70310 The Political Economy of Investing Resource Wealth: Transforming Rents into Productive Physical Infrastructure* Kai Kaiser and Lorena Viñuela resources across jurisdictions. Subnational The scope for creating and preserving economically governments are not as well positioned to smooth and socially productive physical assets through spending and manage investments and do not leveraging extractive industry development and generally have incentives to coordinate with other associated rents in natural-resource-endowed but regions and levels of government in their investment capital-stock-poor economies can be tremendous. i decisions. Such earmarking arrangements are often But the challenges of managing a coherent and the result of political bargains and historical legacies sustainable public investment portfolio are of the ownership of and rights to natural resources compounded by the specific problems observed in that are very difficult to change. Finally, in settings resource-dependent developing countries, which with low institutionalization, in which elites face typically confront a plethora of needs and political difficulties striking and sustaining political bargains, pressures generated by the weakness of other public officials highly discount the future and have economic sectors. Especially in boom periods and at little incentive to defer present consumption in favor the beginning stages of resource production, rents of saving or investment, or to build the capacity of become highly visible and social expectations rise. their public investment management (PIM) systems. Large rents provide public officials with the In turn, the resulting weak planning and opportunity to increase their political capital by implementation capacity of public agencies feed back delivering infrastructure projects and resources to into the incentives to bypass government systems and their constituents and coalition members. This results increase opportunities for rent-seeking behavior. in strong incentives to concentrate decisions about rent allocation at the highest levels of government Effective investment hinges on the quantity and and to bypass the regular budget cycle and procedural quality of resource allocation. Annual and medium- rules. The emphasis is usually put on the creation of term public infrastructure investment actions will new infrastructure to the detriment of maintenance weigh intertemporal consumption versus savings investments and the rehabilitation of existing assets. decisions, as well as often politically charged Because of the uneven geographic distribution of present-day benefit incidence demands. Given that natural resources, earmarking large shares of subsoil assets are being depleted in this process and royalties to producing regions introduces additional that rental values are quite uncertain owing to challenges and distortions in the allocation of fiscal commodity price volatility, sustainability represents an overarching criterion when assessing the success anticipated use of the proceeds of subsoil assets, of resource-rich countries in this aspect of the which is whether it is tilting the balance to savings extractive industry value chain. Since governments and investment or leading mainly to rent dissipation play a pivotal role in regulating access to rents as in the form of current consumption.ii well as capturing rents, their role is especially critical from the perspective of general and extraction-related A key debate for policy guidance is how ambitious infrastructure investment. Creating and maintaining resource-rich governments should be in ramping up ―concrete‖ assets not only depends on allocation particular types of investments at any given point. choices, but also is intensive in its transactional, Liquid financial assets (including sovereign wealth technological, and hence investment capability funds, SWFs) provide both a vehicle of stabilization requirements. Building the proverbial bridges and savings in the face of volatile resource prices and requires effective management across the public production.iii Given resource price and depletion investment value chain, from planning, prioritization, prospects, a key annual and medium-term choice for and contracting, through implementation, completion, resource-dependent settings is ―expansionary‖ versus and operation. ―prudent‖ resource management.iv Rapidly ramping up domestic spending may also create ―Dutch The degree to which a resource-dependent country is disease‖ pressures, which risk driving up the real optimizing the quantity and quality of its public exchange rate/domestic price levels and crowding out investment portfolio depends on the intersection of a other domestic industries that are reflected in set of aggregate ―top-down‖ allocation processes and concerns about absorptive capacity. More broadly, ―bottom-up‖ project selection, implementation, and absorptive capacity is also used to describe the ability completion incentives and capabilities. These of developing countries to spend rents well through allocation processes typically may be centered on the various channels, including risks of leakage and budget and may also be integrally linked to upstream corruption. The Permanent Income (PI) model decisions more directly associated with extractive emphasizes that governments should accumulate investments themselves. Figure 1 provides a stylized financial assets that will generate a more predictable balance sheet for resource-rich settings. Strategic and sustained future income stream. Arguably this choices for resource-endowed governments will more conservative approach has in the past been center on how much to consume or spend now (for emphasized by international financial agencies such example, for recurrent salaries or subsidies) versus as the International Monetary Fund. Other models how much to save or invest. However, it is important argue that capital-scarce developing economies could to examine a fundamental orienting question with have potentially very high economic and social regard to observed and returns by investing in domestic hard and soft infrastructure (Collier, van der Ploeg, and Venables Figure 1. Stylized Resource-Rich Country Balance Sheet 2009). subsoil asset depletion Macro versus micro, top-down versus bottom-up aspects of public investment can be best understood by taking a public investment portfolio perspective private (including international oil and state into public capital stock creation and preservation. v mining companies) At any given time, various parts of the public sector and extractive industries will be considering, resourcing, implementing, completing, and using a portfolio of hundreds, if not thousands, of investment in dual- savings and projects. Many will require years to consumption complete and will potentially offer decades use infrastructure investment or more of returns. Therefore careful attention must be paid to the various institutional channels involved in public investment. The value of physical infrastructure will also be highly contingent on recurrent spending to maintain infrastructure. For example, deferred maintenance of road networks Source: Authors. may rapidly lead to depreciation and even full-fledged obsolescence of capital—in 2 short, wasted assets. ―Investing to invest‖ fragmenting them across various narrower consequently refers to all those measures, including political constituencies. strengthening various aspects of public financial management ranging from budgeting to procurement or contract management, which would help Key Issues for Investing Resource developing countries reap these potential returns. Beyond capturing a set of important technical issues, Rents in Infrastructure Assets investing to invest will confront a series of quite fundamental political debates about how poor Public infrastructure asset creation and preservation countries can best close their infrastructure gaps for involves a series of macro-fiscal as well as ―micro‖ rapid growth, development, and poverty reduction. project-level choices and challenges. Classical public expenditure management (PEM) focuses on three levels: (1) macro-fiscal management, (2) allocation Paradoxes of Public Investment choices (for example, capital/investment versus consumption spending, sectoral prioritization), and (3) operational efficiency. Much of the public The promise of a country’s natural resources giving expenditure literature focuses on aggregate-level birth to modern infrastructure is one of the facets of spending choices (see Ossowski et al. 2008; extractive-led development most likely to capture the Villafuerte and Lopez-Murphy 2010), including imagination of politicians and populations. Especially revenue management institutions. But just as the in capital-scarce developing economies, domestic public sector wage bill ultimately boils down to the capital creation promises to have very high economic sum of payments made to real or notional individuals, and social returns compared to other options for produced capital formation hinges on the sum of a resource allocation.vi In relation to managing both the portfolio of existing and new projects. At the ―micro‖ quantity and quality of public investment for physical level, the decisions and actions determining how each asset creation and preservation, five key paradoxes project is managed and maintained will impact the help frame the content of this note: existing and prospective value of a country’s public capital stock.  Resource rents offer the prospect of investing heavily in physical infrastructure The top-down ―enabling‖ environment of the two that in capital-scarce countries would overarching levels of aggregate macro-fiscal and generate high-return capital assets, but, as a allocations will fundamentally condition what result of the incentives generated by the happens at the level of sectoral or territorial project interaction of politics and the sector-specific portfolio segments.vii Predictable capital resource features, such countries often fail to invest envelopes for ministries, agencies, subnational proactively in the processes and systems that governments, or communities can set strategic yield the very best projects. envelopes by which to steer the prioritization, completion, and maintenance of infrastructure assets.  Investment in public infrastructure is one of However, since investment spending is typically one the policy tools that resource-dependent of the most discretionary expenditure items during countries can use to lay down the basis for annual budget preparation and execution, these economic diversification and to reduce resource allocations will also be the most vulnerable cyclicality; nonetheless, public investment to the vagaries of high fiscal volatility confronting tends to be highly procyclical, thus, resource-dependent settings. Consequently, asset unsustainable. Failure to maintain projects creation and preservation will be particularly generates repeated ―build, neglect, rebuild‖ vulnerable to the volatility of resource-related episodes. revenues, unless the investment budget is adequately insulated in its predictability. Given the prevalence of  A benevolent national planner would ideally contracting and physical works in capital spending, allocate resource-rent-financed public delays in execution will also make it more investment projects to the highest return challenging to effectively calibrate allocation projects, regardless of their geographic disbursements with execution. Delays in mega- location; but political economy dynamics projects (either in their complexity or size relative to often push toward earmarking investments a country’s budget) can have significant impacts on to the location of resource extraction or overall budget credibility. 3 Countries with short-term or ad hoc financial modalities will be an important starting point for management modes are likely to accentuate potential identifying the weakest links for asset creation and boom-and-bust cycles associated with resource preservation and for putting priorities on the table. x In dependence, notably in relation to public finances, many respects, the framework highlights many of the with particularly adverse implications for savings. A themes brought forth by the overarching natural typical risk for resource-dependent countries falling resource management value chain approach adopted into the trap of failing to accumulate assets when rent by Rents to Riches. flows are buoyant, then subsequently dissaving when rent streams are adversely impacted by price and First, technical issues and challenges in each of the production patterns, which creates a volatile fiscal links are likely (for example, effective procurement), environment.viii At an extreme, projects may grind to but the performance of each link in turn will be a halt as governments resort to cash rationing in bust conditioned by political economy factors at the cycles and with mounting, more immediate pressures polity-wide and bureaucratic levels. Second, a variety on the rental pie from other factions. Delays in of institutional options may be open to enhance execution may also see governments reallocate these functionality along particular links. For example, resources to other purposes in the context of the governments may chose to contract out project annual execution cycle. This in turn may ratchet up evaluation skills while strengthening in-house other resource claims in the future, further crowding capacity over time. Third, a significant out investment spending envelopes. interdependence is likely to occur between different upstream and downstream parts of the value chain. A The term ―absorptive capacity‖ is frequently used in poorly prepared project will pose problems during resource-rich settings to capture the macroeconomic, implementation. But even the best prepared and best public finance management, and broader governance implemented project that suffers lack of maintenance challenges associated with scaling up public will rapidly depreciate. Even in standard government investment in resource-rich settings. From the execution of projects, quite a number of diverse perspective of ultimate asset creation and actors and agencies will likely be involved. Thus, it is preservation, this paper argues that it is critical to necessary to carefully consider the range of unbundle this ―black box.‖ix Leaders in resource-rich institutional bottlenecks, as well as remedies, to settings typically profess the desire to invest more for enhance the likelihood that individual projects the benefit of present and future generations. In succeed, but most importantly that the overall practice, however, political and bureaucratic portfolio adds up to more than the sum of its parts, incentives, as well as prevailing public sector and especially for network infrastructure. construction sector capacities, constrain effective asset creation and preservation. The term ―investing Figure 2. A Public Investment Management (PIM) to invest‖ has emerged to describe the variety of Diagnostic Framework measures by which resource-rich governments can improve their ability to enhance their capital stock (see Collier 2010). A key message for these settings is that the barriers to greater asset creation and preservation are not resource constraints per se, but the institutional mechanisms and capabilities by which they are translated. Governments also have a range of options by which to prioritize and sequence the ultimate objective of tangible and timely investing. A Public Investment Value Chain Source: Rajaram et al. 2010. The public investment management diagnostics framework by Rajaram et al. (2010) sets out eight Selecting good projects through effective economic minimum stages a public investment project should appraisal is an important starting point for creating pass through to ensure that it emerges as a productive assets. While a benevolent optimal social planner in a and sustainable public asset (see figure 2). A unitary state prioritizes projects with the highest technical assessment of the prevailing functionality national returns, varying social preferences and types of the PIM system across different sectors and of capital spending are likely to add complexity to 4 managing a country’s public investment portfolio Nontraditional Execution Modalities across agencies or levels of government. Sectoral specialization, combined with associated roles and The Extractive Industries Transparency Initiative responsibilities, means that project portfolios are (EITI) has placed the emphasis on extractive typically segmented across line agencies and across revenues reaching the treasury, while traditional on- expenditure envelopes. One key dimension of budget PIM focuses on executing those resources heterogeneous preferences could be found across through the budget. Significant shares of public spatial or territorial lines (Kaiser and Viñuela 2010).xi infrastructure formation have been conducted through While central finance agencies may seek to set alternative channels, including parastatals, notably minimum standards across all projects, the task of national oil companies, and increasingly also national monitoring and enforcing these standards can be mining companies, and public-private partnerships demanding in the context of more limited capacities. such as resource-for-infrastructure (RfI) deals. xiv Another important dimension for project National oil and national mining companies have prioritization and resourcing may be achieving an received growing attention as a way for developing effective balance between investments intended to host countries to capture a greater share of the support the extractive industry versus broader public benefits of the extractive industry (including learning infrastructure. This may be especially pertinent for and monitoring effects). However, these parastatals mining, where continental extraction may be have significant differences in mission statements, associated with a large infrastructure footprint. xii transparency, and corporate governance, as well as in the nature of the relationship between government One focus in Rents to Riches is on managing and the parastatals. As part of more diverse ―national upstream bargains between the state and resource missions,‖ parastatals may be asked to leverage their investors. An important challenge for creating finance and capacity to generate public credible and effective bargains is mirrored infrastructure.xv However, careful attention needs to downstream in the implementation of capital be paid to the prevailing corporate governance spending. While some of the dynamics may be less incentives, as well as capacities, for parastatals as pronounced (for example, uncertainly of future rents public investors. Resource-linked public-private with resource price developments), they are arguably partnerships and RfI deals, in particular, raise a equally prevalent. A public works contractor bidding number of issues about contract design and, above for a large infrastructure project will be forced to all, implementation, including value of resources, either mark up or frequently renegotiate the contract local context, public good value and sustainability of under conditions of weak intertemporal credibility. investments/assets, and the risks of ―obsolescing While a resource-rich government may borrow bargains.‖ against future oil revenues, the contractor is likely to factor in a significant risk premium because it will be RfI contracts typically are structured around some subject to arrears or nonpayment if the government mix of monetary payment (for example, signing does not manage its finances well. bonuses, some subsequent revenue flow) and an infrastructure asset (usually provided against some The ultimate productivity of ―hard‖ infrastructure for concessional or nonconcessional credit line). The both economic and social sectors will critically infrastructure asset is typically provided by Chinese depend on how well it is maintained and on the companies selected by the Chinese government but effectiveness of the associated ―soft‖ service delivery with no objection by host governments. This and regulatory layers. Even the best kept roads are of structure will also determine the mix of risk and little use if the associated services of public and rewards for governments versus investors over the private sector transport are not forthcoming in life of the project and future price developments, as corresponding measure.xiii Schools and clinics are of well as the extent to which the main foreign little use if the teachers, doctors, and nurses do not contracting agency and implementing partner are show up or if they lack the tools to deliver frontline pushed to deliver a certain quality of infrastructure services effectively. Consequently, the regulatory and asset. As with any extractives contracts, these public resource allocations allowing for these critical agreements may also be associated with the range of layers of functionality must be carefully considered. obsolescing bargain challenges (Hogan and Resource-rich countries may succeed in creating Sturzenbegger 2010), raising questions of how to best four-lane highways but neglect to foster the structure these contracts from the perspective of regulatory emergence of a competitive transport and governments and companies, but particularly citizens communications sector. (the public interest).xvi 5 Infrastructure for resource extraction, dual-use Ideally, countries would fall under the programmatic infrastructure, or pure public good infrastructure pluralism category, where intertemporal credibility reflect a sunk cost. The actual asset value of a piece and political inclusiveness are fairly well of infrastructure is typically harder to monitor than institutionalized and political competition is based on that of a cash payment, especially with regard to the the provision of public goods. In recent years, Chile quality of an infrastructure good. The fact that RfI and Botswana have transitioned into this quadrant. In deals are implemented parallel to country PFM/PIM such settings, PIM institutions have been (public financial management/public investment strengthened by long-term investments in capacity management) systems arguably brings both and skills and by consensus among policy makers advantages and risks. ―Turnkey‖ delivery of regarding resource management policy and infrastructure by foreigners may be faster and more diversification strategies. A large part of the efficient than delivery by the government in weak population and political actors understand and institutional settings, and contractors may feel more support the policies tied to resource extraction, in confident of getting paid against foreign finance particular the need for the government to follow lines. At the same time, these bundled deals may through on its policies. raise concerns. Running monetary and physical resources through parallel systems may make them The case studies in Rents to Riches across Africa, more opaque and susceptible to private appropriation. East Asia, and Latin America revealed a range of Bypassing country systems may lead to further symptomatic outcomes hampering sustained asset neglect of domestic capacity-building and fail to creation and preservation. The short time horizons of draw in domestic labor. Extractive operators will a fragile or unstable autocratic regime are likely to likely have the most direct interest in maintaining provide few incentives for significant public infrastructure during the depletion cycle, but limited investments or to maintain existing assets. These interest in doing so beyond this point. patrimonial regimes may seek only to support investment to the extent it assists extraction. While DRC and Niger have vast infrastructure needs, the Political Economy Settings and governments themselves have not been able to mobilize resources effectively for investment and Dynamics remain largely dependent on development aid. Robinson and Torvik (2005) note the tragic case of The public investment paradoxes presented here have Mobuto’s Zaire (now DRC), where despite resource highlighted the challenges political economy wealth, only 6,000 miles of functional roads were left dynamics can present for effective public in 1980 from the 90,000 miles existing at infrastructure asset creation and preservation. Closer independence from Belgium in 1960. DRC’s attention to contextual political economy dynamics investment budget has become highly contested may also clarify the drivers of low capital spending among the president, prime minister, ministers, and efficiency and excessively rapid depreciation. The governors, nominally in the same government. Rather Rents to Riches framework identifies two key than coming to a consensus on targeting key political economy dimensions—intertemporal infrastructure gaps, the provincial governments of the credibility and inclusiveness—that will impact the producing regions used the resources from new ability and likelihood of polities to deliver public contracts to buy farm equipment like tractors which goods. Intertemporal credibility refers to the ability they then doled out across the country, with limited of politicians, bureaucrats, and other societal actors to prospects of public use. While infrastructure remains collectively commit to achieving a particular a central tenet of the DRC president’s political outcome over time. Inclusiveness refers to the extent platform, even he would find it difficult to implement to which a broader set of societal interests are a significant project through the debilitated considered in decisions. The intersection of these two government systems. dimensions yields four regime typologies (see 2), which can be empirically benchmarked with available governance indicators. Given the longer time horizons, deferred benefits, and public goods character associated with public investment, as well as relative transactional complexity, the observed challenges are likely to be emblematic. 6 Table 2. Political Economy Contexts and Downstream Dynamics Credibility of intertemporal commitment Political inclusiveness Less credible/weaker enforcement More credible/stronger enforcement Less inclusive/ Patrimonial rule Hegemonic government less collectively Individualized political authority; crony hierarchy; Institutionalized one-party regime; either predatory oriented few restraints on power or benevolent • Concentration of decisions about investment • Concentration of decisions about investment allocation at the highest levels of government allocation at the highest levels of government • High vulnerability to revenue volatility • Moderate predictability in channeling of translates to extremely low predictability of investments to asset creation and preservation resource allocations to public investment and • Provision of narrow infrastructure for extractive intergovernmental transfers. industry development and for urban areas in • High degree of private rent-seeking, narrow longer term interest, but less attention to targeting of infrastructure and discretionary broad-based public investment allocation of public investment following short • Private rent-seeking (through both investment term coalitional incentives allocation and procurement), but more • Use of off-budget channels and weakening of contained and institutionalized the of PIM systems • Use of off-budget channels but some attention • Focus on asset creation and neglect asset to strengthening of PIM systems preservation • More incentives for asset maintenance More inclusive/ Clientelist pluralism Programmatic Pluralism more collectively Political competition based on extensive use of Electoral competition based on programs; oriented clientelism/patronage horizontal and vertical accountability • Incentives to concentrate investment allocation • Smoothing of spending and higher decisions in the executive and through predictability of public investment budgets constituency funds • Institutional mechanisms to encourage longer- • Vulnerability to revenue volatility and resulting term public investments with deferred benefit low predictability of capital budget allocations stream and coordination across levels of and intergovernmental transfers government • High time inconsistency in the contracting of • Investments prioritized and allocated with a public works view to public (over private) good; strong • Broader targeting of infrastructure projects enforcement mechanisms on procurement and • Private rent-seeking, including some political transparency side payments, as well as allocation distortions • Investment in and use of PIM systems and introduced by coalitional, electoral incentives institutional learning and earmarking of funds • Attention to asset preservation and • Focus on short-term asset creation and sustainability neglect of asset preservation, with electoral cycle influencing the timing, location and type of investments • Fragmentation of investment portfolio across levels of government and regions Source: Authors. Especially when the electorate and elites are but voters simply do not believe that he or she will be fragmented and the policy coordination across able to deliver it. Therefore politicians more narrowly political forces is weak, democracy and electoral target private goods, notably patronage or accountability will not necessarily lead to the infrastructure projects directed to particular provision of more public goods, including the benefit constituencies, frequently including their own ethnic of efficient public investment. Because of poor group or clan, to gain support (Keefer and Vlaicu coordination and low credibility, politicians have 2007). short-term horizons, which means that they do not consider the full cycle of public investment projects In these clientelist settings, it is particularly important in making spending decisions. In essence, politicians to consider the overarching incentives embedded in in clientelist democracies are not credible in their electoral and party systems, along with other drivers promises to provide public goods to voters (Keefer of client politics (Keefer and Khemani 2009). For and Vlaicu 2007); a politician may promise a bridge, example, in Nigeria, despite concerted reform efforts under recent administrations, periodic reports of they could broadly benefit from more public grand-scale and widespread petty corruption in infrastructure, their political incentives seem to align infrastructure continue to raise concerns about the better with bringing narrow private benefits to their quality of public investment at both the federal and own constituencies. subnational levels. While the government of Nigeria has poured significant resources into the oil-rich but restive Niger delta region, it has not been able to Implications, Options, and create a lasting public infrastructure footprint in the region. Interventions The low intertemporal credibility and coordination While political economy analysis can explain why failures in patrimonial and clientelist pluralist settings countries have suboptimal outcomes in public capital mean that government-wide ―investing to invest‖ formation, development practitioners will be most reforms tend to falter in the implementation link of interested in drawing operational policy implications the PIM value chain. For large-scale infrastructure regarding public investment management. The projects, low intertemporal credibility is also likely to operational contribution of political economy significantly affect the risk premiums for contractors, analysis lies in acknowledging the effect of political as they fear obsolescing bargains. Rent-seeking is incentives on public investment outcomes and likely to be fragmented, which drives up costs, determining what incentive-compatible interventions especially when contractors feel they cannot reach might improve the goal of public asset creation. Key credible bargains against deliverables regardless of measures will be needed to concurrently strengthen markups. These factors will then impinge on the intertemporal credibility and political inclusiveness in quality of projects. Large-scale investment needs will order to enable asset creation and preservation. not be met unless there is better coordination among decision makers. Three basic types of incentive-compatible interventions might achieve the objective of effective Hegemonic governments often present a more varied public asset creation, preservation, and operation (as set of political economy dynamics. Since time outlined in table 3). Some types of intervention are horizons are longer owing to greater regime stability aimed primarily at extending time horizons and and intertemporal policy coordination, particular policy coordination, thereby enhancing intertemporal forms of investment, including those sustaining the credibility. These might include leveraging external extractives sector, may be consistent with the anchors or partnerships, including those with the political economic equilibrium of these regimes. If World Bank. A second type of reform emphasizes the legitimacy of these regimes is linked to a mobilizing stakeholders and enabling collective narrative of modernization and development rather demand-side action in public investment policy and than repression and patronage, the drive for asset management, thereby broadening political creation may be even stronger, as will the desire to inclusiveness. A third form of intervention is slightly invest in country systems to enhance these objectives different: it enclaves institutions and capacity in (Sarr and Wick 2010). The autocratic nature of these natural resource management so that some regimes, however, may result in an excessive top- functionality, albeit limited, is possible, even when down focus on the hardware of development, the wider political economy dynamics are perverse. engendering limited community ownership in the The need and scope for each of these types of preservation of assets. In addition, since political strategies, whether by committed authorities, inclusiveness remains low in these settings, public extractive companies, the broader private sector, civil investment is vulnerable to being used as a conduit society, communities, or development partners, will for channeling rents to elites, and rent-seeking depend on the prevailing political economy context. through procurement systems is likely to present a challenge. But, depending on the size of the elite The principles for incentive-compatible coalition (Bueno de Mesquita 2001), there is still a improvements to public investment management in need to create a mix of public and private goods. As resource-dependent developing countries include an example of a hegemonic regime, Angola’s ruling extending time horizons and achieving collective elite has emphasized a major national infrastructure action, promoting demand-side inclusiveness, push, but may not have paid enough attention to earmarking resources and enclaving capacity, broad-based poverty reduction, instead directing prioritizing PIM system components, and using public investment to meet the demands of influential alternative implementation modalities. urban elites. Even as Angolan officials recognize that 8 Table 3. ‘Good-Fit’ Downstream Interventions for Resource-Dependent Countries Credibility of intertemporal commitment Political inclusiveness Less credible/weaker enforcement More credible/stronger enforcement Less inclusive/ Patrimonial rule Hegemonic government less collectively Individualized political authority, crony hierarchy, Institutionalized one-party regime, either few restraints on power predatory or benevolent oriented • Strengthen country systems while contracting • Strengthen country systems while contracting out key services in the short term out key services in the short term • Emphasize incremental asset creation • Broaden inclusiveness of investment through through less complex, shorter term projects subnational transfers and maintenance • Emphasize checks on executive power to • Ease information asymmetries through simple rein in rent-seeking project design • Consider RfI arrangements and parastatals • Earmark capital budget ratios for preservation for short-term larger infrastructure, with and for creation, emphasizing predictability of mechanisms for external transparency and resource flows emphasis on value for resources • Leverage extractive investor concerns around longer term license to operate for dual-use infrastructure, and leverage collective interests in resource corridors More inclusive/ Clientelist pluralism Programmatic pluralism more collectively Political competition based on extensive use of Electoral competition based on programs, clientelism/patronage horizontal and vertical accountability oriented • Strengthen country systems while contracting • Rely on core country systems, ongoing out key services in the short term investing to invest • Emphasize incremental asset creation • Use matching grants to incentivize through less complex, shorter term projects coordination across levels of government and and maintenance regions and to reduce excessive • Ease information asymmetries through simple fragmentation of public investment project design • Earmark capital budget ratios for preservation and for creation, emphasizing predictability of resource flows • Leverage extractive investor concerns around longer term license to operate for dual-use infrastructure, and leverage collective interests in resource corridors Source: Authors. specific quantity and quality of public investment Extending time horizons and associated collective flows. action One example a reform that improves collective action Ascher (2009) highlights a number of strategies that is the passage of Mongolia’s Fiscal Stability Law in seek to lengthen the time horizons of policy makers, mid-2010. The relatively strong role of legislators in including lessening the perceived short-term losses of Mongolia has been associated with a fragmentation key stakeholders who tend to focus discussions on of the public investment program into small projects, shortsighted actions, carefully structuring multi- as each member has an incentive to channel resources stakeholder processes (including the use of back to his or her own geographic constituency commissions), and emphasizing the selection and (Hasnain 2011). Collectively, members realized that incentive processes for leadership. Such principles this type of individual ―maximization‖ would lead to may prove helpful in identifying incentive- volatility in public investment budgets. Therefore compatible remedies to enhance asset creation and legislators passed the Fiscal Stability Law, which preservation. While they may fall short of full- restricted their funding for smaller investment fledged systematic reforms in PFM and PIM systems, projects and recognized the need for large at the margin they promise to enhance the context- infrastructure, including developing new extractive 9 industries in the southern Gobi Desert. Yet the law Prospective resource corridors may present involved some compromises. While a technically significant opportunities for more inclusive, dual-use desirable option would have been to monopolize infrastructure. Tractable steps in this regard would be resource allocation in a single agency, the political to ―crowd in‖ demand from potential users as part of realities in Mongolia led to more diffuse control evolving spatial plans, which in turn would set the between the finance and planning ministries, basis for longer term constituencies for maintenance. reducing perceptions that key groups are excluded In the service delivery sector, public expenditure from the resource allocation process. Rather than try tracking surveys have gained some traction in to reduce the level of constituency flows, the reform illuminating gaps in frontline service delivery placed the emphasis on improving local projects by financing flows. Capital expenditure tracking surveys setting up basic minimum standards and gatekeeping could be used to track financing flows to actual functions and incentivizing greater coordination. In contracts and physical works, starting with greater order to remain politically feasible, such a system transparency at the project site.xvii must demonstrate that it supports the completion of better projects, for which legislators can in turn take In patrimonial and clientelist settings, the inability to credit. adequately resolve intertemporal bargains affects large-scale infrastructure projects. Consequently, one option may be simply to emphasize smaller projects Promoting demand-side inclusiveness with shorter time horizons, including those depending on decentralized and community-level The demand for public investment may be implementation. Countries with very weak human concentrated or dispersed across various actors in the and institutional capacity may not benefit from system (including selected members of the executive, establishing full-fledged country systems for large- legislative, governors, and mayors). Therefore, scale investment. In attempting to find a good-fit special attention must be paid to those actors in the arrangement, less complex investments may be state who are likely to make an effort to promote achieved by devolving block grants to communities investment with a view to the public good and and subnational governments, even if this action risks sufficiently long time horizons. Where pressure a large share of these resources being used for groups may be particularly well organized (for consumption. Such transfers should be example, transport or business associations) the complemented with incentives that help promote private sector may exert concerted pressure to coordination across jurisdictions when projects have improve infrastructure. But many resource-dependent spillovers and thereby prevent excessive economies with weak non-resource sectors may find fragmentation of the investment portfolio. it especially hard to break out of a low-level equilibrium where demand, hence supply, is weak. The EITI has demonstrated the potential of a multi- stakeholder initiative anchored in an international An emphasis on improving PIM processes can appear mechanism that helps mobilize domestic actors for abstract and removed to political constituencies. A greater transparency in natural resource management. more constructive entry point may be to focus Along similar lines, the Construction Transparency initially on particular aspects of PIM functionality or Initiative (CoST 2010) has now been piloted in seven programmatic, sectoral, or geographically salient countries.xviii Drawing in government, contractors, outcomes. In Brazil, for example, the legislature has and civil society, the initiative has demonstrated that, increasingly exerted pressure on the executive to while the PIM process is complex. A central part of complete projects as evidence of unfinished projects this strategy is to emphasize the prospects for has increased. Campaign slogans in Peru’s resource- successful demonstration cases (that is, to determine rich regions have emphasized the importance of whether more good projects begin to drive out bad efforts to improve the completion rate of projects on projects) and to emphasize learning by doing, rather the public agenda. than supply-driven capacity building support. In this case, capacity must itself be viewed as both While simply finishing projects does not promise endogenous and exogenous: leaders choose to build good projects, such entry points as improving the up capacity if it is in their interest in the medium to project implementation link may provide initial long term, but their policy choices will also be political momentum for further reform. Extractive conditioned by the existing capacity in the short term. industries will often be a strong source of demand for the creation and initial maintenance of infrastructure, The case of Timor-Leste illustrates that weaknesses given its direct links to generating rents and profits. in PIM capacity can reinforce the tendency for 10 politicians to explore alternative public investment the annual budget) and the interests of the extractive modalities. Because electricity provision, particularly company in maintaining the bargain to extract in politically sensitive urban centers such as Dili, is a resources. The time horizons of the extractive deal clear policy concern, the government attempted to will typically exceed those of the ―front-loaded‖ address the electricity shortage by purchasing a used infrastructure provision. For companies, the tangible Chinese power plant. Poor design planning and weak and visible infrastructure contributions may therefore management skills delayed the implementation of the be an important part of the license to operate. In project and, as a result, a third of the country’s extreme cases of limited intertemporal credibility, investment budget in 2009 stood to be unexecuted. however, companies under RfI will not be immune to The government arranged for the excess investment obsolescing bargains. Claims that these deals did not budget to be allocated to a wide range of small works yield enough value for resources may also be used programs to be distributed via an association of against them politically. Therefore it may be in the private construction businesses, instead of through best interest of companies to draw in third-party regular public procurement systems. Preliminary honest brokers and ongoing monitors to provide evidence thus suggests that the lack of a bank of greater transparency to these aspects of the contract. prescreened projects and adequate implementation The contracts should also be structured flexibly modalities meant that the government was enough to respond to significant changes, for constrained in its scope for investment instruments. example, in input costs or midterm design changes host that governments may request. Earmarking and enclaving Development partners can play a role as third-party brokers to help to ease the information asymmetries A final set of options designed to remedy both issues in RfI in the extractive industries. By doing so, they of intertemporal credibility and inclusiveness gaps can enhance time consistency, improve predictability, may be to rely on ―parallel‖ examples for resource and reduce the risks investors face, thereby helping earmarking or enclaving of implementation outside client countries get better resource extraction deals standard ―post-EITI country systems.‖xix Especially for themselves. Several pieces of the upstream of the for large-scale contracts, construction companies may natural resource management value chain are demand significant risk premiums to contract with amenable to greater transparency and more resource-rich but credibility-weak governments. information sharing. Development partners can also These premiums may be associated with a high cost push governments to disclose the terms of extractive of doing business (for example, the need for informal contracts. This is an issue in which international payments) but also the fact that companies may not nongovernmental organizations such as Oxfam get paid in a timely fashion for work completed. International, Revenue Watch, and the EITI play an Angola, for example, was able to leverage significant important role for upstream concerns (Rosenblum credit lines from Brazil and China to draw in and Maples 2009), but they must increasingly be international construction capacity. However, focused on assessing tangible asset creation. inadequate revenue management during the 2008–09 adverse commodity price shock put the country significantly in arrears in the face of fiscal sustainability and cash management concerns. One Conclusions option to enhance intertemporal credibility may be to capitalize projects through multilateral development This note has identified the technical, political banks or escrow accounts with third-party economy, and institutional capacity challenges to procurement agents to ensure that ―showcase‖ enhancing productive public investment in resource- projects are implemented, while contractor premiums dependent developing countries. By examining the are reduced through risk mitigation and insurance. quantity and quality dimensions of public investment, this analysis has elucidated the trade-offs that must RfI deals have emerged as a modality of be made in order to provide productive physical infrastructure investment for both host governments assets, focusing on the project portfolio and its and extractive companies. For host governments, implementation. The note has also identified the they allow subsoil asset value to be directly political economy factors that influence the earmarked to infrastructure, while also buying in incentives to invest in improving public investment capacity to deliver infrastructure. For implementing management systems. Key dimensions in attaining contractors, RfI suggests that their contracts are more productive and efficient investment projects in backed by the resources (rather than the vagaries of resource-dependent settings lie in both the political 11 incentives and time horizons to realize these projects, affording a better contextual understanding of the and also in improving the capacity to do so through varying but often interdependent drivers of careful attention to PIM system components. A investment quality and quantity. In moving down the countervailing factor clearly lies in the investment extractives-led-development value chain, it is critical budget’s attractiveness as a rent-distribution to examine the spending or investment of wealth in mechanism and its vulnerability to corruption. terms of the tangible outcomes of asset creation and Therefore domestic reformers and development preservation, rather than investment flows as such. partners must navigate the most promising paths to While investment flows and good process are clearly gain traction toward better projects in view of the important ingredients, positive increases in the prevailing political economy dynamics. economic and socially productive public capital stock are the results that matter, combined with the value This note also has highlighted the need for more for resources. In this regard, the note has also attention to public investment outside mainstream underscored the critical intertemporal dynamics of channels, including investment through state-owned mobilizing collective action for better investment. enterprises and public-private partnerships. For resource-dependent settings, especially those with Investing to invest, or capacity building efforts to weak administrative capacity, these modalities can improve public investment management, pertains serve as commitment devices to deliver mostly to core country systems, but this note has also infrastructure. A key challenge lies in proactively demonstrated that resource-dependent countries can aligning incentives and capabilities for citizens, resort to different modalities or technologies when governments, and the investors themselves to seeking to scale-up public investment. Increasingly, generate value for resources. RfI deals may be in many cases, asset creation bypasses government particularly attractive to investors in institutionally treasuries, either due to direct links with extractives weak settings—the challenge is to encourage infrastructure or through RfI deals. The caveats developers to see their engagement in these countries notwithstanding, RfI can serve as a commitment as a repeated game, where their reputation and future device in earmarking resource proceeds to profitability are affected by the initial quality and infrastructure, as well as contracting execution sustainability of the infrastructure that was provided. capacity, especially for new and fragile state producers. At the same time, so that governments The ―investing to invest‖ agenda promises high eventually develop credible alternatives, particular returns for resource-dependent countries—yet the care must be taken to ensure that the development of case studies for the Rents to Riches volume suggest core country systems is not neglected, especially with that these prospective returns must also be tempered the prospect of a more diversified resource base and by a reality check. Reforms of public investment prospective evolution of the political system. systems are complex and tend to require strong Enhancing asset creation through RfI will also champions supported by broad coalitions to achieve require adequate mechanisms for sustained asset significant and sustained improvement. preservation and maintenance. Domestic and external pressure may serve as one lever to better align Greater predictability with regard to financing public incentives for actual asset creation with the social investment can clearly be a critical ingredient for license to operate. better public investment management. Consequently, measures that delink annual revenues from spending A better public capital stock is one of the most are a necessary ingredient for medium-term promising avenues for transforming resources rents predictability in infrastructure envelopes. Although into sustainable development riches. Gains in this there has been a trend in international practice to domain prove less ephemeral than pure consumption counteract the traditional bifurcation of recurrent and and even large accumulations of liquid financial capital spending, resource-dependent countries face assets. The right balance between capital creation and the particular challenge of keeping a focus on net preservation will be contextual, and it will also asset creation; hence, some particular focus on capital depend on the existing and prospective capital stock spending may be merited in these settings. in place; for example, a country with few roads has less maintenance to carry out. Ideally, the bulk of the This note has laid out some of the core policy and conversion of rents to public capital would occur capacity decisions governments face in investing the through the treasury. EITI has centered on making proceeds of natural resource extraction. It is sure the revenues due a government from extractives important to unbundle the concepts of absorptive companies do indeed reach the treasury. After this capacity and public investment management, thus EITI stage, however, effective budgeting and 12 execution in public expenditure management are Economies: A Proposal.‖ Policy Research Working Paper critical to achieving the conversion of rents into WPS 5287. World Bank, Washington, DC. physical infrastructure in the most optimal Foster, Vivien, and Cecilia Briceño-Garmendia, eds. 2010. Africa’s intertemporal and distributional fashion. The case Infrastructure: A Time for Transformation. Washington, DC: studies for this volume suggest that banking on full- World Bank. fledged PFM/PIM reforms is often unrealistic, given Foster, Vivien, William Butterfield, Chuan Chen, and Nataliya the prevailing time horizons policymakers face. This Pushak. 2008. Building Bridges: China’s Growing Role as underscores the need to identify, prioritize, and Infrastructure Financier for Africa. Trends and Policy sequence actions that promise to be most tractable Options (PPIAF). Washington, DC: World Bank. and feasible given the prevailing political economy Gelb, Alan, and Sina Grassman. 2010. ―How Should Oil Exporters context. Spend Their Rents?‖ Working Paper 221 (August ). Center for Global Development, Washington, DC. Hamilton, Kirk, and Eduardo Ley. 2010. ―Measuring National Income and Growth in Resource-Rich, Income-Poor References Countries.‖PREMise Note 28. World Bank, Washington, DC. Hartwick, John M. 1977. ―Intergeneration Equity and the Investing Ascher, William. 2009. Bringing in the Future: Strategies for of Rents for Exhaustible Resources.‖ American Economic Farsightedness and Sustainability in Developing Countries. Review 67 (5): 972–74. Chicago and London: University of Chicago Press. Hasnain, Zahid. 2011. ―Incentive Compatible Reforms: The Barma, Naazneen, Kai Kaiser, Tuan Minh Le, and Lorena Viñuela. 2012. Rents to Riches? Political Economy of Natural Political Economy of Public Investments in Mongolia.‖ Resource-led Development. Washington, DC: World Bank. Unpublished manuscript. World Bank, Washington, DC. Brahmbhatt, Milan, and Otaviano Canuto. 2010. ―Natural Hogan, William, and Federico Sturzenbegger. 2010. The Natural Resources and Development Strategy after the Crisis.‖ Resources Trap: Private Investment without Public PREM Note (Poverty Reduction and Economic Commitment. Cambridge, MA: Massachusetts Institute of Management—Economic Policy). World Bank, Washington, Technology. DC. Independent Evaluation Group. 2009. ―The World Bank Group Bueno de Mesquita, Bruce. 2001. ―Minimum Winning Coalitions Support for the Chad-Cameroon Petroleum Development and in Politics.‖ International Encyclopedia of Behavioral and Pipeline Construction: Program Performance Assessment Social Sciences, v. 3.11. Oxford: Elsevier Science. Report.‖ Independent Evaluation Group, Washington, DC. Bulte, Erwin, Christopher M. Meissner, Mare Sarr, and Tim http://siteresources.worldbank.org/INTOED/Resources/Chad Swanson. 2008. From Commodity Boom to Financial and CamReport.pdf. Political Crisis. VOX: Kaiser, Kai, and Lorena Viñuela. 2010. ―Intergovernmental Fiscal http://www.voxeu.org/index.php?q=node/1712 Management in Natural-Resource Rich Settings: A Guide for Collier, Paul. 2010. The Plundered Plant: Why We Must––and Policy Practitioners.‖ Unpublished manuscript. World Bank, How We Can––Manage Nature for Global Prosperity. Washington, DC. Washington, DC: Oxford University Press. Keefer, Philip, and Stuti Khemani. 2009. ―When Do Legislators Collier, Paul, Frederick van der Ploeg, and Anthony J. Venables. Pass on "Pork"? The Determinants of Legislator Utilization 2009 ―Managing Resource Revenues in Developing of a Constituency Development Funding in India.‖ Policy Countries.‖ OxCarre Research Paper 2009-14. University of Research Working Paper No. 4929. Washington, DC: World Oxford, Oxford, UK. Bank. Corrales, Javier, and Michael Penfold. 2001. Dragon in the Keefer, Philip, and Stephen Knack. 2007. ―Boondoggles, Rent- Tropics: Hugo Chavez and the Political Economy of Seeking, and Political Checks and Balances: Public Revolution in Venezuela. Washington, DC: Brookings Investment under Unaccountable Governments.‖ Review of Institution. Economics and Statistics 89 (3): 566–71. CoST (Construction Transparency Initiative). 2010. ―Report of the Keefer, Philip, and Razvan Vlaicu. 2007. ―Democracy, Credibility CoST International Advisory Group.‖ CoST International and Clientelism.‖ Journal of Law, Economics, and Advisory Group, Washington, DC. Organization 24 (2): 371–406. Dabán, Teresa, and Jean Luc Hélis. 2010. ―A Public Financial Ossowski, Rolando, Mauricio Villafuerte, Paulo A. Medas, and Management Framework for Resource-Producing Countries.‖ Theo Thomas. 2008. Managing the Oil Revenue Boom: The IMF Working Paper 10/72. International Monetary Fund. Role of Fiscal Institutions. Washington, DC: International Washington DC. Monetary Fund. Delavallade, Clara. 2006. ―Corruption and Distribution of Public Pritchett, Lant. 2000. ―The Tyranny of Concepts: CUDIE Spending in Developing Countries.‖ Journal of Economics (Cumulated, Depreciated, Investment Effort) Is Not Capital.‖ and Finance 30 (2): 222–39. Journal of Economic Growth 5 (4): 361–84. Devarajan, Shantayanan, Tuan Minh Le, and Gaël Raballand. Rajaram, Anand, Tuan Minh Le, James A. Brumby, and Nataliya 2010. ―Increasing Public Expenditure Efficiency in Oil-rich Biletska. 2010. ―Framework for Reviewing Public 13 Investment Efficiency.‖ World Bank Policy Working Paper 5397. World Bank, Washington, DC. significant social returns. But flooding the domestic market with Rosenblum, Peter, and Susan Maples. 2009. ―Contracts imported food may kill the local agricultural sector, and with it any existent diversification. A well-targeted transfer could ensure that Confidential: Ending Secret Deals in the Extractive children of a poor family are able to complete their schooling, Industries.‖ Revenue Watch Institute, New York. generating human capital. Transferring rents from the state to Sarr, Mare, and Katharina Wick. 2010. ―Resources, Conflict and households may enable the state to tax-back nonresource revenues, Development Choices: Public Good Provision in Resource- allowing for a variety of more efficient household and firm-level Rich Economies.‖ Economics of Governance 11 (2): 183– investments, while also allowing the state to tax-back a more reliable and growing revenue base (see Devarajan, Le, and 205. Raballand 2010). Tanzi, Vito, and Hamid Davoodi. 1997. ―Corruption, Public iii The accumulation of financial assets for resource revenue Investment, and Growth.‖ IMF Working Paper 97/139. stabilization and savings presents a host of technical, as well as International Monetary Fund, Washington, DC. governance and political economy, issues. Accumulation of liquid Villafuerte, Mauricio, and Pablo Lopez–Murphy. 2010. ―Fiscal assets in weak institutional settings with short time horizons may Policy in Oil Producing Countries During the Recent Oil increase the risk of raiding these assets as they increase. Leaders Price Cycle.‖ IMF Working Paper 10/28. International may act with the idea that if they don’t spend (or take) assets now, their successor will. Financial assets may also be subject to Monetary Fund, Washington, DC. significant mismanagement. The recent global financial crisis World Bank. 2009. ―Azerbaijan Country Economic Memorandum: highlighted the importance of distinguishing between risky but A New Silk Road—Export-led Diversification.‖ Report potentially high returns versus ―safer‖ assets. 44365-AZ. World Bank, Washington, DC. iv Commodity prices have historically been subject to a high degree –––. 2011. The Changing Wealth of Nations: Measuring of price volatility and effectively ―random walk‖ trends, which Sustainable Development for the New Millennium. accentuate the risk of overspending on the basis of overly Environment and Development Series. Washington, DC: optimistic assumptions about future price developments (Gelb and World Bank. Grassman 2010). A random walk simply means that no good model exists for whether prices for key resources will go up or down in the future. While there is frequent mention of commodity ―supercycles,‖ the 2008–09 drop in commodity prices highlighted About the Authors the various other factors that could affect actual prices for a country’s resources received in next year’s budget. v Broader definitions of investment also focus on the creation of Kai Kaiser is Senior Economist of the East Asia human capital. While the focus here is on physical infrastructure, Poverty Reduction and Economic Management Unit given its particular technical, incentive, and institutional at the World Bank. challenges, ―soft‖ capital formation in such areas as education and health will depend on building schools and clinics. But it ultimately depends on how teachers, doctors, and nurses are Lorena Viñuela is a Consultant at the Public Sector actually deployed to increase the skill base and health of a Governance Anchor at the World Bank. population. The World Bank’s The Changing Wealth of Nations (2011) ―green accounting‖ framework, for example, explicitly accounts for education spending in its genuine savings estimates. The definition used here includes human development only to the Notes extent of including associated facilities, such as schools and clinics, and infrastructure to allow beneficiaries to access these facilities. The notion of soft capital could also be broadened to a host of other types of ―intangible‖ capital, including the quality of This note was written by Kai Kaiser, Senior Economist, World government administration. The example o fDRC, for example, Bank, and Lorena Viñuela, Consultant, World Bank. It is the fourth suggests that actually having government buildings across the in a series of four notes on the natural resource paradox based on national territory may be an important aspect of investing in the Naazneen H. Barma, Kai Kaiser, Tuan Minh Le, and Lorena state itself and a sense of national unity. Viñuela, Rents to Riches? The Political Economy of Natural vi Resource-Led Development (Washington DC: World Bank, 2012). Arguably, a domestic physical capital stock may not only yield This note summarizes key messages from chapter 5 of the volume, higher economic and especially social returns than financial which provides additional country-specific examples to support the savings, especially if this is complementary to ―soft‖ human analysis. development capital formation, but may also be a more secure asset than the buildup of large liquid assets in settings with weak i Potential investment flows can represent several points of gross intertemporal credibility. A bridge once built promises to yield domestic product (GDP), especially when compared with the sustained benefits, while politicians may quickly draw down a nonextractive economy. Recent investment levels in Angola savings fund during a weaker price cycle or political campaign. accounted for over a third of its GDP. The dictum that resource vii rent proceeds should be invested is encapsulated by the so-called Resource-dependent settings will frequently be characterized by Hartwick (1977) rule. Hamilton and Ley (2010) suggest that the a relatively narrow nonresource tax base. Consequently, revenue bulk of resource-rich developing economies perform quite poorly base diversification should be an important strategic objective for on this measure. these settings. Increasing emphasis has also been placed on the accountability dimensions of state-society tax linkages, in the spirit ii The channels by which public spending can affect present and of taxation engendering demands for societal representation. A future citizens’ welfare are diverse and complex and cannot be disciplining device for public infrastructure spending is how it covered adequately given the scope of the analysis. Using a dollar serves as a potential input to sustaining and increasing the state’s of oil proceeds to push a person above the poverty line will have 14 future revenue base. Given that this link is typically weak in referred to as the ―Angola model.‖ Interestingly, Japan appears to resource-dependent countries, it fails to act as a disciplining device have used a similar model in the 1970s and 1980s with respect to on revenue mobilization and allocation to public capital spending. Chinese coal and oil resources (Brautigam 2010). viii Significant macroeconomic policy guidance exists concerning xv The significant politicization of Venezuela’s national oil savings and stabilization for resource-dependent settings company PDVSA has arguably compromised its core mission of (Brahmbhatt and Canuto 2010), as well as mechanisms for maintaining upstream functionality owing to various downstream resource revenue stabilization and savings (Dabán and Hélis 2010; social mission expectations (Corrales and Penfold 2001). Ossowski et al. 2008; Villafuerte and Lopez-Murphy 2010). The success rate of many of these arrangements has been especially xvi The Democratic Republic of Congo’s (DRC) recent US$ 3 low in institutionally weak settings. Consequently, greater billion-plus deal with the Chinese centered on access to copper attention needs to be given to finding ways to anchor their actual deposits was notionally on budget, but otherwise completely implementation more effectively within the prevailing political bypassed standard government systems, including those for economy context. One very tangible anchor may actually be fixed procurement. Angola was able to quickly draw in significant asset creation. Fiscal stabilization rules may target some baseline Chinese, as well as Brazilian, construction capacity for postconflict price (for example, longer run price-moving average) to set annual reconstruction against oil production. A Nigerian deal with a resource revenues for budget assumptions. If price (and Korean contractor was abrogated, but with the courts subsequently production) exceeds these values, stabilization funds will be built ruling against the government. up. Longer term saving objectives, frequently linked to asset xvii Increasingly, online systems linked to geographic information appreciation and other strategic objectives such as other resource systems (GIS) and procurement systems, coupled with access to access, may also drive countries to establish SWFs. A central information laws, provide additional technical opportunities for question for fiscal policy making is whether resource-related fiscal greater transparency. rules should target overall spending and savings aggregates, or instead seek to earmark some level of resource rents for capital expenditures. ix The prevailing market structure and the extent to which various inputs to public investment are tradable determine the cost of projects and the degree to which public expenditures will create inflationary pressures. A stark illustration of this was seen in Luanda, Angola’s capital and main port, as vital shipments lingered for months at sea owing to capacity bottlenecks, stalling reconstruction and leading to spiraling construction prices. Since capital spending envelopes are normally more discretionary than other forms of public spending, such as wages, entitlements, and debt servicing, they tend to be prone to high degrees of volatility and lack of annual predictability. Limited execution of capital spending envelopes may be a result of top-down fiscal constraints or cash management, or bottom-up problems of failing to implement projects on time. x The World Bank has prepared a PEFA-style framework (Public Financial Management [PFM] Performance Measurement Framework) to assist in this benchmarking for capital spending. xi Heritage and ownership arguments with regard to subsoil assets will typically mean that the extractive industry’s local license to operate (and potentially the government’s overall political legitimacy) hinges on ensuring that rents and investment flow back to the citizens of the extracting localities. Doing so will require effective coordination of fiscal and public investment policy across national and subnational levels, as well as careful attention to the absorptive capacity and governance quality at the national, subnational, and community levels. xii Ancillary infrastructure costs in principle would be accounted for in the cost of extraction, hence they would reduce the rental take. However, if governments pay for extractive industry, they are reducing the cost of extraction. Collective infrastructure across a number of extractives may reduce the overall cost of extraction and enhance the rent take, as, for example, various mines use the same trunk lines. xiii While Azerbaijan has made significant strides in physical investment, arguably it has not take enough measures to provide business environment reforms to promote a more dynamic and diversified private sector (World Bank 2009). xiv Growing recourse to this modality is associated with Chinese engagement with Sub-Saharan Africa and Latin America (Foster et al. 2008), and early successful examples have also seen RfI deals 15