6. Revenue Management

The extraction of oil and gas has a potential of generating massive revenues.  Once EI revenues have been generated and collected, a government must decide on their management and allocation, according to the EI Source Book. A failure to manage properly the wealth arising from oil, gas, and mining operations can lead to poor growth outcomes and a misallocation of resources, including the promotion of social and economic inequalities, the funding of corrupt practices, and the generation of intra-state, or even inter‐state, conflicts. Options include spending or saving with decisions required on appropriate channels or mechanisms for each. Sharing of resource revenues among levels of government and regions is increasingly common and Requires careful balancing of pros and cons. Key considerations for oil, gas, and mining When considering management of revenue from oil and gas, and mining activities, it is important to keep in mind the challenges and goals. Challenges   According to the EI Source Book, there are four main challenges in managing EI revenues:

Figure: Revenue Management Challenges

Figure source: Summary of issues in the World Bank’s EI Source Book.

Goals

Although there are many challenges, governments can make decisions to use their natural resource revenues in a manner that has long-term positive social and economic impact on the country. According to the Natural Resource Governance Institute, there are 6 revenue management goals for policymakers to consider:

Table: Revenue Management Goals

Distributing benefits across generations  In countries with pervasive economic and social needs and a government capable of transforming resource revenues into development, immediate spending to increase economic growth and improve the standard of living may be wise. If social and economic needs are less acute, a longer spending plan may be appropriate, which could include investing resource revenues in stocks or bonds to generate revenue after the resources are depleted.
Distributing benefits across the nationThe government must decide the appropriate distribution of benefits within the current population. Should the benefits be distributed in such a way that all people benefit equally, or should they be distributed based on other considerations, such as need or impact from the EI activity?
Balancing domestic vs. foreign investments  For governments, the end goal of allowing resource extraction should be to increase government revenues and improve citizens’ livelihoods through better access to health care, education, and other services. The best way to do this is not necessarily by directly investing in domestic public services, and may include foreign investments, which can generate revenue after resources are depleted and may help manage market volatility.
Managing volatilityVolatile resource revenues do not necessarily mean the government has volatile expenditures. A government can choose to use tools, such as the fiscal rules, to stabilize the amount of revenues that are spent in any given year.  
Improving economic growthImproving the domestic economy, with the potential to increase jobs and tax collection, should be the goals of investing natural resources revenue.   
Managing expectationsAn open and transparent revenue management and distribution process can aid the government in managing citizens’ expectations for new investments and expenditures.  
Table source: Summary of issues in NRGI’s March 2015 Reader “Revenue Management and Distribution – Addressing the Special Challenges of Resource Revenues to Generate Lasting Benefits.” 

Key guidance and further information The following resources provide additional information on the process for revenue management.

EITI: The Extractive Industries Transparency Initiative is a global standard to promote the open and accountable management of oil, gas, and mineral resources. EITI’s Revenue Allocation (Requirement 5) provides additional information on EITI standards related to the allocation of revenue.
NRGI: The Natural Resource Governance Institute helps people to realize the benefits of their countries’ endowments of oil, gas, and minerals and has a number of publications addressing revenue management.
IMF: The International Monetary Fund’s Administering Fiscal Regimes for Extractive Industries: A Handbook focuses on effectively administering revenues from extractive industries. It offers guidelines to establish a robust legal framework, organization, procedures and capacity for administering revenue from extractive industries in developing and emerging economies.
IIED: The International Institute for Environment and Development is a policy and action research organization that promotes sustainable development. Its paper Meaningful community engagement in the extractive industries: Stakeholder perspectives and research priorities explores what ‘meaningful community engagement’ means in the context of extractive industries, and the challenges faced by companies, governments and civil society organizations in ensuring that that community engagement leads to sustainable development outcomes.
World Bank: The World Bank’s Rents to riches? The political economy of natural resource-led development provides an analytical framework for assessing a country's political economy and institutional environment as it relates to natural resource management across the value chain.
United Nations: The United Nations’ report on Extractive industries and indigenous peoples  discusses international human rights standards for indigenous peoples in the context of extractive industries.

Key audit considerations

Oil and Gas: AFROSAI-E has identified several high level considerations for revenue derived from petroleum. It suggests the auditor should consider whether:

Table: Revenue Management: Key Audit Considerations for Oil and Gas

Timeliness of paymentsIs petroleum revenue being paid on time to the designated account in the Central bank?  
Management agreement for investmentsIs there a management agreement between the Ministry of Finance and the Central bank which also covers investment policies?  
Caps on petroleum revenue transfersIs the government adhering to the cap set on the amount of petroleum revenue to be transferred to the annual budget? Normally, the transfer of petroleum revenue should not exceed what is needed to fund next year's national budget.  
Compliance with transfer authorizationsAre transfers from the Central bank (or the petroleum revenue account holder) processed only with the appropriate signatures?  
Reserve managementAre reserve funds established and managed in a proper way and are they used for the intended purpose? Withdrawals should only be made for the correct reasons.  
Table source: Summary of issues in AFROSAI-E, Guideline: Audit Considerations for Extractive Industries.

Mining The Canadian Audit & Accountability Foundation has similarly identified several high level considerations when auditing revenue derived from mining. It suggests the auditor should consider:

Table: Revenue Management: Key Audit Considerations for Mining

MaterialityAre the revenues from the extraction of minerals material significant?  
Predicted versus actual revenueIs there a significant difference between predicted and actual revenues? If so, what is the explanation for this difference?
Public complaints  Have there been any public complaints or reporting of any inappropriate practices in the sector (transfer mispricing, for example)?  
Revenue framework reviewWhen was the last review of the revenue framework conducted? When is the next one planned?  
Significant changes in revenueWhere significant changes in revenues are observed, are they in line with current market conditions and production levels?  
Table source: Summary of issues in the Canadian Audit & Accountability Foundation’s Practice Guide to Auditing Mining Revenues and Financial Assurances for Site Remediation.