Many hydrocarbon or mineral rich countries have chosen to use public sector enterprises to develop part or their entire resource base. These companies may provide a vehicle for the country and its citizens to build their expertise and professionalism in the resource sector and may allow the country to better control the pace of resource development, secure supply, or achieve other governmental objectives including the development of ancillary and downstream industry.
On the other hand, many national companies have performed poorly. Furthermore, investments in national resource companies limit diversification and increase the country’s reliance on the resource sector, making total government revenues (fiscal revenues plus returns from the state enterprise) more dependent on the resource sector and resource prices.
Because of its size and its preferred access to resources and finance, a national oil or mining company is often one of the most important political and economic actors in the country. This privileged position may lead to abuse by entrenched managers or favored government officials responding to their own personal incentives. The best antidotes are transparency in structure and activity and openness to competition. Any initial public investment and organizational costs should be treated as government expenditure and be evaluated in the context of the alternative uses of public sector funds (Precepts 7 and 9).
Transparency can be facilitated by having the national company organized as a separate legal entity with clearly established authorities and objectives and by having governing and management boards separate from the government. Public oversight and control can be enhanced by (i) having public accounts maintained in accordance with international standards and subject to independent audit, (ii) clearly identifying any private ownership interests and transactions with such interest holders, (iii) having the national company makes the same disclosures required of publicly held companies, and (iv) conducting regular and systematic oversight through parliament or other oversight entities.
Commercial operations of the national petroleum or mining company should be in open and genuine competition with other companies in order to avoid inefficiencies associated with monopoly positions. Competition acts as a discipline on the efficiency of the national company and provides a useful yardstick in measuring its performance. Open and genuine competition may also be the best policing device for procurement, a major source of waste and abuse in some national companies. Competition is enhanced if the state enterprise is subject to the same fiscal regime, including royalties, as a private sector investor in this and other sectors. The state enterprise should also compete for investment and operating funds. New investments and additional operating cost ultimately come either at the expense of other government programs (if internally generated funds are used rather than being paid as dividends to the state for use in other programs) or by increases in the public debt.
National resource companies sometimes take on regulatory functions for the sector but this can result in serious conflicts of interest between commercial and wider public interests. To avoid this, the government should separate the national resource company from the licensing, and technical and regulatory supervision of the resource sector, placing those functions instead in independent governmental entities. Where the functions are retained within the national company, conflicts of interest can be reduced and better monitored if they are segregated from commercial operations and subject to separate supervision and reporting.
National resource companies are often used to carry out social functions such as distributing subsidized fuel, with the costs absorbed in the budget of the national resource company. Use of the national resource company, however, makes the costs of such policies opaque and pushes the company into a more political role that is not consistent with professional and efficient operation. In the event that such programs are entrusted to the national resource company, the government and parliament’s control and oversight can be improved by having the national company report separately and in detail the costs of the social programs that the company is tasked with, including the opportunity costs of such items as mandated discounted sales of fuel or other supplies. These costs should also be explicitly recognized in budget and national accounts.
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