OIL TO CASH
Oil to cash is an idea that has been more warmly embraced by scholars than by politicians. Scholars have advocated the idea generally (Moss et al. 2015), for sub-Saharan Africa (Shaxson 2007; Diamond & Mosbacher 2013), and for Iraq (Birdsall & Subramanian 2004) and Nigeria (Sala-i-Martin & Subramanian 2003). It has yet to be implemented, although Alaska’s oil dividend program contains elements of the idea and other conditional cash transfer programs such as Brazil’s Bolsa Familia program and Mexico’s Oportunidades program have operated for decades. There has, to date, been almost no discussion of the idea in Somaliland. It did not, for example, feature at all in the 2017 presidential election campaign.
Scholarly enthusiasm for oil to cash largely arises out of pessimism about the prospects for other proposed solutions to the resource curse. Perhaps the most widely promoted solution is greater transparency through the Extractive Industries Transparency Initiative (EITI). Common critiques of the EITI include that compliance is entirely voluntary (Hilson & Maconachie 2009: 91; Kolstad & Wiig 2009: 528; Gillies 2010: 119), that oil exploration and production involves a complex chain of events while the EITI focuses on just one step of the process – the payment of revenues by companies to host country governments (Kolstad & Wiig 2009: 527–8; Gillies 2010: 120), and that providing transparency on revenue payments is of limited utility if citizens cannot hold their governments accountable (Shaxson 2007: 1134; Hilson & Maconachie 2009: 70; Kolstad & Wiig 2009: 529). The EITI is also probably not an option for unrecognized Somaliland. The EITI currently comprises 51 ‘implementing countries’ among its members but all are widely recognized sovereign states. Somaliland’s lack of recognition has, to date, deterred investments from western oil majors. None of the four much smaller companies exploring in Somaliland – Ansan, DNO, Genel, and RAK Gas – are among the 59 current EITI ‘supporting companies’.
Another posited solution is the use of savings and stabilization funds. Savings funds are designed to save a portion of the oil revenues for future generations. Stabilization funds are designed to smooth the volatility of oil revenues as price and production levels fluctuate. Critics highlight the poor empirical track record of such funds in countries including Azerbaijan, Chad, Nigeria, and Venezuela (Birdsall & Subramanian 2004: 85; Moss et al. 2015 52). Another common critique of such funds is that their ability to function as intended presupposes the existence of strong institutions that can protect and safeguard them (Sala-i-Martin & Subramanian 2003: 19). This is a subset of the larger critique against the institutionalist turn in the resource curse literature for, in effect, telling weak states to develop strong institutions or for asking Angola to become more like Canada (Morrison 2013). As Moss et al. (2015: 2–3) put it, ‘The advice is correct but hardly helpful’. Oil to cash is seen by its proponents as a more robust solution for addressing the resource curse.
Although the specific details can vary along numerous dimensions, oil to cash is essentially a three-step proposal. First, states need to create a dedicated fund to receive revenues. Ideally, such a ring-fenced and transparent fund would receive all the revenues associated with oil production whether they came from signature bonuses, royalties, taxes or other sources and it would avoid the complexities seen in the revenue management system in Chad which made it difficult to understand and monitor (Pegg 2006: 11–12). A ‘future generations’ savings fund could complement this receiving fund but is optional. In contrast, ‘a medium-term receiving fund is a necessary component for Oil-to-Cash’ (Moss et al. 2015: 58).
Second, distributions from the fund to citizens need to be made ‘in a regular, universal, and transparent payment based on a set of agreed-on fiscal rules’ (Moss et al. 2015: 3). Distributions should be paid on a regular schedule with the regularity mattering more than the specificity of annual or quarterly payments. They should be calculated according to clear, transparent, and simple rules, again avoiding the type of complexity seen in Chad’s revenue management system. Distributions also need to be directly tied to oil revenues which can fluctuate with production volumes and prices. Thus, ‘If production or prices decline, the dividends should decline proportionally, so the fiscal purse is not left saddled with an unfunded cash transfer system’ (Moss et al. 2015: 61–2). Obviously, a failure to communicate this feature clearly could result in a loss of citizen trust in the system when dividend payments decline.
Third, the state needs to collect taxes on the revenues distributed to its citizens. Taxation fundamentally distinguishes oil to cash from the lavish welfare spending seen in many oil-rich Arab countries. Such spending is an indirect distribution of resources controlled by government elites. Oil to cash is a direct-distribution which sends the money to citizens who decide for themselves what to do with it. Taxation is essential for oil to cash because it goes directly at the problem of oil revenues appearing as non-tax revenues which governments do not have to raise from their own citizens. In this sense, it is an attempt to ensure that ‘governments will ultimately come to depend on tax revenues and be forced to build a tax administration, rather than bypass constituents by relying solely on rents’ (Moss et al. 2015: 82). While distributing revenues directly to citizens and then taxing them might seem inefficient, the fundamental problem with Arab petroleum-fueled welfare states is that when citizens are not asked to pay taxes, ‘the crucial bond of accountability never materializes’ (Diamond & Mosbacher 2013: 95). Denying governments easy non-tax revenue and forcing them to raise taxes from their citizens is designed to ensure that ‘Relationships with the government would tend towards ones of taxation and accountability, not of lobbying and corruption’ (Shaxson 2007: 1135–6).
Ultimately, a functioning oil to cash program only requires four things: an extensive public information campaign to explain how it works, a reliable means by which beneficiaries can be identified, a way to transfer funds to citizens electronically or via mobile payments and a way to tax back a portion of the revenue distributed to citizens (Moss et al. 2015: 62).
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