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One of the paradoxes of development is that those countries with an abundance of natural resources, particularly oil, have often experienced declining incomes. This “curse of oil” is caused by many things. Oil wealth allows the state to subsist on the revenues it receives from oil and not on taxation, breaking the pressure that taxation places on the responsible use of revenue. Further, because there is a substantial difference between the market price and the cost of producing oil once it’s discovered, officials and elites focus on capturing for themselves this differential at the expense of more entrepreneurial and productive activity. The presence of oil revenue can also cause distortions in the economy, increasing inflation and depressing the value of agricultural and other exports, thus further depressing activity in the non-oil sector. And finally, oil wealth can often lead to great corruption and inequality. To help ward off these dangers, Sao Tome and Principe, a democratic but impoverished island country off the west coast of Africa, turned to the Earth Institute at Columbia University — an academic center for the study of the Earth, its environment, and society — and Hogan & Hartson to help draft and implement an oil revenue management law that, properly implemented, will provide new international legal standards of openness and control. PROMISE OF OIL Sao Tome and Principe is composed of two small islands touching the equator in the Gulf of Guinea. The country is democratic and has an open press. It has no oil production, but it shares territorial waters with Nigeria that hold the promise of billions of barrels of crude oil. A good indication of the likelihood of oil in the region was the willingness of Chevron to make an initial payment of $123 million to Nigeria and Sao Tome and Principe upon the 2004 signing of the first lease agreement in the shared territory. Chevron also made a substantial commitment of exploration funds to the area. This potential oil wealth could lead Sao Tome and Principe out of its poverty and ensure its future, if it can avoid the curse that has infected its West African neighbors — Nigeria, Equatorial Guinea, Angola, and Gabon — where billions of dollars have been lost to waste and corruption. Faced with these daunting circumstances, Fradique de Menezes, the president of Sao Tome and Principe, sought out Jeffrey Sachs, an economist and director of the Earth Institute. Sachs agreed to help not only with oil but with malaria eradication and other critical areas. To head the oil team, Sachs called upon Hogan & Hartson, based on the firm’s previous international projects. The oil team also included professors from Columbia University and the Columbia University School of Law, and a postdoctoral fellow with the Earth Institute. Over the next two years the team made six visits to the country. On each visit the team met with government and parliamentary committees, the president, and key government officials. On the first visit the group flew to the island of Principe with the Sao-Tomean parliamentary oil committee. The island has only 5,000 residents, but the committee held a public hearing in the local community center to discuss its objectives and to gain insight and opinions from area residents. There were informational workshops with the World Bank, an important donor and lender to Sao Tome and Principe, as well as open forums and public hearings. At these events, citizens and civil society discussed their concerns about oil revenue savings for future generations, the areas where they believed the money should be spent, and the impact of local politics on revenue management. In the United States the group met with the World Bank and others addressing the same issue, and developed seminars for President de Menezes and other country officials during their annual visit to the United Nations. After months of back and forth, the National Assembly of Sao Tome and Principe unanimously approved the bill of oil revenue law, and the president signed it into law in December 2004. The law is already in effect. It is a first in West Africa and is expected to be a model for others. THE OIL FUND The central feature of the law is the establishment of an oil fund. All oil revenues of the state are to be paid electronically into the fund and are not considered paid until the fund receives them. The fund is to be held offshore in an international custodial bank (initially with the Federal Reserve Bank of New York) and may only be invested in a limited number of highly secure financial assets. There is a single annual transfer from the fund to the treasury in accordance with the national budget adopted for that year. The plan is that the account, when fully established, will enable anyone to view the account’s daily activity via the Internet — holdings, deposits, and withdrawals. Citizens, on their own or in public information offices, will be able to monitor the flows into and out of the account. This unprecedented legislation is expected to be a model for other developing countries. An important part of the law is the creation of a “future generations” fund. In addition to supporting current development, the oil account will include a portion of the annual revenues that cannot be spent, a permanent savings fund so that long after the oil resources — whatever they turn out to be — have been depleted, the country can enjoy the benefit of oil. An investment committee — whose membership includes the minister of Planning and Finance, the governor of the Central Bank, and three other members with portfolio management experience — appointed by the president and the National Assembly, will make policies for the fund subject to conflicts of interest and risk limitations. The process will be supervised by an oversight board that includes representatives of the president, the National Assembly, the government, local communities, and civil society. The fund is subject to a number of limitations. In particular, no borrowing against the fund or oil resources is permitted. This is to avoid the experience of other West African funds where borrowed money in vast amounts has been wasted or lost to corruption. Throughout the entire process of receipt, investment, distribution to the treasury, and use of oil-derived revenues, the government and its private counterparts must adhere to broad transparency principles and comprehensive disclosure requirements. Deposits into the fund, withdrawals, and holdings are all public. All oil industry procurement, oil contracts, and fund audits, for example, are required to be made public. The calculations underlying the amount transferred each year from the fund to the treasury, among many other things, also must be made public. To ensure this openness, the law requires that information be available in hard copies at the public information offices and also online via a free and accessible Web site. Internet access is critical, as simply making information available locally does not ensure transparency. In a country with human and institutional capacity as limited as in Sao Tome and Principe, allowing citizens, civil society, and the international community to access information directly avoids the overburdening of institutions and helps make oversight possible. The oil law cannot ensure the wise use of oil resources in Sao Tome and Principe, but it does provide the openness and control that can ensure that the resources get to the treasury, and by example it can encourage a general culture of transparency. This commitment has been illustrated by the recent report of the now-permanent parliamentary oil committee in Sao Tome and Principe, in which the committee denounced the lack of transparency and due diligence and other possible irregularities in the selection of the winning bidders of the latest licensing round in the Joint Development Zone, the offshore area that Sao Tome and Principe shares with Nigeria. The country’s attorney general is investigating the allegations. Sao Tome and Principe is just one of Hogan & Hartson’s international pro bono clients. With lawyers in offices around the globe, Hogan & Hartson seeks to make a significant and institutionalized pro bono contribution to the work of the international community.
Patricia Brannan and Joe Bell are partners and Teresa Maurea Faria is an associate in the Washington, D.C., office of Hogan & Hartson. Brannan is director of the firm’s community services department, which provides pro bono legal services. Bell and Faria have been working on the Sao Tome and Principe project for the past two years.

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