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Sunday, 15 July 2007

Promoting transparency...

On the blog "Right idea, wrong example?" I agreed with Collier's proposal that countries should consider adopting charters that encourage transparency (e.g. external audits) as a way of fighting corruption. What I should have added is that when the issue is primarily tackling corruption and ensuring that revenues are being spent properly, there are a number of approaches that could be used and may be just as effective as Collier's proposal. A good example is the "Alaskan model".

The state of Alaska takes a quarter of the money it makes on oil leases and royalties and puts it in an investment portfolio. This portfolio then pays a dividend, each year, to every Alaskan citizen. Alaska set up this fund 30 years ago, and today it's got $36 billion in assets. Last year, the dividend was over $1,100 for every adult and child.

Replicating this fund in Zambia would be very, very attractive for lots of reasons. Most of all, it's a clever way to contain the government's opportunities to stick its hands in the cookie jar. Also, since Zambian citizens would profit directly, we would all have an incentive to make sure the copper industry runs efficiently and honestly.

Of course this all depends on getting a larger share of revenues. The Government's current approach to that appears to focus on looking for examples of good practice according to yesterday's article in the Daily Mail :

Rupiah Banda, says Government will not be rushed into making “reckless” decisions on the mining agreements before renegotiating with mine owners. Mr Banda told Parliament yesterday that as much as Government would like the mining companies to pay more in royalties, there was no way it would demand that they start paying more without following the laid down procedures.

Government was also concerned that the current mining agreements did not offer good returns for Zambia and it was the reason a team of professionals was sent to Chile and other countries to study similar agreements with mining conglomerates.“If we rush things we are going to destroy the mining industry in Zambia.

We should not make decisions that will make investors run away, so we are not going to force mine owners to start paying more taxes right away without sitting down to renegotiate,” he said. Government did not want to make the existing investors uncomfortable and would tackle the issue with caution and in the interest of the people. He was answering a question from Lusaka central member of Parliament, Guy Scott (PF) who wanted to know how far Government had gone in re-negotiating the current agreements.

11 comments:

  1. Alaskan Model? Forget it. Someone will bring relatives from across a few rivers that form international boundaries of our country and register them for the "dividend"!

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  2. You mean the government doesn't know who is in the country? They know can register to vote.

    So what is your solution?

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  3. Cho,


    Alaska set up this fund 30 years ago, and today it's got $36 billion in assets. Last year, the dividend was over $1,100 for every adult and child.

    Well something is better than nothing. But in Alaska, even $1,100 won't get you very far today.

    And that is the problem I have with these divident payout schemes - which have also been suggested for Iraq, by the way.

    They spread out a lot of money over even more people. On the other hand, if this money could be re-invested in a way that guaranteed all these people a $10,000 per year income... The multiplier effect comes in, when the money is correctly invested instead of paid out.

    Replicating this fund in Zambia would be very, very attractive for lots of reasons. Most of all, it's a clever way to contain the government's opportunities to stick its hands in the cookie jar.

    What I am looking at more and more, is a way to officialize the 'hand in the cookie jar' phenomenon, and I think share ownership is the way to do it.

    One of the reasons corruption exists is that it smoothes over things. Many fewer people are likely to object if they have a direct interest in the success of a project. So let's use that smoothing effect and incorporate it in business.

    Let's say a company sets up operations in an area, and by law, 20% of shares go to the chief, 1% to the local politician, and 5% to the manager. In exchange, the state charges very little in taxes. Or exempts employees from income tax.

    If the chief would be obliged to invest a minimum of 20% of his income in his area (for instance, in order to be exempt from income tax), that would again benefit the local area.

    Whichever the system, to ensure that everyone is properly paid, there should be draconian penalties for underdeclaring profits.

    There are lots of possibilities.

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  4. The Alaskan Permanent Fund Corporation is not focused on dividend payouts directly to citizens, however that is one aspect of its activities. The primary purpose of the Fund is to reinvest in economic diversification and social welfare (annual housing subsidies alone amount to more than direct cash payments). A quick perusal of the top 50 equity stock holdings of the Fund clearly shows that vast sums are being accumulated over time and not simply being distributed. With an annualized long term return rate of 10.4% over the thirty years of its existence, the Fund is now larger than any other US endowment fund, private foundation or union pension trust and has become one of the largest investors in the world.

    The principal capital contributions to the Fund from oil and mineral royalties are not eligible for distribution as dividends, only a portion of the income earned through subsequent investments can be given to eligible recipients. I think that this Fund model is intriguing and may indeed be applicable to the stewardship of revenues from Zambian resource extraction activities, thanks for calling it to our attention!

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  5. Someone look at how the Royal Bafokeng Kingdom has done it with its rich mineral resources in the north of South Africa. There is unprecedented development in the area around Mafeking and Rustenburg because of the royaltiies that the companies there pay and the reinvestment of the same in the social and economic sectors by the royal authorities in consultation with the subjects.
    In response to mrk's observation, you know what happens during elections when refugees and people with funny accents are all given NRCs to enable them vote. This would apply even more in the "Alaskan Model".

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  6. Gershom,

    Thanks a lot for this lead.

    To quote Toni Braxton, 'you don't get what you deserve, you get what you negotiate.'

    Certain ministers should pay attention.

    http://www.fly-net.org/aeromedia/bafoken1.html

    In 1999 the late Kgosi Lebone Mollwane Molotlegi II won a 10-year legal battle for royalty payments from Impala Platinum Holdings (Implats) - amounting to an estimated R827-million at the end of the 2002 financial year - which began mining platinum on Bafokeng soil in the 1960s. Royalties were raised to 22% from 1998, and the Bafokeng were given one million Implats shares, worth about R250-million today, and a seat on Implats' board, which is currently occupied by the new king.

    The Bafokeng have formed Royal Bafokeng Resources Holdings (RBR) to manage the mining-related interests of the nation - including its 43.9% shareholding in SA Chrome and Alloys, the only ferrochrome producer listed on the JSE Securities Exchange.

    The Bafokeng have used their income from mining to build schools, roads, clinics and other infrastructure such as a sports complex incorporating a soccer stadium with an athletics track, an Olympic-size swimming pool, tennis courts, basketball courts and a gymnasium. Almost all the infrastructure has been planned, designed and funded by the Royal Bafokeng.

    The Bafokeng king has devised Vision 2020, a programme which aims to foster sustainable development for the Bafokeng through the effective use of resources. The king has said he will strive, as part of the vision, to move the Bafokeng mindset away from work-seeking employees to job-creating employers, and to transform their economy from a resource-based into a knowledge-based one.


    Also interesting is their setup.

    I would have to know more about why they work, but they could form a model for development/economic growth through empowering chiefs.

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  7. Yakima,

    The Alaskan Permanent Fund Corporations is a great idea.

    It could be applied to all regions where natural resources are found, as well as be paid into by future commercial farms.

    The Alaskan Permanent Fund Corporation is not focused on dividend payouts directly to citizens, however that is one aspect of its activities.

    It was my understanding that this was one suggestion for Iraq's oil wealth - a regular payout.

    But I acknowledge that the Alaskan Permanent Fund Corporation does more than paying out profits or dividends.

    Looking at their 'target asset allocation', their money goes to:

    Private Equity 4%
    Real Estate 10%
    Infrastructure 2%
    Non-US Bonds 3%
    US Bonds 23%
    Global Stocks 14%
    Non-US Stocks 13%
    US Stocks 27%
    'Absolute Return' 4%

    So, only 4% of their money is paid out directly to Alaskans. Two percent is invested in Alaskan infrastructure.

    Their biggest investment targets are US stocks and US Bonds (50% in total), with international stocks and bonds adding another 30% (for a total of 80% or 4/5).

    With so much of Zambia being undeveloped, I would funnel a lot more money into enterprises that would develop the country, as well as infrastructure.

    But the concept is very interesting.

    A problem I would have with it, is that much of their resources have been built up over time. In other words, if Zambia would take the same route, we might be in Alaska's position, 40 years from now. Do we have that long? The economy is massively underdeveloped, and the population doubles every 25 years or so.

    I would make sure that a lot more of the profits would benefit such a fund right now, up front. They should get a lot more money from revenues or turnover.

    This would basically be a development fund for a region. Or a chiefdom. I would say the possibilities are endless.

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  8. Gershom, I think your point with regards to the porous nature of our borders is valid. But its an issue that transcends this particular area. So I don't really think it has any bearing on the undesirability of "Alaskan model".

    MrK's initial concerns appears to have been rightly addressed by Yakima's useful and much more fuller explanation. I would add however, that if the approach was based on the Norwegian "Future Generations Fund" then the concerns would have been valid. The Norwegian approach which stores up all if not most of the money in the Future Generation fund is not well suited to our needs....

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  9. Gershom makes an excellent point about the challenges of determining eligibility requirements for receiving benefits from a Zambian Permanent Fund Corporation (or smaller local equivalent). Likewise MrK's point that unlike Alaska, Zambia is not a geographically isolated and sparsely populated artic wilderness with a highly seasonal labour force, and faces widespread poverty and economic underdevelopment.

    The APFC is specifically prohibited from acting directly as a development bank, and appears to be similar to the Norwegian model in that it is intended partially as a hedge against eventual exhaustion of the region's mineral resources and the income derived therefrom. So while government oil revenues have steadily declined by about 75% since the highs of the early 80's, from around $3B or $4B to under $1B, APFC income has reciprocally increased from $0 up to about $2.6B as of 2006. Essentially they are trading their oil and other minerals for stocks, bonds, certificates of deposit and real estate holdings.

    Where the APFC appears to diverge from the Norwegian model is in the direct dividends and use of fund income to pay for appropriations to State departments like corrections, health, and public safety as well as the purchase of rental housing units. The Fund's impact on development in the non-mineral sector has been more diffuse and indirect, however by investing in local bank certificates of deposit they have dramatically improved the pool of capital available for enterprise development of tourism, processing and manufacture in the area. While not as targeted as NABARD refinancing of local development loans, such investments by the APFC serve a similar function on a less dramatic scale.

    Perhaps one way to address Gershom's observation would be to tie whatever income payouts get made by a Zambian Fund-version directly into localized infrastructure projects. That way invitations to distant relatives would result in sharing the same benefits among more people, reversing the incentive. The difficulty then would swing towards questions of unequal distribution of money and/or infrastructure attainment between localities, and the corruption potential therein.

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  10. Yakima, my concern with Gershom's point is that followed to its ultimate conclusion, it implies that Zambia cannot actually develop (beyond a certain threshold) because any additional growth (beyond that threshold) would make Zambia so attractive compared to the DRC for example that it would become counter balanced from additional influx of ghost citizens due to the porous nature of our borders.

    In Europe we see ghost citizens all the time. European social benefit systems which gives money to the unemployed spills over for example to people who from abroad who should not be getting those benefits. The Americans also face the issue, but it is no reason not to press forward with a mechanism that delivers benefits on a broader level.

    I think it is attractive to pursue an infrastructure allocation mechanism as a way of avoiding Gershom's concerns, but we would have to be careful that it delivered a more superior solution. Generally putting money in people's hands works better than any other form of transfers - even infrastructure spend.

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  11. Cho,

    There are ways of tracking people, money, have clear rules about accountability, and holding officials responsible.

    I don't see the problem of 'ghost citizens' as substantive enough to have it influence policy in any major way.

    If we're not careful, this leads to a paralysis of policy.

    At some point, after all checks and balances are put in place, you have to trust the people and the government.

    Checks and balances have to be put in place though, which has not happened at all. And this government seems to be as intentn on sidestepping putting real mechanisms in place, as they are avoiding a popularly drawn up constitution.

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