased Chevron’s 25 percent Badoit stake for US$1.3 billion; financed with US$1.45 billion prepayment from Glencore repayable over 4 years initially, later rescheduled. - 2015 actuals: Glencore purchased 14 cargos containing 13.2 million barrels; gross proceeds US$528 million (CFA 312 billion); Glencore retained US$183 million costs; net proceeds US$345 million; Glencore applied US$158 million to debt service; remaining US$187 million (CFA 110 billion) transferred to Government. - Rescheduling December 2015 produced new US$1.45 billion prepayment, lowered interest saving ~US$150 million, extended repayment to 2022 at latest. - Two fiscal regimes mechanics: - Common payments: signature bonus US$ 40 million (o/w US$10 million deductible); production bonus US$ 2 million; production royalty 12.5-16.5%; statistical fee 1% of exports; government participation max 25%; training and audit contributions specified. - PSC-specific: tax oil 40-60% of profit oil depending on R-factor; cost oil limit 70%. - Concession-specific: corporate income tax 42.5-65% of net profits depending on R-factor. - Modeling result: concessionary regime regressive; PSC progressive; PSC tax take exceeds concession only when Brent > US$57 p/b (per Gab-Leyba and Laporte 2015 modeling). - EITI and transparency: - Chad produced EITI reports covering 2007–13; declared EITI compliant in 2014; 2013 EITI report issued Jan 2016. - 2013 oil revenue totals: FCFA 803 billion (State reporting); corporate income tax accounted for 70 percent of oil revenue. - EITI findings: no significant discrepancies between company payments and government receipts, but not all revenue received in the budget. - EITI recommendations: create public cadaster of oil/mining licenses; Ministry of Petroleum and SHT to better track government oil and consolidate supervision. - Modeling and forecasting: - IMF FARI model available (life-cycle model); Chad’s MoF uses a rudimentary model; enhancements needed to reflect both regimes, integrate commitments, produce risk assessments, and maintain updated historic data and assumptions. - Information flows and audits: - Essential inputs: companies’ work plans, monthly reports, reserve/investment/cost reports, detailed tax submissions, pipeline transport cost data. - Audit recommendations: - Audit exploration and development phase companies because costs will be deducted when production starts; Chad PSCs allow 5 years after end of fiscal year to launch audits. - Outsource audits when capacity constrained; Chadian authorities use international firm services. - Proper independent external audit of SHT financial statements in accordance with International Standards on Auditing and publication with auditor’s opinion. - Regular audits of SHT marketing operations; SHT contract requires monthly reports and explanatory notes after each shipment. - Audit of revenue administration itself (Cour des Comptes involvement suggested). - Make utilization of audit rights publicly accountable (reporting on audits exercised, expirations, conclusions). - Pricing and market notes: - Doba crude priced at a discount to Brent; Platts assessed Doba discounts (increase to US$10 in Dec 2015, decline to US$6.50 in May 2016). - Determining fair discounts: use other companies’ revealed prices and specialized firm estimates. ### Audit specifics and SHT financials - SHT scale (end-2014): assets ~US$2,750 million (FCFA 1,462 billion); asset composition US$1,042 million in land and US$1,179 million in financial participations; liabilities US$937 million in investment subsidies and US$1,427 million in financial debts. - PSC audit fee provisions: - Exploration phase: US$200,000 per year (inflation indexed, plus travel and per diems for four staff). - Exploitation phase: US$400,000 per year. - Recommendation: institutionalize regular audits, publish results, and ensure audit strategy and responsibilities are clear and coordinated across MoF, MoP, and SHT. _Italic: Excerpts and figures drawn verbatim from the supplied IMF staff report content in file _cr16275._ ### References ____________________________________________________________________________ 20 ### References ____________________________________________________________________________ 20 ### Financial sector overview - Chad’s financial sector is underdeveloped and dominated by a few commercial banks. - Eight commercial banks with CFAF 1,034 billion in assets as of December 2015 (US$1.8 billion, 16 percent of GDP), equivalent to 7 percent of CEMAC banks’ assets. - Banking sector concentration: three banks hold close to two thirds of total assets. - Foreign and state participation: - Two largest banks are subsidiaries of foreign banks. - Four banks include state participation ranging from 20 to 62 percent of total equity. - Weak banking intermediation: credit to the private sector was 8.4 percent of GDP in 2015; minimal interbank transactions; no established secondary market for government debt. - Microfinance institutions (MFIs): - More than 100 MFIs operating in network, mostly cooperatives. - End-2015 estimates: more than 200,000 beneficiaries, stock of credit about CFAF 18 billion and CFAF 12 billion in savings (2.8 and 1.9 percent of GDP, respectively). - Other financial institutions: two small pension funds and three insurance companies; less than 5 percent of employees pay contributions to CNPS. ### Financial soundness indicators (selected figures) - Capital Adequacy (Regulatory capital / Risk-weighted assets): 12.5 (2010), 20.0 (2011), 18.1 (2012), 22.0 (2013), 13.4 (2014), 14.6 (2015). - Asset Quality: - Gross nonperforming loans/Gross banking loans: 9.9 (2010), 7.6 (2011), 7.4 (2012), 9.8 (2013), 11.7 (2014), 16.5 (2015). - Provisions / Nonperforming loans: 81.1 (2010), 89.0 (2011), 64.5 (2012), 65.3 (2013), 68.3 (2014), 56.1 (2015). - Net nonperforming loans / Gross banking loans: 1.9 (2010), 0.8 (2011), 2.6 (2012), 3.4 (2013), 3.7 (2014), 7.3 (2015). - Profitability: - Return on assets: 3.2 (2010), 2.1 (2011), 2.0 (2012), 2.3 (2013), 1.8 (2014), 1.6 (2015). - Return on equity: 32.0 (2010), 19.2 (2011), 15.5 (2012), 21.1 (2013), 19.4 (2014), 13.1 (2015). - Liquidity: - Liquid assets / Total assets: 29.4 (2010), 24.3 (2011), 28.1 (2012), 24.0 (2013), 25.7 (2014), 26.0 (2015). - Liquid assets / Short term liabilities: 148.3 (2010), 149.3 (2011), 146.6 (2012), 139.3 (2013), 152.9 (2014), 142.1 (2015). - Source for table figures: COBAC. ### Macroeconomic background (shocks and fiscal response) - Since mid-2014, two massive external shocks: persistent decline in oil prices and regional security shocks (notably Boko Haram). - Oil revenue impact: fiscal oil revenues expected to fall by almost 70 percent in nominal terms between 2014 and 2017. - Security costs: operations against Boko Haram estimated at least CFAF 10 billion (US$ 16.5 million) per month, i.e., more than 2 percent of non-oil GDP in 2015. - Authorities’ response: sizable fiscal adjustment and mobilization of domestic and external (concessional) financing; support from BEAC via statutory and exceptional advances. - Outcome: accumulation of domestic payment arrears that could not be settled by end-2015. - Real non-oil GDP: estimated contraction of 2.9 percent in 2015 (compared to 7.1 percent growth in 2014). - Sectoral impact: construction contracted by estimated 12.5 percent in 2015. ### Key macro-financial linkages - Main transmission channels operate indirectly through a sharp fiscal adjustment and the government’s quest for additional financing. - Direct exposure of banks to oil sector is limited: - Extractive industries accounted for less than 4 percent of banks’ stock of loans to the private sector at end-2015. - Only one oil sector company was among the largest exposures of one Chadian bank. - Indirect effects are sizable: - Prolonged low oil prices lead to slow asset growth, weakening asset quality, declining profitability, and capital erosion in banks. - Rapid increase in banks’ NPLs from 9.5 percent of total banks’ loans in June 2014 to 16.5 percent in December 2015. - Banking sector exposures to the public sector: - Central government, public agencies, and nonfinancial public enterprises accounted for about 28 percent of banks’ total credit as of December 2015 (CFAF 211.2 billion; US$353 million; 4 percent of non-oil GDP). - Public sector deposits averaged more than 30 percent of total deposits between 2008 and 2015, with a maximum of 44 percent in 2013. - Public sector deposits decreased from CFAF 149 billion at end-2014 to CFAF 124 billion at end-2015, representing 20.6 percent of total deposits in commercial banks at end-2015. - Government financing actions and market response: - Authorities issued a significant amount of securities in the regional bond market in 2015, but a large part of proceeds ended up in swaps against existing banks’ loans, suggesting limited appetite or space for banks to expand lending to the government in 2015. - Real economy feedbacks: - A significant share of private companies with bank access depend on public contracts; a 50 percent decline in public investment and outlays on goods and services in 2015 and 2016 relative to 2014 levels likely affected these firms. - Oil companies delayed investments and reduced operational costs, translating into fewer contracts for local companies (impact more modest than public contract decline because oil firms mainly contract foreign companies). - Projected reduction in government transfers and subsidies over 2016-17 could negatively affect banks’ credit portfolio to public corporations or decentralized entities. ### Systemic risks and potential outcomes - With a dimmer domestic economic outlook, there are important risks to financial stability driven by: - Increase in NPLs. - Reduction in deposits (notably public sector deposits). - Crowding-out impact on private credit if banks accommodate additional government financing needs. - Accumulation of domestic arrears and potential securitization of arrears placing burdens on banks. - Monetary policy and supervision are set at the regional level (BEAC/COBAC), complicating domestic policy maneuvering. *Prepared by Gabriel Léost, Jephte Nsumbu Kibidikila, and Alex Ho.* ### 15. The recent accumulation of domestic payment arrears brings about several risks to ### 15. The recent accumulation of domestic payment arrears brings about several risks to banks ### Risks from government domestic payment arrears - In 2015, the government accrued around CFAF 148 billion or 3 percent of non-oil GDP in domestic payment arrears, bringing their stock to CFAF 200 billion or 4 percent of non-oil GDP. - The accumulation of domestic arrears contributed to an increase in banks’ NPLs to 16.5 percent of total banks’ loans as of end-2015. - Companies awaiting settlement by the government likely resorted to short-term bank financing, supporting private sector credit growth in the first half of 2015. - Decentralized public entities (e.g., universities, hospitals) withdrew deposits and in some cases resorted to bank overdrafts to maintain operations amid reduced and delayed government transfers, exacerbating banks’ resource constraints. - The government is implementing a plan to gradually clear its arrears to ease conditions for the private sector and limit damage to banks’ credit portfolios. ### Short-term liabilities, liquidity levels, and maturity transformation - The proportion of sight deposits in Chad is 85 percent of total deposits (the highest ratio among CEMAC members), making banks particularly vulnerable to deposit withdrawals. - Liquid assets represented 26 percent of total assets for the banking sector at end-2015. - At end-2015, banks’ excess reserves exceeded CFAF 64 billion or 6.2 percent of their total assets. - Short-term loans represented 75 percent of total commercial banks’ loans at the end of 2015. - Deposit intermediation level (deposits-to-loans ratio) was 94 percent in December 2015 and is declining. - Treasury bonds issued have an average maturity close to 3 years, which can increase maturity mismatches given short-term deposit structure. ### Government financing options, operations, and regional measures - Direct monetary financing from the BEAC was widely used in 2015; Chad benefitted from statutory and exceptional advances totaling CFAF 232 billion in 2015. Additional direct monetary financing is unlikely in 2016 because the ceiling on such advances has been reached and further use could compromise common-currency stability. - Chad increased public security issuances in the CEMAC regional market in 2015 with net issuances of Treasury bills and bonds of CFAF 190 billion. - Several issuances were used to swap against existing banks’ direct loans, leading to a principal repayment of domestic debt of CFAF 234 billion in 2015 (compared to CFAF 80 billion in 2014). - For 2016, the authorities intend to issue Treasury bills and bonds for a net amount of at least CFAF 150 billion (2.5 percent of non-oil GDP). - As part of arrears-clearance strategy, authorities issued two Treasury bonds at the end of March 2016 for a total amount of CFAF 65 billion; proceeds to be used to repay part of accumulated domestic arrears. The operation includes a discount of 7 percent on arrears’ claims to be kept by the bank involved in the operation. - Caution: funding for arrears-repayment operations competes with ordinary financing of the 2016 budget; additional similar operations should be considered with extreme caution. - BEAC regional decisions (late March and early April 2016): - Raised the ceiling for Chadian commercial banks’ refinancing at the BEAC from CFAF 200 billion to CFAF 300 billion, amplifying rediscount operations and liquidity buffers. - Halved required reserves at the central banks, immediately translating into around CFAF 25 billion in additional liquidity for Chadian commercial banks. - Only half of the stock of Chadian public securities issued in the regional market is held by domestic banks; the other half is held by banks in other CEMAC countries (mainly in Cameroon). Thus, BEAC monetary easing impacts non-Chadian banks holding Chadian securities and decisions at regional headquarters can affect local banks’ capacity to satisfy Chadian government financing needs. ### Crowding-out risks and credit slowdown - Additional public sector financing can crowd out bank credit to the private sector, reinforcing difficulties for private companies to access commercial bank loans and potentially impacting non-oil growth and banks’ NPL ratios. - Evidence of a credit slowdown since mid-2014, although short-term credit lines have so far prevented a negative growth in private sector credit. ### Stress tests, vulnerabilities, and monitoring recommendations - At end-2015, the solvency ratio stood at 14.6 percent. - Stress test scenarios and outcomes: - If NPLs were to reach 20 percent of total loans (a 25 percent increase in NPLs leading them to more than 20 percent of total loans), some commercial banks would not meet the minimum risk-weighted capital adequacy ratio; the solvability ratio would fall under its regulatory threshold of 8 percent. - A further 25 percent decline in total deposits (for example, a 50 percent decline in government deposits combined with a 20 percent decline in deposits from non-financial enterprises) would bring most Chadian banks below the regulatory liquidity ratio. - At end-2015 the liquidity ratio was 142 percent compared to a regulatory threshold of 75 percent; an important decline in deposits (by 25 percent) would be necessary to see the liquidity ratio fall below the regulatory threshold. - Given these vulnerabilities, close monitoring of the banking system by the authorities, in coordination with the regional regulator, is warranted to minimize potential fiscal costs, including through potential recapitalizations of government-owned banks. ### Financial inclusion and microfinance: overview and implications - Financial inclusion can reduce poverty and improve growth by lowering credit constraints on the poor and helping small firms and entrepreneurs. - Data sources used: IMF’s financial access survey (FAS) and the World Bank’s Global Findex (Findex), mainly 2014 data. - Financial development gap: the “financial development gap” (ratio between benchmark and actual private credit to GDP) was nearly 3 percent in Chad in 2012, compared to 1.7 percent in SSA. - Physical banking presence improvements (2004–2014): - Number of branches of the eight commercial banks doubled to reach 58 in 2014. - ATMs per 100,000 adults increased (time series shown in source figures). - Household use and balances (2014): - Households’ deposit accounts with commercial banks: 23.82 per 1,000 adults. - Household loan accounts with commercial banks: 10.93 per 1,000 adults. - Outstanding deposits of households with commercial banks: 4.11 percent of GDP. - Outstanding loans from commercial banks to households: 2.33 percent of GDP. - Low usage of financial services relative to peers: - In 2014, only 12 percent of adults reported having an account in Chad and only 7 percent reported having an account with a financial institution. - By comparison, in 2014 almost 35 percent of the adult population in Sub-Saharan Africa reported having an account, with nearly 30 percent having an account with a financial institution. - Gender disparity: - Only 8 percent of adult women have an account (4 percent in a financial institution) compared to 18 percent of adult men (about 12 percent in a financial institution). - Chad’s gender inequality in financial inclusion is similar to most CEMAC peers but worse than averages for LICs and SSA countries. - Payment methods and formal borrowing: - Most payments are done in cash; checks, electronic payments, debit/credit cards remain unusual. - In 2014, only 2.8 percent of the population aged 15 years and over had a debit card (17.9 percent on average in SSA) and only 0.5 percent of the population used it to make payments (8.7 percent on average in SSA). - Nearly 41 percent of adults reported borrowing any money in 2013, but less than 3 percent borrowed from a financial institution. - Nearly 27 percent of the poorest indicated it is not at all possible to come up with emergency funds. - Almost half of adults reported saving money in the past year, but only 4.6 percent saved at a financial institution (15.9 percent on average in SSA). *International Monetary Fund — Country Report excerpt* ### 31. Increasing mobile phone penetration in Africa in recent years led to rapid ### _cr16275 - 31. Increasing mobile phone penetration in Africa in recent years led to rapid ### Mobile banking and financial inclusion - Mobile banking complements traditional financial services and allows households and businesses to perform transactions (making transfers or paying bills) without access to physical banking facilities, which is generally scarce in CEMAC countries. - Due to higher coverage of mobile phone services in the population, mobile banking is considered a way to improve financial inclusion. ### Mobile account penetration (2014) - Chad: 5.7 percent of adults reported to have a mobile account in 2014. - Gabon: 6.6 percent of adults reported to have a mobile account in 2014 (highest among CEMAC countries referenced). - LICs average: 10 percent (as reported). - SSA countries average: 11.5 percent (as reported). - Observational finding: Chad’s mobile-account ratio remains significantly lower than the LICs and SSA averages cited. ### Microfinance institutions (MFIs) development and regulation - MFIs began developing in Chad in the 1980s and 1990s to mobilize local savings and finance business activities, especially in rural areas. - According to COBAC, Chad had more than 200 MFIs by end-2004. - CEMAC regulatory framework on microfinance was adopted in 2012, requiring MFIs to: - hold a valid license to operate; - join the country’s professional MFI association; - be regulated and sanctioned by COBAC. - Implementation and reinforcement of microfinance unit at COBAC in 2014 led to a decline in the number of MFIs. ### Impact, scale, and geographic distribution of MFIs (findings) - Number of beneficiaries continued to increase despite decline in number of MFIs; beneficiaries now above 200,000 people. - Outstanding amounts handled by MFIs (savings, loans, transfers) increased significantly. - Market shares at end-2015: - Deposits at MFIs: 1.6 percent of total deposits in the financial system. - Loans by MFIs: 2.3 percent of total loans by the financial system. - Geographic concentration: majority of MFIs located in central and southern regions, where banks’ presence is heaviest; expansion uneven despite international partners’ efforts. ### MFI product offerings and pricing - Loan types: commercial loans (for new activities), construction/housing loans, agricultural loans, educational and social loans. - Accepted collaterals include cattle, land, or equipment. - Lending rates: generally at a minimum of 2 percent per month (noted as significantly above the 8-15 percent per year offered by commercial banks). ### MFI operational and financial weaknesses - Weak management procedures, high administrative costs, and poor internal control mechanisms. - Some MFIs rely on subsidies from foreign partners and have weak business models to sustain operations. - Lack of risk management procedures can lead to MFI distress. ### Chad’s MFI sector — time series figures (Table 2) - 2000: - MFIs (number): 76 - Clients (number): 31,300 - Outstanding savings (CFAF billion): 0.61 - Outstanding loans (CFAF billion): 1.38 - 2004: - MFIs (number): 214 - Clients (number): 97,318 - Outstanding savings (CFAF billion): 4.42 - Outstanding loans (CFAF billion): 3.67 - 2013: - MFIs (number): 170 - Clients (number): 190,109 - Employees (number): 880 - Outstanding savings (CFAF billion): 8.51 - Outstanding loans (CFAF billion): 10.64 - 2014: - MFIs (number): 113 - Clients (number): 197,262 - Employees (number): 900 - Outstanding savings (CFAF billion): 10.29 - Outstanding loans (CFAF billion): 16.04 - 2015e: - MFIs (number): -- - Clients (number): >200,000 - Employees (number): -- - Outstanding savings (CFAF billion): 12.00 - Outstanding loans (CFAF billion): 18.00 ### Policy steps to improve financial inclusion (recommendations and roles) - Government role: - Dismantle obstacles to financial inclusion through laws that protect property or creditor rights and ensure enforcement. - Set standards for disclosure and transparency. - Promote credit information-sharing systems and collateral registries. - Educate and protect consumers. - Specific policy considerations: - Grant exemptions from onerous documentation requirements. - Allow correspondent banking. - Shift to the use of electronic payments into bank accounts for government payments. - Note on resources and institutional support: - A specific Ministry in charge of microfinance was created in 2006, replaced in 2014 by a technical unit part of the Ministry of Finance and Budget with low allocated resources. - Most sector support comes through agreements with development partners, e.g., Support Program for Inclusive Finance of Chad (financed by Chadian government and UNDP) and Microfinance Project in Chad (co-funded by government of Chad and the Islamic Development Bank). - Expected outcomes: - By implementing these measures, authorities can generate significant progress in increasing financial inclusion, reducing inequality, and boosting growth. --- ### Chad’s first steps in the regional public securities market — background and context - Prior use of regional public securities market by Chad: - Two issuances through bank syndication in 2011 and 2013 before resorting to auction market. - First Treasury bills issued in the last quarter of 2014; expanded issuances in 2015. - Motivation for analysis: - Development of CEMAC market is recent; detailed analysis justified by Chad’s recent access to the auction market and the shock from sharp fall in oil prices since mid-2014. - Database and data elements used in analysis: - Issuer country, date of issuance, maturity, number of primary dealers as bidders, amount announced by the Treasury, amount of bids, amount auctioned, and the interest rates or prices (minimum and maximum proposed by primary dealers, ceiling rate or maximum price accepted by the Treasury, and weighted-average interest rate). ### Regional market development (CEMAC) and 2015 dynamics - Timeline and policy: - BEAC decision in 1999 to freeze statutory advances and establish domestic market; transitional scheme approved March 2008 permitting coexistence of statutory advances (scheduled to decrease) and issuance of government securities. - Yearly issuances (gross) progression (CEMAC): - 2011: CFAF 52 billion (gross issuances, chart referenced). - 2012: CFAF 109 billion. - 2013: CFAF 221 billion. - 2014: CFAF 217 billion. - 2015: CFAF 451 billion (gross issuances; gross issuances more than doubled in 2015 compared to 2014, reaching CFAF 608 billion when including further detail in text). - Stock of auctioned public securities: - End-year stock (CFAF Billion) progression cited: 2011: 49; 2012: 66; 2013: 133; 2014: 157; 2015: 303 (chart referenced). - Text statement: stock of auctioned public securities more than doubled in 2015 to reach CFAF 532 billion. - 2015 specifics: - High level of one-year Treasury bills’ issuances in 2015: CFAF 196.5 billion. - At end-2015, Treasury bonds represented 43 percent of the stock of auctioned public securities. - BEAC financing mechanisms and reactivation: - In early August 2015, mechanism of “statutory advances” was reactivated with approval of a 52.4 percent increase in their ceilings. - BEAC approved in late September 2015 an additional mechanism of “exceptional advances”, allowing disbursement of CFAF 140 billion to Chad in October 2015 and CFAF 9.2 billion to the Central African Republic in May 2016. - Comparative stock sizes at end-2015: - Stock of BEAC statutory advances to CEMAC countries: CFAF 1,984 billion. - Stock of public securities: CFAF 330 billion. - Observation: stock of statutory (and exceptional) advances still almost 6 times larger than stock of public securities. - Cameroon: the only CEMAC country whose balance of statutory advances is lower than its stock of securities. - Congo and Equatorial Guinea: biggest users of BEAC’s statutory advances; Equatorial Guinea had two issuances. ### Chad’s participation, auction strategy, and 2014–2015 issuance activity - Prior market access: - Chad had previously used syndications: CFAF 107 billion in 2011 and CFAF 85 billion in 2013 through bank syndication. - First auctions (late 2014): - Initial auction strategy: announce up to CFAF 10 billion with maturity of 3 months; despite total bids approaching CFAF 18 billion, Treasury accepted only CFAF 1 billion to send strong signal on maximum acceptable interest rate. - Outcome: through four 3-month Treasury bills’ issuances, Chadian Treasury mobilized CFAF 27.5 billion in 2014 at a weighted average annual interest rate of 2.8 percent. - Observed result: maximum interest rate proposed by SVTs fell sharply by the third issuance in December 2014. - 2015 issuance program: - Six 6-month Treasury bills between March and July 2015 totaling CFAF 71 billion; all oversubscribed; average annualized interest rate 3.05 percent. - Between September and end-2015, one-year Treasury bills: five issuances totaling CFAF 64 billion at an average annual interest rate of 3.4 percent. - Treasury bonds issued: CFAF 139.3 billion with maturities of two, three and five years; effective average interest rate 4.3 percent. - 2015 aggregate placements for Chad: - Treasury bills placed (gross): CFAF 156 billion. - Treasury bonds placed (gross): CFAF 139.3 billion. - Net placements of public securities: around CFAF 190 billion. - Note: net domestic financing (excluding from BEAC) was actually negative as several issuances were used to swap or roll-over existing bank loans. - Main benefit asserted: lengthen maturity of outstanding government liabilities and potentially lower future debt service while providing banks with more liquid securities that could be refinanced by the central bank. ### Domestic risk premium and market pricing observation - Comparison with Cameroon (similar issuance dates): - Interest rate spread: 104 basis points for 3-month Treasury bills. - Interest rate spread: 110 basis points for 6-month Treasury bills. - Observation: Chad has paid slightly more than 100 basis points than Cameroon on short-term Treasury bills. *Italic: IMF staff report content as provided in the source PDF unit.* ### 15. More generally, a clear hierarchy in terms of risk premiums would have existed among ### 15. More generally, a clear hierarchy in terms of risk premiums would have existed among ### Risk premium hierarchy on 3- and 6-month Treasury bills - Total of 142 individual issuances of Treasury bills in the regional market between November 2011 and end-2015; 76 issuances by Cameroon. - Using Cameroon interest rates as benchmarks: - Gabon: second “best” risk among CEMAC countries, with interest rates 30-40 bps higher than Cameroon, but with a large standard deviation. - Chad: interest rates higher than Gabon, but with a low variance among issuances (possible lumping of similar maturity issuances). - Central African Republic: highest interest rates, at around 5 percent per year for 3 month-Treasury bills and slightly more than 5 percent for 6 month-Treasury bills. ### Link between interest rates, governance, and public debt - Interest rates appear positively linked with governance and public management ratings, and with public debt indicators. - Country risk classifications by trade credit insurers show better ratings for Cameroon and Gabon than for Chad and the Central African Republic. - World Bank Doing Business rankings show a better rating for Cameroon and Gabon. - Public debt/GDP ratio is significantly lower for Cameroon and Gabon than for Chad and the Central African Republic. ### 1-year Treasury bills: weaker hierarchy and yield anomalies - Cameroon long-standing regular issuer of 1-year Treasury bills; first Gabon 1-year issuance in April 2015; Chad had five 1-year issuances between September and December 2015. - Examples of anomalies: - Gabon 1-year bills in late-2015: average interest rate 4 percent. - Chad five 1-year issuances: average interest rate 3.4 percent. - December 23, 2015 auctions: same day, same amount (CFAF 8.5 billion), Cameroon interest rate 3.9 percent vs Chad 3.5 percent. - Equatorial Guinea first issuance September 2015: interest rate 1.36 percent (lower than any Cameroon issuance for any maturities). ### Treasury bonds and yield curve inversion - Only Chad and Gabon issued Treasury bonds in 2015. - Gabon 2-year Treasury bonds: interest rate 4.6 percent. - Chad 5-year Treasury bonds: interest rate 4.1 percent. - An inversion of the yield curve present for Chad (lower interest rates for 5-year than for 2-year bonds). - Possible explanation: limited number of SVTs bidding (only one or two), favoring prior agreement between Treasury and bank(s) and potential market mispricing. ### Mispricing, monetary financing, and market development constraints - Low interest rates obtained by Chad and other CEMAC countries in auctions confirm mispricing of securities; serious obstacle to market development. - Current relatively inexpensive monetary financing: TIAO--Taux d’Intérêt des Appels d’Offres--of 2.45 percent per year. - Governments appear not ready to pay significantly more on domestic market, opting for low cut-off rates in auctions. - Comparison with international bond issuances reinforces that interest rates on CEMAC public securities are abnormally low (examples noted in footnote: Gabon 10-year Eurobond June 2015 at 6.95 percent; Cameroon 10-year Eurobond November 2015 at 9.75 percent). - Mispricing discourages emergence of a secondary market. ### Challenges and policy recommendations to develop the CEMAC public securities market - Promote a market that better reflects the reality of risks; correct mispricing to attract non-SVT investors and foster a secondary market. - Attract retail and non-resident investors: - No restrictions for retail investors, including non-resident investors, to purchase CEMAC government securities. - SVTs have exclusive right to direct participation in auctions but must buy/sell public securities at request of any investor. - As of end-2015 holdings: 95 percent of Treasury bills in the CEMAC owned by SVTs (92 percent for Chad); 5 percent owned by SVTs on behalf of other banks not registered as SVTs. - Treasury bonds ownership: 88 percent SVTs, 9 percent on behalf of non-SVT regional banks, 3 percent on behalf of private customers (essentially insurance companies). - Develop the secondary market: - Dematerialized securities; SVTs obliged to display purchase/sale prices, but SVTs mainly hold for own investment or for BEAC rediscounting. - Secondary market very limited: about twenty transactions on BTA and OTA recorded between 2011 and 2014. - Syndicated bonds slightly more active: 77 transactions on Cameroonian bonds recorded between 2011 and 2014 (average annual volume 11 percent of securities in circulation). - Planned implementation in 2016 of legal framework for the repo market (Sale and Repurchase Agreements) should support secondary market. - Strengthen SVT network and dialogue: - Chad: nine SVTs, of which three are domestic. - Improved dialogue can avoid damaging competition among issuers, reduce mispricing, and help target end-buyers (large corporates, insurance companies). - Unify treatment of auctioned and syndicated Treasury bonds: - Currently auctioned bonds traded OTC; syndicated bonds traded on Douala and Libreville stock exchanges. - Encourage domestic syndication by designating an SVT leader and involving other banks through the auction market. - Would require modification of article 9 of BEAC regulation of public securities. - Respect issuance calendars: - National Treasuries must publish annual and quarterly indicative calendars of issuances; better adherence enhances credibility. - Chad: several auctions in 2015 postponed; some auctions undertaken without prior announcement. - Improve pre- and post-auction communication: - Current pre-auction statements minimalistic in CEMAC; WAEMU examples include more comprehensive pre-auction notes and issuance information published on UMOA-Titres website. - CRCT (Cellule de Règlement et de Conservation des Titres) does not have its own website. - Chad in 2015: three of 12 Treasury bills issuances not preceded by statements announcing issuances; two not followed by a statement of results. - Strengthen debt management and decision-making transparency: - Respect planned issuance calendars; disclose comprehensive and timely information. - Coordinate across CEMAC to avoid simultaneous issuance with identical maturities. - Clarify decision-making on cut-off prices (“ceiling rate” for Treasury bills; “price limits” for Treasury bonds); explain deviations (auctioning less or more than planned) in statement of result when decisions are taken. - Make regional market financing more regular for Chad: - Initial Chadian issuances were emergency responses to large budget revenue losses from exogenous shocks. - Regional market access can provide transparent financing at relatively low interest rates with no currency risk. - Challenge: improve issuance planning and integrate issuances and planned repayments into a cash management plan rather than only increasing amounts borrowed. ### Key statistics and tables (preserving original figures) - Annex I. CEMAC Treasury Bills Yearly Issuances (CFAF Billion) - Gross 2011 2012 2013 2014 2015 - Cameroon 50 100 119 145 133.7 - Gabon 0 0 99 42.4 132 - Central African Rep. 1.56 9.4 2.5 2.5 14.8 - Chad 0 0 0 27.5 156 - Equatorial Guinea 0 0 0 0 15 - TOTAL 51.56 109.4 220.5 217.4 451.4 - Due to mature 2011 2012 2013 2014 2015 - Cameroon 0 90 80 149 140.5 - Gabon 0 0 65 44 76.4 - Central African Rep. 0 5.21 8.25 0 9.3 - Chad 0 0 0 0 104.5 - Equatorial Guinea 0 0 0 0 0 - TOTAL 0 95.21 153.25 193 330.7 - Net 2011 2012 2013 2014 2015 - Cameroon 50 10 39 -4 -6.8 - Gabon 0 0 34 -1.6 55.6 - Central African Rep. 1.56 4.19 -5.75 2.5 5.5 - Chad 0 0 0 27.5 51.5 - Equatorial Guinea 0 0 0 0 15 - TOTAL 51.56 14.19 67.25 24.4 120.7 - Selected interest rates and benchmarks cited - TIAO--Taux d’Intérêt des Appels d’Offres--of 2.45 percent per year. - Gabon 2-year Treasury bonds (2015): 4.6 percent. - Chad 5-year Treasury bonds (2015): 4.1 percent. - Gabon 10-year Eurobond June 2015: 6.95 percent. - Cameroon 10-year Eurobond November 2015: 9.75 percent. - Central African Republic: ~5 percent per year for 3-month T-bills; slightly more than 5 percent for 6-month T-bills. - Gabon: interest rates 30-40 bps higher than Cameroon on 3- and 6-month T-bills. *Source: _cr16275 - 15. More generally, a clear hierarchy in terms of risk premiums would have existed among* ### 1. Public investment is critical to support the delivery of key public services and catalyze ### 1. Public investment is critical to support the delivery of key public services and catalyze ### Importance of public investment - Public investment is critical to support the delivery of key public services and catalyze economic growth and poverty reduction. - Public investment in social infrastructure is essential to improve access to education and health services throughout the country. - Investments in economic infrastructure (e.g., roads and electricity) should help expand, integrate and expand economic sectors and favor the generation of private sector employment. - Beyond its level, the efficiency of public investment is crucial: economic and social impacts depend on the relative efficiency of public investment, inferred from comparisons of the value of public capital (input) and measures of infrastructure coverage and quality (output). ### Theoretical rationale for scaling up public investment (Chad context) - Elevated rates of return are expected due to lack of productive capital. - Higher potential growth from the removal of bottlenecks to development. - Complementarities between public and private capital. ### Historical trends in Chad’s investment and capital stock - Between 1960 and 2000: - Public investment flows never exceeded 1.5 percent of GDP, averaging only 1.2 percent per year. - Private investment flows averaged 2.8 percent of GDP per year. - Long period of instability and conflicts between 1965 and the early 1990s resulted in a capital stock over 60 percent of GDP in 2000 (only 22 percent of GDP for public investment). - Early 2000s (oil sector development): - Private investment flows reached 10.9 percent of GDP in 2001, 19.5 percent in 2002, and 14.2 percent in 2003. - After mid-2003, private investment flows averaged 8 percent of GDP per year. - The oil sector generated over US$10 billion in public revenues for Chad between 2000 and 2013. - Public investment flows increased and reached, on average, 9 percent of non-oil GDP between 2000 and 2013. - By 2013: - Investment stock reached 100 percent of GDP (of which 30 percent of GDP in public investment). - Chad remained the African country with the lowest capital stock measured in percent of GDP. ### Infrastructure gap and recent progress - On the eve of the oil era (circa 2000) Chad’s infrastructure was exceptionally poor among African LIDCs: - Less than 10 percent of 6,200 kilometers of roads were paved in 2000. - Access to power, electricity, telecommunications, water, and health services were highly underdeveloped. - Indicators of progress: - World Economic Forum’s Global Competitiveness Index (GCI): perception of quality of overall infrastructure in Chad increased from 1.55 in 2007 to 2.43 in 2016 (scale 1 to 7, best). - Quality of roads sub-index more than doubled between 2007 and 2016. - Mobile phone subscriptions per 100 habitants reached almost 40 in 2016, compared to 1.4 in 2007. - Logistics Performance Index (World Bank): Chad’s infrastructure ranking moved from 141st in 2007 to 112th in 2014. - Nonetheless, perception of infrastructure quality in Chad remains significantly lower than the Sub-Saharan African average; electricity supply progress has been slow; mobile subscriptions remain more than two times lower than the Sub-Saharan African average. ### Public Investment Management (PIM) and efficiency - IMF’s PIMA methodology and related work: - For LIDCs like Chad, around 40 percent of the potential benefits of public investment are on average lost due to inefficiencies in the public investment process. - Strengthening institutional arrangements could close up to two-thirds of the efficiency gap identified. - Key stages where transparent and well-governed institutions matter: - Planning: ensure fiscal sustainability and effective coordination across sectors, levels of government, and between public and private sectors. - Allocation: comprehensive, unified, medium-term capital budgeting; objective criteria and competitive procedures for appraising and selecting projects. - Implementation: ensure projects are fully funded, transparently monitored, and effectively managed for timely and cost-effective delivery. ### Assessment of Chad’s PIM performance - The 2011 Public Investment Management Index (PIMI) placed Chad among the worst performers among 71 countries (40 low-income and 31 middle-income countries), particularly on: - Strategic guidance and project appraisal. - Project selection and budgeting. - Evaluation and audit of projects. - General weaknesses similar to other LIDCs: need to strengthen institutions related to investment implementation, budget execution transparency, procurement openness, and cash management efficiency. ### Specific issues identified in Chad - Inconsistency between medium-term investment priorities (National Development Plans, NDPs) and actual budget allocations and project selection: - NDPs are the sole reference framework and priorities are included in Public Investment Plans (PIPs), but sectoral ministries do not always follow these priorities when selecting investments. - Budget presentation weaknesses: - Ministries submit project proposals for preliminary budget discussions, but the budget law often allocates global credit lines by ministry without a detailed list of projects and specific allocations, allowing expenditure commitments for projects not originally contemplated. - Planning, allocation, evaluation and audit deficits: - Many projects are approved with limited preliminary studies, raising concerns about technical quality and consistency with macroeconomic and sectoral objectives. - Ex-post evaluations and audits are basic and superficial. - Recurrent spending mismatch: - World Bank public expenditure review for 2004-2009: expenditure on transfers and on goods and services rose by about 156 percent, while domestically financed investment spending rose by 270 percent over the same period. - Field visits in October 2009 found many newly constructed health and education structures stood empty without adequate budgets for operationalization. - During recent fiscal adjustment, expenditure on goods and services were drastically reduced by 37 percent between 2014 and 2015. - Expenditure chain complexity and weak controls: - Decree on general regulations on public accounting describes four phases (commitment, validation, authorization, payment), but precise steps are not specified and subject to interpretation. - Expenditure process is heavy and complex; for some procurement by the ministry of infrastructure, no less than 15 steps between different services were identified. - Risk of accumulation of potential claims against the State due to allocation and control issues; some spending commitments (“dette intérieure”) may not be officially recognized and could compete with budgeted investment projects and lead to domestic arrears. - Role of private sector and regional coordination: - Government should assess whether to play a role in all major infrastructure projects or only in strategic ones; space for private investment depends on regulatory framework and business environment. - Chad faces one of the most challenging business environments in SSA. - Greater regional coordination (particularly among CEMAC countries) recommended to improve prioritization, coordination, synergy, reduce costs, prevent duplication, and support economic integration. ### Policy recommendations (specific and general) - Strengthen institutions related to funding, management, and monitoring of project implementation to improve PIM efficiency. - Improve preparation and presentation of the budget: - Establish a medium-term macroeconomic framework. - Publish a multi-year public investment program. - Advance towards multiyear budgeting for investments ahead of the planned transition to program budgeting. - Simplify and formalize the expenditure chain: - Create a handbook formalizing procedures for all parties in the expenditure chain, reduce redundant controls, and retain controls with real added value. - Protect investment appropriations: - Ministry of Finance should appropriate total project costs at project commencement, prevent budgets from being “raided” to meet current pressures, and allow some carryover of unspent appropriations to future years. - Enhance transparency and accountability: - Improve transparency of budget execution, openness of procurement, efficiency of cash management. - Strengthen project management, monitoring, and evaluation to incentivize timely, on-budget delivery and ensure value for money and integrity. - Reassess government role and foster private participation: - Consider focusing public involvement on strategic projects and enabling private investment via improved regulatory framework and business environment. - Promote regional coordination: - Strengthen concerted regional strategy among CEMAC countries for better prioritization, coordination, and synergy of national investment programs. *Source: _cr16275 - 1. Public investment is critical to support the delivery of key public services and catalyze* ### 1. Chad developed its oil sector under uniquely difficult circumstances: extremely low levels of ### _cr16275 - 1. Chad developed its oil sector under uniquely difficult circumstances: extremely low levels of ### A. Early development, production history, and revenues - Chad faced extremely low levels of human and physical capital, civil strife, a virtual absence of basic infrastructure in the oil producing region, and is landlocked. Oil discovered in the 1970s; civil war prevented early development. In 1988 the Chadian Government granted a 30-year concession to a multi-company consortium; Esso eventually became the operator. - Construction began in 2000. Key infrastructure: a 1,070 km buried pipeline from Doba (Chad) through Cameroon to the Atlantic coast near Kribi. The Doba reservoir was estimated to contain one billion barrels, to be extracted over 25 years. Oil production started in 2004; production peaked in 2005 at 172,000 barrels per day, then declined. New fields stabilized overall production at 120,000 b/d in 2008 before rising to 145,000 b/d in 2015. - Oil prices and revenue trajectory: - During 2000-03, oil price was near US$ 30 p/b; Chad’s budget was expected to benefit by US$45 to 50 million per year. - Doba oil prices reached around $100 p/b during 2011-14. - Chad’s oil revenue peaked in 2011 at US$2 billion, making up 76 percent of government revenue. - As prices fell to US$43 in 2015, revenues dropped to some US$200 million in 2015, or 24 percent of government revenue. - Over 2004-15, Chad (population 10 million in 2004) collected cumulatively US$13 billion in oil revenue. ### B. Institutional arrangements and transparency safeguards - Original Petroleum Revenue Management System (PRMS) with World Bank involvement included safeguards: - Royalties paid into an offshore account. - Income tax paid into the central bank. - Earmarking of revenue for investment spending. - The initial sector structure (one consortium, two licenses, one set of oil fields, one fiscal regime) made revenue collection relatively transparent and integrity challenges limited. - A new PRMS was adopted in 2014 which: - Maintained the CCSRP (College de Contrôle et de Surveillance des Recettes Pétrolieres) producing annual reports covering direct oil revenue use; the last report covers 2013. - Retained the offshore account with Citibank in London as the single account for direct revenues (royalties and proceeds of sale of RIK); only the Treasury has access. Indirect revenues (taxes and customs duties) must be paid into Treasury accounts. - Built on a 2010 model Production Sharing Contract to standardize fiscal parameters. - Supported Extractive Industries Transparency Initiative (EITI) participation: Chad produced annual EITI reports covering 2007-13 and was declared EITI compliant in 2014; to remain compliant Chad must produce the 2014 report before end-2016 meeting EITI standards. ### C. Increasing complexity of the oil sector (key developments and risks) - More producers and exploration: - Beyond the Doba Consortium: China National Petroleum Company International (CNPCI), producing since 2011, and Glencore (previously Griffith), producing since 2013. A dozen other companies hold exploration permits. - Two fiscal regimes: - Consortium and CNPCI first phase continue under the concessionary (royalty/tax) regime. - All licenses issued after the Hydrocarbon Law of 2007 are of the production sharing contract (PSC) type. - Creation of a national oil company: - Société d’Hydrocarbures de Tchad (SHT) created in 2006 to manage government participations and tasks requiring coordination with other agencies. - Shift to revenue-in-kind (RIK): - In 2012 the Government switched to RIK. Companies pay royalties and taxes (under the CPP) in physical barrels of oil. In 2015, RIK accounted for two-thirds of oil revenue; marketing RIK is a major challenge and risk factor. - Quarterly income tax advances: - Since 2008 the Doba Consortium pays quarterly income tax advances based on concurrent estimates rather than prior year declarations. Advances are more accurate but introduce quarter-to-quarter uncertainty in receipts. - Oil-collateralized borrowing and government acquisitions: - RIK enabled prepayment agreements: in 2013 Government borrowed US$600 million for budget financing; in 2014 SHT borrowed—with government guarantee—US$1.45 billion to purchase a 25 percent share in the Doba Consortium. - In 2011 a refinery (N’Djamena Refinery Company, NRC) started operations; owned 60 percent by CNPCI and 40 percent by SHT. - Government increased participation in the sector: - 2014 purchase of 25 percent in the Doba Consortium from Chevron. - 2014 assumption of 10 percent in CNPCI’s two producing fields as part of a settlement over environmental damages (on top of US$600 million in cash compensation). - SHT holds 25 percent in CNPCI’s three not-yet-producing fields, and a 15 percent stake in Glencore (after having sold 10 percent in 2013). - Consequences of complexity: - More complicated accounting for past revenues and projection of future revenues. - Debt service on oil-collateralized borrowing is onerous and hard to predict (function of oil prices and production). - Greater need to organize smooth information flows, strengthened oversight, and increased audit responsibilities across Government. ### D. Two oil fiscal regimes: concessionary (royalty/tax) vs. PSC (key features and comparisons) - Both regimes in Chad generate similar revenue flows with specific overlaps; differences summarized: - Common payments for both regimes: - Signature bonus (US$ 40 million, o/w US$10 million deductible). - Production bonus (US$ 2 million, upon issuance of exploitation license). - Production royalty (12.5-16.5% of production at well head). - Statistical fee (1% of exports). - Government participation (max. 25%, carried interest) gives rise to payments to SHT. - Surface fees. - Contribution to staff training (US$ 250,000 p/a in exploration, US$ 500,000 p/a in exploitation). - Contribution to audit costs (US$ 200,000 p/a in exploration, US$ 400,000 p/a in exploitation). - PSC-specific: - Tax oil (40-60% share for government of total profit oil, depending on R-factor). Profit oil calculated as total production minus royalty minus cost oil (with 70% cost limit). - Concession-specific: - Corporate income tax (42.5-65% of net profits, depending on field and R-factor). - Mechanics and policy considerations: - Under concession: royalty (user fee) plus corporate income tax; royalties provide early continuous revenue but are regressive and can encourage premature cessation of marginal fields. Chad’s income tax is progressive with rates from 42.5 to 65 percent tied to the R-factor. - Under PSC: government retains ownership; company is contractor rewarded with physical barrels after cost oil deduction; profit oil split determines government’s tax-equivalent (tax oil). Chad’s PSC government share is 40 to 60 percent depending on R-factor; cost oil limit is 70 percent (ensuring at least 30 percent of turnover in profit oil). - Government participation (max. 25%) is a risk-free benefit when exercised after production; modalities in Chad include carried equity participation where partners advance costs and reimburse from cost oil and equity profit oil; such participations are assigned to SHT which receives equity profit oil as income. - Fiscal-design objective: - Overarching objective is to maximize government “tax take” (Average Effective Tax Rate, AETR) while leaving sufficient risk-adjusted margin to companies; progressive regimes increase tax take with project profitability. - Gab-Leyba and Laporte (2015) modeling concluded Chad’s concessionary regime is regressive and its PSC regime is progressive. However, only when Brent price goes over US$57 per barrel does the tax take under the PSC start to exceed the one under the concessionary regime. *Prepared by Anton Op de Beke and Samson Kwalingana.* ### 15. As of 2016, Chad has three producing oil companies. One is a consortium of companies, the ### 15. As of 2016, Chad has three producing oil companies. One is a consortium of companies, the other two operate for their own account. As of 2013, eight other companies were in the process of exploring (EITI, 2016). ### Major producers and 2015 production levels - Doba Consortium (led by Esso): about 70 K bbl/d in 2015. - China National Petroleum Corporation International (CNPCI): 48 K bbl/d in 2015. - Glencore (ex Caracal, ex Griffith, ex Petrochad Ltd): 21 K bbl/d in 2015. - SHT sales (government RIK): 36 K b/d in 2015 (one quarter of Chad’s total production). ### The Doba Consortium (Esso-led) - Operates under: - 1988 Convention: blocks Komé, Miandoum and Bolobo. - 2004 Convention: blocks Nya, Moudouli, Maikeri and Timbré. - Ownership shares: - Esso: 40 percent. - Petronas Carigali: 35 percent. - SHT (since 2014): 25 percent (previously Chevron Petroleum Chad). - Fiscal regime changes from 1988 to 2004 Conventions: - Royalty rate increased from 12.5 to 14.25 percent. - Corporate income tax changed from a fixed 60 percent to a range of 42.5 to 65 percent depending on the field and R-factor. - Note: When the Brent price drops below a certain inflation adjusted floor, the rate is reduced to 55 percent. - Operator and cost recovery: - Esso is the “operator” and recovers costs via “cash calls” proportional to equity shares. ### CNPCI (China National Petroleum Corporation International) - Operates block H, including Ronier and Mimosa fields; purchased licenses from Cliveden and Encana. - Phase 1: - Started in 2011 to supply the NRC refinery (CNPCI owns 60 percent of NRC). - Gradually raised production to NRC’s maximum throughput capacity of 14,000 barrels per day in 2015. - CNPCI deliveries are not subject to royalty; NRC delivers equivalent refined product for free to the army and the electricity company; price set in a long-term agreement. - Phase 2.1: - Started production in 2014 under a concessionary regime. - Fiscal terms: royalty rate of 13.5 percent and an income tax rate of 40-50 percent. - SHT holds a 10 percent stake in Phase 2.1 (government in process of selling). - Phase 2.2: - Production on fields that make up Phase 2.2 had yet to start as of the report. - Covered by a PSC with a cost oil limit of 70 percent, a profit oil split of 40 to 60 percent depending on the R-factor, and a royalty of 14.25 percent. - SHT has a 25 percent stake in Phase 2.2. ### Glencore (ex Caracal / Griffiths Energy / Petrochad Ltd) - Entered production since 2013 on blocs DOI, DOB, DOH, Borogop and Chari East Doséo. - Transaction: - April 2014: Glencore purchased Caracal’s licenses for US$1.35 billion. - SHT holds a 15 percent share (having sold 10 percent of Caracal in 2013). - Ownership and operations: - Glencore production company owned by Glencore Xtrata Plc but operationally separate from Glencore’s trading arm. - Fiscal terms (same as CNPCI Phase 2.2): - Cost oil limit of 70 percent. - Profit oil split of 40-60 percent. - Royalty of 14.25 percent. - Financial impact of oil price collapse: - Glencore wrote off US$790 million of its initial investment in 2015. - Note on reporting: Glencore reports on payments to governments (reference to Glencore reports). ### The National Oil Company SHT (Société des Hydrocarbures du Tchad) - Created in 2006; public enterprise, 100 percent government owned; supervised by the Ministry of Petroleum. - Governance instruments: - 2006 law of establishment. - 2007 decree describing statutes. - 2011 management contract with the Government covering marketing of government oil. - Mandate and activities: - Broad mandate: prospecting, exploration, development, production, transport; may include refining, storage and distribution of refined products. - 2011 Contract: SHT is not a regulator; only the Government issues licenses. Government receives all payments from companies other than the RIK assigned to SHT. - Resources of SHT: - 2 percent commission on sale of oil. - Net income from its oil assets. - Interest income, loans, and state subsidies. - Tax treatment: - SHT subject to oil fiscal regime for production activities; general income tax for marketing. - Not subject to any dividend rule; Statutes allow General Assembly latitude to re-invest net income. - Practical role and assets: - Manages government oil assets and markets government and SHT oil. - Largest asset: 25 percent in Doba Consortium known as Badoit, purchased in 2014 for US$1.3 billion from Chevron — entitles SHT to 25 percent of production (after royalties); proceeds must cover associated costs. - SHT sold government RIK totalling 36 K b/d in 2015. - All SHT sales currently to Glencore under a monopsony marketing contract integral to the prepayment agreement. - SHT shareholdings include NRC (40 percent SHT, 60 percent CNPCI) and stakes in Tchad-Oil (SHT 45 percent), Tchad Handling Services (SHT 55 percent), SOTRADA (SHT 45 percent, Bocom 55 percent). - Transparency and reporting: - SHT does not publish an activity report nor financial statements; its website is under construction. ### Box 2 — The Badoit Project Purchase (summary of transaction and consequences) - Transaction details: - June 2014: Government purchased Chevron’s 25 percent Badoit stake in Doba Consortium for US$1.3 billion (US$1.23 billion for Badoit and remainder for Chevron’s shares in TOTCO and COTCO). - Price agreed in 2013. - Financed with a US$1.45 billion oil prepayment from Glencore. - Prepayment agreement guaranteed by the Government and to be repaid over 4 years; serviced from proceeds of oil cargoes sold by SHT to Glencore; sales agreement sets number of cargoes and discount to Brent. - Fiscal upside/downside: - Government stood to gain full 100 percent of profits on Badoit instead of only the 60 percent tax take, but also agreed to share any losses. - Projections in 2014 with Doba price at US$90 p/b showed purchase price recoverable over four years solely from Badoit equity oil, leaving US$500 million positive cash flow for Government. - Subsequent sharp drop in oil prices changed that projection dramatically. - Rescheduling and new prepayment: - Oil price drops in 2014–2015 jeopardized project profitability and net proceeds for debt service. - Government negotiated rescheduling with Glencore; included balance on US$600 million 3-year prepayment from 2013. - December 2015 rescheduling resulted in a new US$1.45 billion prepayment. - Rescheduling lowered interest rate, saving Government an estimated US$150 million, and extended effective repayment period to 2022 at the latest depending on oil prices. - Expansion of RIK available for debt service under rescheduling: - 2013 prepayment to be repaid solely from royalties; 2014 one solely from Badoit equity oil. - For repaying new 2015 prepayment the Government’s royalty as well as equity oil can be called on. - From purchase price of cargoes, Glencore first retains Badoit cash calls and pipeline fees; remainder used for debt service: 100 percent for “equity deliveries” and 70 percent for “royalty deliveries” (50 percent until July 2016). Debt service subject to quarterly caps. - Remaining funds after debt service are paid by Glencore into the Government’s off-shore account in London. - 2015 actuals related to Glencore purchases: - Glencore purchased 14 cargos in 2015 containing a total of 13.2 million barrels (equity and royalty deliveries combined). - Gross proceeds: US$528 million (CFA 312 billion). - Of gross proceeds, estimated US$233 million from Badoit equity oil. - Glencore retained US$183 million (CFA 108 billion) in costs including US$113 million in cash calls for Badoit and US$65.0 million for transportation (US$4.9 p/b), resulting in net proceeds of US$345 million. - Of net proceeds, Glencore applied US$158 million (46 percent) to debt service — US$99 million in interest and US$59 million in principal. - Remaining US$187 million (CFA 110 billion) were transferred to the Government. - Important contractual note: - Badoit is not a “carried interest” participation; joint venture partners are under no obligation to make advances to help the Government pay its cash calls. ### Oil sector transparency arrangements and EITI participation - Rationale: - Transparency is crucial to counter the “resource curse”; it promotes better informed debate, better decisions, risk appreciation, and policy credibility. - International initiatives mentioned: - IMF’s Guide on Resource Revenue Transparency. - EITI (Extractive Industries Transparency Initiative). - Natural Resource Charter. ### Chad’s 2013 EITI Report (issued January 2016) — scope and main findings - Coverage: - Hydrocarbon and mining sectors (mining revenue was CFA 1.9 million). - Reconciles payments from extractive companies with government revenue information. - Principal conclusion: - Absence of any significant discrepancies — all company payments were identified as having been officially received by the government. - Not all revenue was received in the budget. - EITI does not audit whether companies paid what they should under contracts, laws and regulations (audits needed for that). - EITI does not determine whether fiscal regime is competitive; such assessment requires contract modeling and international comparison. - Report particulars: - Covers 28 payment flows: 6 in-kind flows and 21 cash flows, plus one residual cash flow (any pertinent payment/revenue exceeding $100,000). - Identified 20 companies active in petroleum sector: 17 upstream, 3 downstream (TOTCO, COTCO, and the NRC). Out of 17 upstream, 13 submitted data; omitted companies judged immaterial. - SHT plays dual roles: collects revenue (RIK) and makes payments to other government agencies (Treasury, Customs, Ministry of Petroleum). - EITI encourages companies to have external auditor approve submissions: out of 13 reporting companies, 12 did so. - 2013 oil revenue totals and composition: - Chad’s oil revenue in 2013: FCFA 803 billion (State reporting). - This amounted to 68 percent of total revenue and 17 percent of non-oil GDP. - Corporate income tax (flow 13) accounted for 70 percent of oil revenue; royalties accounted for remainder. - In-kind royalties collected by SHT (flows 1, 4 and 6) transferred to the State (flow 2). - Barrels collected vs paid by SHT: 3,886 and 3,757 thousand respectively (difference explained by end-year accumulation too small for marketing in 2013). - Marketing proceeds and price: - Proceeds from marketing totaled FCFA 186 billion in 2013, implying average price per barrel of US$100.4 given an average Brent price of US$108.9 p/b — discount of US$8.5 p/b relative to Brent. - One-time SHT revenue in 2013: - “Other significant payments” (flow 28) included CFA 41.5 billion (US$84 million) — net proceeds of sale by SHT of a 10 percent stake in Caracal concession to Glencore. - SHT reportedly received US$150 million for its 10 percent share in Badila and Mangara fields; paid US$60 million in carried-interest debt and US$6 million to Treasury as registration fees; remaining US$84 million used by SHT to fund Board-approved activities. - Because EITI definition of State includes SHT, transaction did not produce EITI payment-revenue discrepancy even though funds were not received in the budget. - Key EITI recommendations (from 2013 report) to Chad’s EITI High National Committee: - Create a publicly accessible, authoritative cadaster of all existing oil (and mining) licenses containing EITI-required minimum information on licenses and license holders. - Ministry of Petroleum and SHT to better track oil belonging to the Government and consolidate supervision and control over utilization of these resources (including explaining oil-collateralized borrowing). ### Selected figures from the 2013 EITI summary table (as reported) - In-kind oil revenues (thousand barrels): - Royalty on production (Allocation): 3,809. - Royalty on production (Marketing Treasury): 3,757. - Profit oil State (Allocation): 63. - Profit oil (Marketing Loan Glencore): 14. - Total in-kind oil revenues: 3,886 (SHT collector and payor columns align to 3,886 and 3,757 for State reporting respectively in table). - Cash oil revenues (FCFA): - Royalty on production (paid in cash): 2,224,170. - Royalty on production (cash counterpart Treasury): 119,209,691. - Royalty on production (cash counterpart Glencore): 67,047,894. - Corporate income tax: 564,667,037. - Statistical royalty on gross exports: 13,704,267. - Personal income tax (IRPP): 16,529,091. - Other significant payments (flow 28): 49,925,758 (companies) and 41,486,760 (SHT), with residuals shown in table. - Total cash oil revenues (sum of relevant entries in table): 655,837,528 (companies) and 41,486,760 (SHT) yielding State reporting total of 803,290,252. - Memorandum percentages from the EITI table: - Total oil revenues as percent of Nominal GDP: 12.6. - Total oil revenues as percent of Non-oil Nominal GDP: 17.2. - Total oil revenues as percent of Total revenues: 67.7. - Exchange rate noted in table footnote: Average annual exchange rate 493.9 FCFA/US$. *Source: Excerpts from IMF staff report content on Chad’s oil sector and Chad’s 2013 EITI report as provided in the supplied content.* ### 27. A potentially very powerful transparency tool for governments is the modeling of oil ### 27. A potentially very powerful transparency tool for governments is the modeling of oil contracts. ### Modeling purpose and structure - Modeling combines the oil fiscal regime parameters (e.g. tax rates, profit oil splits, and amortization schedules) with project-specific information (costs and production), economic assumptions (e.g. prices, inflation, interest and discount rates), and financing assumptions. - Typical users and interests: - EI companies: profitability indicators. - Governments: measures of “government take”. - Stability and uncertainty: - The fiscal regime is the most stable component of a model. - All other variables are subject to great uncertainty; model results are indicative. ### Applications across time horizons and scopes - Long-term applications: - Forecast revenues of a single project over its projected life. - Aggregate forecast of revenues from all existing projects over a certain period. - Evaluate fiscal take of proposed projects or hypothetical changes to the fiscal regime. - Life-cycle models show revenue types (e.g. royalty and income tax) by project stage to manage popular expectations and inform strategic economic planning. - Medium-term applications: - Revenue forecasts for budget preparation; should be detailed and updated regularly. - Short-term applications: - Monthly or quarterly forecasting essential for cash management and spending programming. ### Retrospective use and audit targeting - Models can compare actual project performance against company feasibility study expectations to reveal gains or losses relative to company projections. - Resource revenue administrations can use models to calculate precisely how much revenue should have been received over a past period given actual production, costs, prices, etc., and compare with actual collections to focus audit efforts. ### IMF FARI model and public tools - The IMF developed the Fiscal Analysis of Resource Industries (FARI) life-cycle model: - Discounts cash flows across four distinct project life cycles: exploration, development, production, and closure. - In 2016 the Fund publicly released the FARI model, its methodology description, and an Excel template to promote wider use. - Target users include governments, the public, and IMF staff for advising on resource fiscal regimes and providing technical assistance. ### Current status and recommendations for Chad - Existing capacity: - The Study and Forecasting Directorate of Chad’s Ministry of Finance uses a rudimentary model for short- to medium-term revenue forecasts. - Enhancements needed: - Produce more detailed reports. - Properly reflect both the concessionary and PSC fiscal regimes. - Allow risk assessments or scenario analysis. - Integrate any government commitments affecting oil revenue (e.g., oil-collateralized debts). - Maintain continuously updated historic data and assumptions, requiring free information flow within the administration. - Model-maintenance staff should be informed immediately of any changes to the fiscal regime. ### Oil sector information flows (Chad-specific findings) - Importance: - When oil prices peaked in 2011-12, oil revenues contributed three quarters of total government revenues in Chad. - A free flow of information across MoP, SHT, and MoF is indispensable for good management. - Institutional roles: - Ministry of Petroleum (MoP): contract negotiations, monitoring upstream/downstream activities, sector promotion. - Société des Hydrocarbures du Tchad (SHT): government equity participation, benefits from oil prepayments, quasi-fiscal spending from net income, collects and sells Government’s oil. - Ministry of Finance (MoF): taxation-derived revenue streams, debts contracted/guaranteed by government, forecasting and reporting of government oil revenue for budget purposes. - Recent institutional steps and shortcomings: - Creation of Office for Monitoring Oil Revenues in MoF (not truly operational). - 2014: Unit for Collecting and Centralizing Revenues from the Extractive Sector in the Treasury proved useful for 2013 EITI report. - 2015: Creation of Inter-Ministerial Committee in Charge of Monitoring Petroleum Revenues; became a structural benchmark under the ECF-supported program for June 2015. - Committee agenda (first meeting July 2015) included identifying oil revenue flows, following litigations, examining Glencore loan accounting, exploiting company audit reports, and preparing proposals for a new petroleum revenue management system. - Government decision to publish more detailed oil sector information in quarterly budget execution reports (structural benchmark for September 2015) and to regularly publish production volumes, shipments, Doba discount, individual revenue flows, and SHT financial flows (structural benchmark for June 2016). - Progress uneven: the Inter-Ministerial Committee rarely meets; the last budget execution report with oil sector information covers the first semester of 2015. - Latest plan: MoP to form a “data room” centralizing oil sector information for government consultation. ### Information inputs required to keep models current - Essential company submissions: - Companies’ work plans and annual budgets (provisional and definitive). - Companies’ monthly reports. - For long-term forecasts: reports on remaining reserves, investments, and operating costs to produce them—currently companies in Chad do not produce such reports. - Quarterly tax submissions with details including calculations of fiscal flows and deductions for amortization and debt—currently tax submissions in Chad do not contain this detail. - Pipeline companies: information to project transport costs. - Rationale: - Oil revenue volatility arises from prices and costs; costs can often be anticipated with good company information such as investment programs and amortization payments. - Much information is sent to MoP; some arrives only at SHT—timely flow from MoP and SHT to MoF is critical. ### Publication of contracts and transparency - Current state: - Public information scarce; EITI reports are currently the most comprehensive source. - Esso contracts available on the EITI website. - Five PSCs signed between 2011 and 2013 have entered the public domain via regulatory actions abroad; fiscal terms across these five contracts are nearly identical though other provisions differ (e.g. signing and production bonuses). - Good practices and recommendations: - Publication of contracts is good transparency practice; public access to contracts enables accountability and is recognized in Chad’s draft Transparency Code (transposition of the 2011 CEMAC Directive). - Chad should publish on a website all existing concessions and contracts, the model PSC (contrat type), and feasibility studies submitted with license applications; the site could also host the cadaster of oil licenses recommended by EITI. - Publication benefits companies too: clarifies rights and obligations publicly and allows defense against allegations. - Noted irony: - Companies can often obtain contracts via an active informal market despite confidentiality clauses; the public remains uninformed. ### Oil sector integrity arrangements and audits - Need for audits: - As sector complexity increases, assuring integrity of oil revenue flows becomes more challenging. - Oil revenues pose a high risk of malpractice due to large, technically complex transactions and scarcity of countervailing expertise. - Governments should emphasize data quality, internal controls, and independent external audits. - Audit types and purposes: - Physical audits: verify volume and quality of production; audit production valuation when based on benchmark prices. - Cost audits: ascertain accuracy of company cost information; detect excessive costs and abusive transfer pricing in related-party transactions. - Tax audits: verify compliance with tax laws, regulations, and specific contract provisions after production, prices, and costs are verified. - Audit frequency and prioritization: - Given large revenues at stake, oil company tax declarations should be audited annually, even if selectively, and risk assessments should guide audit selection. ### Audit institutional responsibilities in Chad - Current institutional complexity: - MoF through Directorate General of Taxes (Directorate Général des Impôts - DGI) is responsible for licenses under the concessionary regime (held by ESSO and the CNPC) because they involve corporate income tax. - Licenses under the PSC regime (e.g. held by Glencore and also the CNPC) are excluded from corporate income tax, suggesting audit responsibility would fall to the MoP; SHT’s 2011 contract leaves open the possibility of delegation. - Considerations and recommendations: - Integrated administration of oil revenues by the tax department has advantages over a fragmented approach. - Technical expertise of MoP is indispensable for conducting physical, price, and cost audits. - A case can be made to assign tax-oil auditing to the MoF given similarities between tax oil and corporate income tax, but coordination with MoP technical experts is necessary. *Source: IMF staff analytical text on Chad’s oil sector transparency, modeling, information flows, publication of contracts, and audit responsibilities.* ### 44. Even oil companies that are still in the exploration or development phases should be ### _cr16275 - 44. Even oil companies that are still in the exploration or development phases should be audited. ### Audit of exploration and development phase oil companies - Exploration and development phase companies "should be audited." - Rationale: they "are incurring substantial costs which will be deducted for tax oil or income tax calculations as soon as oil production starts." - Timing risk: "At that time, it may be too late to properly audit them since audit rights expire, and so do companies’ record-keeping obligations." - Chad PSCs: the Government has "five years after the end of a company’s fiscal year to launch an audit of that year’s accounts." - If the Government fails to do so, the accounts will be deemed "accurate and definitive." - Any pertinent findings must be brought to the attention of the company, after which a time-bound correspondence ensues. This should result in a clear conclusion that the company owes a tax adjustment. If not, the accounts are again deemed "accurate and definitive." - In case of an unresolved dispute, the parties can turn to mandatory arbitration "in front of the International Chamber of Commerce in Paris." ### Industry audit practice and implications for Chad - Audits are common in the oil industry and "not at all interpreted as a lack of trust." Typical sequence: - internal commercial audit; - independent external audit; - consortium partner audits (e.g., ESSO audited by its consortium partners); - regulatory and tax authority audits of physical operations and tax declarations. - Implication for Chad: ESSO being audited by its partners "should give some comfort to Chad’s fiscal authorities in the context of their audit strategy." ### Outsourcing tax audits - Outsourcing can be useful "when capacity constraints prevent the full and effective utilization of all audit rights." - Developing country revenue administrations face difficulties to "train and retain the necessary staff." - Advantages of outsourcing to reputable international audit firms: - match specialized staff of oil companies; - possible prior experience with the same company in other countries; - access to comparator data needed for cost audits; - with appropriate terms of reference, outsourcing can assist with capacity development. - Current practice in Chad: "the Chadian authorities are presently using the services of an international company to audit their oil companies and the refinery." ### Proper auditing of the SHT (Société des Hydrocarbures du Tchad) - Importance: "Proper auditing of the SHT is paramount." - SHT scale: "some US$2,750 million (FCFA 1,462 billion) in assets at end-2014." - Asset composition end-2014: "US$1,042 million in land and US$1,179 million in financial participations." - Liabilities end-2014: "US$937 million in investment subsidies and US$1,427 million in financial debts." - Legal and governance requirements: - As an oil company, the SHT is subject to the Hydrocarbons Law regarding production of financial statements. - Its Statutes oblige it to "produce annual financial statements, within six months after the end of the year, and in line with internationally accepted accounting principles (Art. 33)." - Because SHT is branching out to core and non-core activities, its financial statements "should be compiled on a consolidated basis." - According to its Statutes (Art. 28), the SHT must submit its financial statements to an internal auditor approved by the Communauté Economique et Monétaire de l’Afrique Centrale (CEMAC), and the Government may nominate an external auditor. - The newly created Accounting Court (Cour des Comptes) has responsibility for proper auditing of public enterprises. - Best practice recommendation: SHT financial statements should be subjected to "an independent external audit in accordance with International Standards on Auditing" and published together with "the opinion of the auditor on their truthfulness." ### Auditing SHT oil marketing - SHT responsibility: "marketing of the government’s oil." - Importance: "Given the high stakes and risks, this operation should be regularly audited." - Government receipts in kind: "two-thirds of its oil revenue in kind, some 13 million barrels in 2015." - Reporting requirements per SHT Contract: - SHT must send the MoP an explanatory note (Note de calcul) immediately after each shipment. - Every month SHT must send a detailed report to the MoP and the MoF "justifying the prices and other terms and conditions of the sale." - The Government has the right to "appoint an expert to evaluate the SHT’s marketing performance, and to take back this mandate from the SHT if it believes SHT prices are unfavorable." ### Pricing challenges for Doba crude - Market characteristics: "With total production of less than 200 thousand barrels per day, the market for Doba is shallow, and none of the parties publishes prices." - Typical pricing: "Usually the Doba price is quoted at a discount to Brent." - Guidance for government in gauging discounts: - Use prices revealed by other oil companies (those subject to income tax reveal turnover price; those under PSCs reveal price for converting US dollar costs into barrels of cost oil). - Complement with information from specialized firms that estimate crude prices based on quality and refinery needs. - Market observation (industry publication): Platts began assessing Doba in August 2015 and "observed a steady increase of the discount to Brent, to US$10 beginning of December, followed by a decline to US$6.50 in May 2016." ### Audit of the revenue administration - Integrity assurance should include "an audit of the revenue administration itself." - Scope: should not re-audit oil companies’ tax returns but should examine the revenue administration’s audit systems and include "a selective review of its audit papers." - In Chad, auditing the government auditors could be assigned to "the Government Accounting Court (Cour des Comptes), possibly with the help of outside expertise." - Suggested topics: distribution of responsibilities and accountability across agencies, and the audit strategy being pursued. ### Accounting for utilization of audit rights and public accountability - Expert audits are costly but "in the case of oil companies may produce significant additional revenues," typically especially at first. Over time audits become regular and "are less likely to result in major corrections to the tax assessments" — interpreted as evidence of disciplinary effect. - PSCs obligations and fees: companies must pay the government to organize tax audits. Fees specified: - exploration phase: "US$200,000 per year (inflation indexed, plus travel and per diems for four staff)"; - exploitation phase: "US$400,000 per year." - Public accountability recommendations for utilization of audit rights: - Audit rights are "hugely valuable" and their utilization should be publicly accountable. - A regular report could indicate: which licenses or projects give rise to audit rights; what type of audit rights these are; their expiration; the government agency assigned those rights; how the rights have been exercised; and the main conclusions of the audits. - The report could also cover agencies (for instance, SHT, NRC) or activities (for instance, production or marketing of oil) the Government wants audited regularly. *CHAD — INTERNATIONAL MONETARY FUND (excerpts from the provided content).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16275.pdf_