Editorial: Chad's resource curse

Dec. 21, 2009
An assessment of the World Bank's failed Chadian experiment confirms the intuition that poor countries with dodgy governments remain doomed to the resource curse.

An assessment of the World Bank's failed Chadian experiment confirms the intuition that poor countries with dodgy governments remain doomed to the resource curse. In Chad and neighboring Cameroon, the bank wove extraordinary financial and transparency controls into loans for a major energy project. It wanted development to proceed with minimum social and environmental disruption and maximum development and alleviation of poverty. Against the first two standards the experiment seems to have succeeded. Against the latter standard—the bank's priority—it did not.

The effort was noble. Too frequently, resource development does more economic harm than good in poor countries. In too many cases, a rush for riches crushes traditional economic activities, trade reversals sink local currencies, corruption dissipates wealth, and living conditions deteriorate. This is the curse, a nagging question about the social acceptability—as distinct from but no less important than legality—of expatriate work by international oil and gas companies.

The project

The project in the World Bank's experiment is development by an ExxonMobil group of oil fields in the Doba basin in Chad and construction of a 670-mile pipeline across Cameroon (see map, OGJ, July 28, 2008). In 2000, at the request of the operators, the bank and its affiliates approved a series of loans totaling $342.4 million for field development, pipeline construction, and "capacity-building"—enhancing governmental mechanisms—in Chad and Cameroon. The lenders attached unprecedented conditions to the financing, including stipulations about use of project revenue, creation of a "future generations fund," and establishment of an independent group to review and advise the Chadian government on the distribution of money.

Oil flow began ahead of schedule in 2003. Because of rising crude-oil prices, revenue in the early years beat expectations. By 2005, however, the desperate Chadian government was reneging commitments and dismantling the financial framework's legislative supports (OGJ, Feb. 13, 2006, p. 19). In September 2008, the World Bank collected loan balances and withdrew.

Last month, a World Bank independent evaluation group (IEG) reported on the Chadian experiment. "The evaluation finds that the program's fundamental development objective of reducing poverty and improving governance in Chad through the best possible use of oil revenues in an environmentally and socially sustainable manner was not achieved," wrote Vinod Thomas, director general of evaluation, in a cover letter. The overall program rating: unsatisfactory.

The project itself, which was producing 118,000 b/d at midyear, drew high marks. In Cameroon, the IEG called handling of environmental and social issues surrounding the pipeline "among the best in extractive industries projects in Africa." The group approved of the management of environmental and social effects in Chad, too. But those issues were secondary in program importance to developmental goals. Although money available to the Chadian government leaped from $112 million in 2000 to more than $2 billion in 2008, almost 90% from oil, conditions in Chad have deteriorated. "The macroeconomic, development, poverty reduction, governance, and institutional development outcomes were disappointing, and there is as yet no evidence of the hoped-for positive improvement," the IEG said.

Although oil development and the pipeline were physically, technically, and financially successful, the IEG said, the early arrival of unexpectedly large amounts of money hampered development. "The management arrangements devised for a comparatively limited amount of oil revenue cracked under the weight of the much larger revenue that materialized," the assessment said. "The larger revenue also generated temptations and competing claims that were in part associated with the reemergence of political instability and violent rebellion."

Furthermore, the system for managing oil revenue proved to be too prescriptive, detailed, and rigid, the IEG said. But the main downfall, however, was "the borrower's performance," including "repeated government violations of its commitments."

Escaping the curse

Chad, the IEG said, still can escape the resource curse. "But the most important factor would be a new and genuine determination by Chad's government to use the oil resources for development and poverty reduction, and do so responsively and efficiently."

The oil industry has strong reason to encourage any change that promises to lift the curse—in Chad and everywhere it works.

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