Clearly define the rationale for state ownership, and clarify the objectives of individual SOEs;
Separate the state-owned sector’s administration and regulation functions;
Encourage SOEs to establish internal controls, ethics and compliance measures, for instance in the form of an anti-corruption programme, that are based on risk assessments and that have their content and implementation subject to independent review;
The role of SOE boards should be clearly defined in relevant legislation including company law, regulations, the government ownership policy and corporate charters. Politicians who are in a position to influence materially the operating conditions of SOEs should not serve on their boards. An appropriate number of independent members should be on each board and sit on specialised committees (e.g. audit, risk management, remuneration);
Establish a disclosure policy that requires SOEs to consistently report in accordance with high quality internationally recognised standards on corporate disclosure and encourage that it is made publicly available. Disclosure requirements could include information related to the ownership, governance, operations, and financial results of SOEs including for example, pricing policies, costs, revenue flows, tax payments, financial flows between the SOE and the state, procurement plans, shareholders, SOE beneficial ownership, and disclosure of the identities of the SOE's major contractors and partners, including the beneficial ownership of such entities) (OECD, 2005[5]);
Encourage SOEs to develop efficient internal audit procedures and require that SOEs be subject to independent external audit based on international standards (OECD, 2005[5]);
Encourage participatory monitoring and other independent oversight mechanisms separate from state regulatory authorities (e.g. civil society and/ or parliamentary committees and courts) (OECD, 2016[5]);
Disclose all financial support by the state to SOEs in a transparent and consistent fashion (OECD, 2019[6]);
Clarify and make publicly available information about the ownership structure, including linking the SOEs to the ownership entity responsible for said SOEs. This could include recording SOEs in beneficial ownership registers; and
Encourage disclosure of the organisational structure of the SOE, including its subsidiaries and any joint ventures and the percentage owned in each such subsidiary/holding, as well as the countries of their incorporation and operation.
How to Select Buyers of Oil, Gas and Minerals
1. Putting in place institutional arrangements
1.1. Corporate governance of SOEs
Box 1.1. What governments can do to promote integrity and anti-corruption in SOEs
Before developing a buyer selection process or entering into direct negotiations with a potential buyer, SOEs and governments should ensure that appropriate and robust governance structures are in place to empower the SOE to undertake its operations (including buyer selection) in an efficient and transparent manner.
Robust governance arrangements for SOEs are particularly important for mitigating the heightened corruption risk in the extractive sector. According to a 2018 OECD study, SOEs in the oil and gas and mining sectors are more likely to have reported experiencing corruption or other irregular practices (deviations from integrity that harm SOEs and that open avenues for specific forms of corruption, including bribery) than SOEs in other sectors. These risks include: interference in decision-making processes, favouritism (nepotism, cronyism and patronage), undeclared conflicts of interest, stealing or theft of goods from the company, fraud and receiving bribes (OECD, 2018[7]).
In recognition of the important role that SOEs can play in the economy, the OECD developed in 2005 (and revised in 2015) the Guidelines on Corporate Governance of State-Owned Enterprises (Corporate Governance Guidelines) which provide recommendations to governments on how to ensure that SOEs can operate with similar efficiently, transparency and accountability as good practice private enterprises. They are supported by the OECD Guidelines on Anti-Corruption and Integrity in State-Owned Enterprises (2019). The Corporate Governance Guidelines recommend that governments should develop an ownership policy. The policy should inter alia define the overall rationales for state ownership, the state’s role in the governance of SOEs, how the state will implement its ownership policy, and the respective roles and responsibilities of those government departments involved in its implementation. The state should define the rationales for owning individual SOEs, such as national oil companies (NOCs) or national mining companies (NMCs), and subject these enterprises to recurrent review. Any public policy objectives that individual SOEs, or groups of SOEs, are required to achieve should be clearly mandated by the relevant authorities and disclosed (OECD, 2015[8]).
Governments should allow SOEs full operational autonomy to achieve their defined objectives and refrain from intervening in SOE management. Often, strict separation between ownership and other government functions may not be in place or effective, and therefore, the line between SOE operations and the interest of political figures may be blurred.
Where SOEs combine economic activities and public policy objectives, high standards of transparency and disclosure regarding their cost and revenue structures must be maintained, allowing for an attribution to main activity areas. As a guiding principle, SOEs undertaking economic activities should not be exempt from the application of general laws, tax codes and regulations (OECD, 2015[8]).
In some circumstances, SOEs sell commodities on behalf of the state as opposed to selling commodities on their own account as a commercial entity. SOEs should be clear in their reporting and disclosures which transactions are attributable to both commercial and non-commercial objectives.
Clarity around ownership and governance structures of key actors involved in commodity trading is of particular importance in situations where private actors play a role alongside the government. For example, many SOEs are 100% government owned. However, some may be partially listed on a stock exchange, such as Equinor in Norway or Petrobras in Brazil, or may be partially privately owned, such as Debswana in Botswana.
In situations where the state is not the sole owner, the state and SOEs should ensure that all shareholders are treated equitably. SOEs should develop an active policy of communication and consultation with all shareholders, and transactions between the state and SOEs, and between SOEs, should take place on market consistent terms (OECD, 2015[8]).
SOEs should report material financial and non-financial information on the enterprise in line with high quality internationally recognised standards of corporate disclosure, and including areas of significant concern for the state as an owner and the general public (OECD, 2015[8]).
Persons willing to report real or encouraged illegal or irregular practices in and concerning SOEs, including related to the state owner, should be offered protection in law and practice against all types of unjustified treatments as a result of reporting. Transparent procedures should be developed to ensure that all detected irregularities, in and concerning SOEs are investigated and prosecuted when necessary in accordance with domestic legal procedures. Enforcement of provisions in the legal framework should be rigorous and systematic, and ensure that SOEs are not given unfair advantage or protected by their ownership (OECD, 2019[6]).
1.1.1. Role of the SOE Board
The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management. The role of SOE boards should be clearly defined in relevant legislation, including company law.
The state should let SOE boards exercise their responsibilities and should respect their independence. The boards of SOEs should develop, implement, monitor and communicate internal controls, ethics and compliance programmes or measures, including those which contribute to preventing fraud and corruption. They should be based on country norms, in conformity with international commitments and apply to the SOE and its subsidiaries. SOEs should observe high standards of responsible business conduct. Expectations established by the government in this regard should be communicated to SOE boards and publicly disclosed, with mechanisms for their implementation that are clearly established (OECD, 2015[8]).
The process of nomination of individuals to SOE boards should be transparent, clearly structured and based on an appraisal of the variety of skills, competencies and experiences required. Board members should be selected, among other things, on the basis of personal integrity and professional qualification (OECD, 2019[6]). Competence and experience requirements should derive from an evaluation of the incumbent board and needs related to the SOE’s long term strategy.
The boards of SOEs should be assigned clear mandates and ultimate responsibility for the SOE’s performance. Mechanisms should be implemented to avoid conflicts of interest preventing board members from objectively carrying out their board duties and to limit political interference in board processes (OECD, 2015[8]). Politicians who are in a position to influence materially the operating conditions of SOEs should not serve on their boards. Persons linked directly with the executive powers – i.e. heads of state, heads of government and ministers – should not serve on boards as this may cast serious doubts on the independence of their judgment.
Civil servants and other public officials can serve on boards under the condition that qualification and conflict of interest requirements for board members apply equally to them. A pre-determined “cooling-off” period should as a general rule be applied to former politicians (OECD, 2019[6]).
To enhance the objectivity of SOE boards a certain minimum number of independent board members on SOE boards should be required – that is, independent from the state and from the enterprise. Independent board members should be free of any material interests or relationships with the enterprise, its management or its ownership that could jeopardise the exercise of objective judgement. Full transparency surrounding board member qualifications is especially important for SOEs.
It should be a board responsibility to appoint and remove the CEO, not the state owner’s (OECD, 2015[8]). The state should expect that boards apply high standards for hiring and conduct of top management and other members of executive management who should also be appointed based on professional criteria (OECD, 2019[6]).
1.1.2. Auditing arrangements
SOEs should be subject to robust and regular auditing processes that consist of internal audits within the SOE as well as and external audit by third parties and, additionally where the legal framework allows, by the state audit institute.
In terms of internal auditing, SOEs should develop efficient internal audit procedures and establish an internal audit function that is monitored by and reports directly to the board and to the audit committee or the equivalent corporate organ.
The state body responsible for exercising ownership rights on behalf of the state should receive all necessary and relevant information from the SOE in a timely manner, in order to regularly assess SOE performance, and oversee their compliance with applicable corporate governance standards.
Governments should ensure that SOEs are subject to external audits that are carried out in accordance with internationally recognised standards. Adequate procedures should be developed for the selection of external auditors and it is crucial that they are independent from SOE management as well as from the government (OECD, 2015[8]). When supreme audit institutions play a role in monitoring SOEs, the state should require that SOEs be additionally subject to annual external audits that are carried out in accordance with internationally recognised standards (OECD, 2019[6]).
1.2. Establishing a mandate to sell publicly-owned commodities
SOEs should ensure that they have the legal mandate to enter into sale and purchase agreements with buyers to sell publicly-owned commodities. Governments may grant authority to SOEs to enter into commodity sale agreements, and this authority should be clearly conferred by law, statutes, presidential or ministerial decree. In other cases, the ownership rights (title) of the commodity may be vested in the SOE.
In some circumstances, SOEs may sell commodities on behalf of the state, and in other circumstances may sell commodities on their own account as a commercial entity. It is not unusual for an SOE to sell commodities on both accounts – that is, acting on mixed objectives.
The ownership of the commodities sold by SOEs varies across countries. The majority of SOEs surveyed by the OECD Development Centre in 2018 reported that the SOE held the legal ownership of the commodities after the title to those commodities had been transferred from the state. In some cases, the state retains legal ownership and in other cases, legal ownership can be split between the SOE and the state. In Myanmar, the majority of gemstones sold by Myanmar Gems Enterprise (MGE) are owned directly by the government. In Suriname, commodities are owned directly by the SOE Staatsolie. Ownership of commodities is transferred from the state to Staatsolie once the crude oil has been processed. In Mongolia, ownership is transferred from the state to Erdenes Tavan Tolgoi (ETT) once the coal has been extracted by ETT.
In all cases, the SOE should have a clear mandate to enter into sale and purchase agreements with buyers.
Table 1.1. Ownership of commodities sold by selected SOEs
|
Country |
SOE |
Ownership of commodities |
|---|---|---|
|
Colombia |
Ecopetrol |
SOE |
|
Ghana |
GNPC |
SOE and government |
|
Mexico |
PMI Comercio Internacional (PMI) |
SOE |
|
Mongolia |
Erdenes Tavan Tolgoi (ETT) |
SOE and government |
|
Mozambique |
Empresa Nacional de Hidrocarbonetos (ENH) |
SOE and government |
|
Myanmar |
MGE |
SOE and government |
|
Suriname |
Staatsolie |
SOE |
|
Trinidad & Tobago |
Petrotrin |
SOE |
Source: (OECD Development Centre, 2018[9]).
1.3. Establishing and resourcing the buyer selection team
Box 1.2. What SOEs can do to put together an effective buyer selection team
Set clear parameters for the sale process (terms of reference, strategy, policy etc.);
Assemble a buyer selection team with multidisciplinary skills;
Strengthen the multidisciplinary skills of the team by hiring an external provider, if these skills cannot be located in-house;
Ensure that the buyer selection team operates autonomously from management and free from political interference but is still subject to a sufficient level of oversight at executive or board level; and
Ensure that there are clear reporting lines for employees to report concerns about real or encouraged illegal or irregular practices, and that reporting persons (whistle-blowers) are protected.
SOEs should create a team to undertake the buyer selection process and should ensure that this team is appropriately resourced to carry out its functions. The majority of the SOEs surveyed by the OECD Development Centre reported the existence of temporary or permanent teams to administer their buyer selection processes. These teams can be composed of and administrated solely by the SOE or can include representatives from other government agencies if required by law.
1.3.1. Mandate and procedural requirements
At the outset, and before any negotiations take place, it is important for senior leadership within the SOE (ideally at executive or board level) to set clear parameters for the sale process. These parameters should provide the buyer selection team with a clear mandate, which defines the scope for the sale process (including any negotiations), includes the terms of reference, powers and functions of the team, what is expected to be achieved, the elements that are subject to negotiation (and conversely those that are not), and the scope of the team’s negotiating position in each of these areas.
SOEs should appoint a team leader who will be accountable to the senior leadership of the SOE (ideally at executive or board level), and will be required to establish that the buyer selection process accords with the mandate received, the parameters of the terms of reference, and any overarching selection strategy.
For example, in Ghana, for each buyer selection by Ghana National Petroleum Corporation (GNPC), senior management will first appoint an evaluation team. That team will then prepare the evaluation criteria and assess bids against that criteria. Subsequently, the evaluation team will submit a report on their findings and recommendations back to GNPC senior management who are empowered to make the final decision. At the end of each buyer selection process, the evaluation team is disbanded.
1.3.2. Conflicts of interest
Each member of the buyer selection team should be required to make a declaration of any conflict(s) of interest they may have with all bidders and potential buyers. A thorough assessment will be required for each declaration that identifies a conflict of interest to determine whether the conflict can be mitigated. Examples of potential mitigation measures include: divestment or liquidation of the interest by member of the buyer selection team (if applicable); resignation of the member from the conflicting private-capacity function (if applicable); recusal of the member from involvement in active decision making processes; and restriction of access by the member to particular information (OECD, 2003[10]).
If a conflict of interests cannot be mitigated, then that individual should not participate as a member of the buyer selection team.
Box 1.3. What SOEs can do to identify and manage conflicts of interest in the buyer selection team
Identifying risks presented by bidders to the integrity of the SOE and its employees;
Prohibiting specific unacceptable forms of private interest;
Making employees aware of the circumstances in which conflicts can arise; and
Ensuring that effective procedures are deployed for the identification, disclosure, management, and promotion of the appropriate resolution of conflict-of-interest situations.
Source: Adapted from (OECD, 2003[10]).
1.3.3. Composition and capability
Given the technical and commercial nature of the sales of oil, gas and minerals, SOEs may make use of multidisciplinary teams. Multidisciplinary skills that may be required are (but are not limited to): financial, commercial, technical, marketing, trading, due diligence, legal, procurement and risk management. In some cases, if these skills cannot be located in-house, they may need to be sourced from external organisations.
In some cases, buyer selection teams may involve other government agencies alongside the relevant SOE where required by law. In Albania, a “Commission” is responsible for overseeing the buyer selection process and evaluation of the bids. The Commission is comprised of three representatives from the Ministry of Infrastructure and Energy, two representatives from the SOE (Albpetrol), one representative from the State’s Technical and Industrial Inspectorate, and one representative from the National Agency of Natural Resources (AKBN) (Deloitte, 2018[11]). In Mozambique, the buyer selection team has input from the SOE Empresa Nacional de Hidrocarbonetos (ENH), the Ministry of Mineral Resources and Energy, and the National Institute of Petroleum (INP).
1.3.4. Oversight and reporting
The buyer selection process is likely to attract substantial political interest and it may be difficult to shield the selection process from undue political influence. SOEs can seek to mitigate the risk of undue influence by establishing an autonomous buyer selection team with the corresponding mandate whilst also setting clear reporting lines and being subject to a sufficient level of oversight at executive or board level.
In Colombia, Ecopetrol has constituted a permanent team for the selection of buyers called the “International Trading Group” which is comprised of the: International Trade Manager, Head of Department of Crude Oil, Head of Department of Product and various individual traders. Another team, the “Commercial Committee” fulfils a review function of specific aspects of the buyer selection process. The Commercial Committee is comprised of the Commercial and Marketing Vice-Presidency, International Trade Manager, and the Commercial CFO. In Nigeria, bids are first evaluated against a set criteria, and then independent reports are compiled for NNPC Management by two separate teams: the NNPC Evaluation Team and the Nigerian Content Board.
SOEs should take appropriate steps to promote anti-corruption and integrity measures in their operations in order to encourage good governance and integrity, internal controls, ethics and compliance measures. In addition SOEs should set out clear rules and procedures for employees or other reporting persons to report concerns about real or encouraged illegal or irregular practices in or concerning SOEs (including subsidiaries or business partners). Reporting persons (also known as “whistle-blowers”) should be protected in law and practice against all types of unjustified treatments as a result of reporting concerns (OECD, 2018[7]).
In Chile, Codelco’s buyer selection team is subject to both internal audits and external audits carried out by government agencies. Ecopetrol (Colombia) and Pemex (Mexico) have established a whistle-blower line where personnel can use to report irregularities or concerns.