The impending development of off shore oil fields discovered in Cambodia’s territorial waters, and continuing onshore exploration, may herald big changes to the country’s economy. A joint ADB and World Bank Oil and Gas Mission visited Cambodia recently. During their visit the World Bank Newsletter had the opportunity to interview Ms Masami Kojima, Lead Energy Specialist World Bank, on the implications of the development of Cambodia’s oil and gas deposits.
Q: Oil and gas is very much in the news in Cambodia today. We understand that this is your first mission to Cambodia. What is the purpose of this mission?
This is primarily a fact-finding mission for me. The Oil, Gas, and Mining Policy Division, to which I belong, has done a lot of work in oil-producing countries, but this is a complex area and there is no “one policy-fits-all” solution to managing oil revenue well. First I have to understand the country-specific situation.
Q: We have heard quite a bit about the so-called resource curse. What is it? What can we do to avoid it?
A: When people hear that great mineral wealth has been discovered in their country, most people assume that this can only mean good news, but sadly the opposite is often the case. The “resource curse” refers to the general observation that, since the 1970s, countries rich in natural resources (particularly oil, gas, and minerals) have achieved a slower rate of economic growth than resource-poor countries.
Oil in particular generates a huge revenue stream for the government, but the number of taxpayers contributing to the oil revenue is small. This makes the government feel less accountable to its citizens, and often leads to worsening governance. Large oil exports, bringing in lots of foreign currency, can lead to a rise of the local currency in a way that makes other exports less competitive.
This may adversely affect Cambodia’s garment exports, for example. Also, oil revenue is extremely volatile and unpredictable, making it difficult for even the most responsible of governments to handle it well. But such problems are not inevitable. Among developing countries, Botswana, Chile, Indonesia, and Malaysia have largely avoided them. These governments have followed a prudent fiscal policy much of the time.
Q: Every year, around 30,000 people enter the labor force in Cambodia. Can the new petroleum industry in Cambodia create jobs for them?
A: The petroleum industry is capital intensive but employs very few people. This makes it all the more important for the government to manage oil revenue well. The benefit of the petroleum industry for job creation will be indirect: sound fiscal policy leading to higher economic growth, resulting in more jobs.
Q: We hear the government revenue will increase by a huge amount once production starts, and especially after the initial investment costs are recovered. But, at the same time, people here are worried about how the revenue will be managed. What lessons are there from other countries?
A: It is important to have adequate checks and balances safeguarding the revenue and its management. Experience elsewhere shows that it is often difficult to avoid large-scale corruption. Increasingly, oil producing countries are recognizing the importance of transparency through disclosure and dissemination of information to the public. For example, a growing number, including Nigeria, are now implementing the Extractive Industries Transparency
Initiative, whereby all payments made to the government and all revenues received are separately and independently audited, the figures verified, the two sets of figures reconciled (the two numbers should match), and finally the audit results are published on a regular basis.
In this way, citizens can see exactly how much money was received by the government, and hold the government accountable for how it spends the money. If the amount of the extra revenue flowing to the government is very large, the government may find it difficult to spend all of it well. For this and other reasons, some countries have decided to save a portion of the money: for a rainy day (for example, the price of oil could collapse, resulting in a large reduction in government revenue one day), for an unforeseen disaster (such as tsunami), or for future generations.
Q: What is the World Bank doing in the oil and gas sector in Cambodia?
A: We are working closely with a number of donors to ensure that our assistance to the government is well coordinated. The donor group can share lessons from other petroleum-producing countries, help the government tailor the lessons to the Cambodian situation, help strengthen institutional capacity across a number of ministries and institutions to manage oil revenue well, and help ensure there is widespread public scrutiny and debate to help guard against bad practices and promote good uses of revenues.
(Source: The World Bank Newsletter, Number 4, Volume 6, June 2006)