ANALYSIS

While a trendy priority for new oil producers, sovereign wealth funds can easily be manipulated if their internal governance and oversight are not strong enough.

The Libyan Investment Authority (LIA) has taken two international banks to courtseeking to recover over $3.3 billion (11 trillion shillings) that the oil-producing country lost in 'bad deals' that were initiated by the banks during former President Muammar Gaddafi's reign.

LIA is attempting to recover $1.2 billion (about 4 trillion shillings) from a U.S investment bank, Goldman Sachs and another $2.1 billion (almost 7 trillion shillings) from French bank, Societe Generale. The country's Sovereign Wealth Fund alleges that the two banks advised it to enter risky deals in 2008 that ended up being worthless. The hearing of one of the cases resumed in London in June 2016, with LIA's lawyers accusing Goldman Sachs executives of taking its officials on luxurious trips to Morocco and Dubai in order to influence their investment decisions. One witness in court claimed that the trips were laden with 'heavy drinking and girls'.

Key in the case is Goldman Sach's relationship with Haitem Zarti, a brother to Mustafa Zarti who was LIA's second-in-command at the time. The bank is said to have paid for Zarti's lavish trip to Dubai and later offered him an internship placement at their headquarters in New York. The Fund's lawyers now argue that the Bank's treatment of Haitem Zarti biased his brother to stake the fortunes of the $67 billion Fund in a series of bad deals.

Happier times: Late Col. Gaddafi's son, Saif-Al-Islam Gaddafi.

The second case against Societe Generale is expected to commence in early 2017 but there are indications that the Fund's lawyers will attempt to link the bad deals to bribery and influence peddling involving the first family, particularly Gaddafi's son, Saif Gaddafi.

But what made Libya's Sovereign Wealth Fund so susceptible to manipulation? During Col. Muammar Gaddafi's four decade reign, opacity dominated management of the country's Petroleum Fund, allowing unchecked corruption to thrive. Patronage, family links and political influence were much more important than institutionalised, competence-based investment decision making. Hence, the Fund was often manipulated into investing billions of US dollars in risky assets managed by political friends or allies of the regime. Transparency, independent oversight, clarity of rules and political will eluded Libya, resulting in mismanagement of the resources and potentially causing avoidable losses that form the basis of the cases in court today.

The Libyan case provides a good example of how Sovereign Wealth Funds can be vulnerable to abuse by overbearing governments, unless they have strong, independent governance structures and sufficient corruption control mechanisms. For Uganda, the case comes at an opportune time, since the country is operationalizing the Petroleum Fund as established by The Public Finance Management Act, 2015(PFMA). In some ways, the law attempts to address key issues necessary to ensure good governance of revenues expected from Uganda's nascent oil and gas sector.

However, a number of loopholes exist in the law which, if not addressed, would expose Uganda to the perils Libya has witnessed. Unless regulations for the Act, once issued, offer more clarity, Uganda's Petroleum Fund could end up like that of Libya.

Firstly, reading through that Act, it is not clear what the objectives of the Petroleum Fund are. While the Act alludes to the Fund helping to support budget stability [Section 58 (a) and Section 63 (2)] as well as providing heritage for future generations [Section 64 (3) & (4)], neither of these is clearly stated as its objective. This lack of clarity of objectives presents difficulty for policy makers in terms of giving policy direction in form of operational rules for the fund. It also remains difficult to decide the sort of assets the savings can be invested in and therefore the nature of restrictions that should be put in place for government to access the Fund.

If, on one hand, the Fund is to play a stabilising role, a significant chunk of the money should be invested in liquid assets that can easily be accessed in case of budget shortfalls, like bonds. On the other hand, if the Fund is to serve as a heritage for future generations, restrictions for accessing it have to be made tighter, for example by requiring that the money be invested in long term assets like real estate. Where the Fund has a dual function, this should also be clearly stipulated in law or the regulations.

Secondly, the PFMA presents a possibility of conflict of powers between the Minister of Finance and Bank of Uganda or an external Fund Manager appointed by the Bank over the choice of investments into which the Fund's money may be committed. Whereas section 63 (2) (C) gives power to the Minister to prescribe an instrument into which the Fund's finances may be invested, section 64 (1) vests operational management responsibilities in the Bank of Uganda. Again, Section (64) (6) also leaves it to Bank of Uganda to establish risk management arrangements for the instruments to be used in the management of funds in the Petroleum Investment Reserve. This could result in conflict in the case of Bank of Uganda rejecting an instrument prescribed by the Minister for investment of the Fund's money, even if that may have been done on a technically sound basis.

In addition, the Act falls short of clarifying, in terms of jurisdiction, where funds in the Petroleum Revenue Investment Reserve shall be invested. Although Section 63(2) mentions that the money shall be invested in internationally convertible currency deposit or a debt instrument denominated in internationally convertible currency, it remains silent on whether these investments are to be made in the domestic economy or abroad. Different lessons from the Management of the Government Pension Fund of Norway show that investing petroleum revenues abroad protects domestic industries (and economy), diversifies risk and maximises returns.

However, the choice of that 'international investment' and how the decision to invest in it is made, are very crucial and that is where the Libyans got it wrong. They now claim that they were hoodwinked by street smart bank executives to invest in risky ventures that resulted in billions of dollars in losses.

Yet the Fund should have had their own professional advisors to assess the risks and decide accordingly. In any case, Norway invests the bulk of monies in her Fund in stock markets in the USA. However, because of a more streamlined investment decision making mechanism, when Norway lost hundreds of millions of dollars in the 2008 economic downturn, it was easier to attribute the losses to the global economic downturn and not mismanagement. Uganda should, therefore, consider investing in more developed financial markets abroad to secure the best returns and protect her economy against over-heating, while ensuring that independent investment decision making procedures are followed.

However, Uganda's PFMA (2015) lacks provision for independent third party oversight over the Fund's operations, a cardinal principal in ensuring transparency and accountability in the way funds are managed. Third party oversight is critical in exerting public pressure on policy makers and fund managers to ensure open decision making as a guarantee for integrity in the way natural resource funds are managed.

In Ghana, the Public Interest and Accountability Committee's (PIAC) May 2012 report revealed that the Ghana National Petroleum Company (GNPC) was retaining large amounts of petroleum revenues that threatened to grow the petroleum sector at the expense of other sectors. The report also revealed that the Ministry of Finance had overestimated corporate income taxes by nearly 100 percent in order to create extra fiscal space for government and legitimise greater spending under the country's laws.

Although Ghana's PIAC has been constrained by lack of funds and mandate to implement its recommendations, its experience underscores the need for Uganda to ensure third party oversight if our revenues are to be managed in a transparent manner.

Globally, Norway offers the best lessons given that they have been exemplary in running their extractives sector. Several similar funds around the world have been successful as well. It is estimated that worldwide, sovereign wealth funds hold assets in excess of three trillion dollars. Information on some of the natural resource funds globally is shown in the table below:

Country Fund name Year established Estimated value of assets

Norway Government Pension Fund Global 1990 $850 billion

Saudi Arabia SAMA Foreign Holdings 1952 $730 billion

Public Investment Fund 1971 $5.3 billion

Abu Dhabi (UAE) Abu Dhabi Investment Authority 1976 $773 billion

International Petroleum Investment Authority 1984 $68.4 billion

Mubadala Development Company 2002 $60.9 billion

Kuwait Kuwait Investment Authority 1953 $400 billion

Qatar Qatar Investment Authority 2005 $175 billion

Russia National Welfare Fund 2004 $87.9 billion

Reserve Fund 2004 $87.3 billion

Algeria Revenue Regulation Fund 2000 $70.9 billion

Dubai (UAE) Investment Corporation of Dubai 2006 $160 billion

Ghana Ghana Heritage Fund 2011 $0.13 billion

Ghana Stabilization Fund 2011 $0.32 billion

Botswana Paula Fund 1994 $5.7 billion

Nigeria Nigeria Sovereign Investment Authority 2011 $0.98 billion

Adapted from Andrew Bauer, 'Managing the public trust: How to make natural resource funds work for citizens', 2014.

Uganda too can join this elite club in a decade or so. However, the politicians need to let the proposed Petroleum Fund function independently and only allow for independent third party oversight over its operations.

Chris Musiime is the Managing Editor, Oil in Uganda while Gerald Byarugaba is a Research Associate, Advocates Coalition for Development & Environment (ACODE) and a 2014 PETRAD Fellow.

Demonstrators chanted anti-government slogans and waved flags as they marched down Kinshasa's streets on Sunday, calling for President Joseph Kabila to resign after his term ends in late December.

Addressing tens of thousands of protesters, opposition leader Etienne Tshisekedi said the electoral commission needed to be convened by September 19, the "first red line, which must not be crossed."

"The electoral body must be convened for the presidential election. If it is not, high treason will be proved in the person of Mr. Kabila, who will take responsibility for the misery of the Congolese people," said the 83-year-old leader.

Presidential polls are due to take place in November, but Kabila's government has said logistical problems may delay the vote.

In May, Congo's Constitutional Court ruled Kabila could remain in office in caretaker capacity beyond the end of his mandate. The ruling sparked fears that Kabila could try to extend his rule by a third term.

Tshesekedi credited with uniting opposition

Kabila, 45, took over as president of the country of 71 million people after his father was assassinated in 2001. He won a 2011 election against Tshisekedi, which critics say was marred by fraudulent practices.

Earlier this week Tshisekedi returned from Europe, where he had been undergoing medical treatment for two years. An immensely popular figure, he rose to prominence in the 1980s as a strong critic of former dictator Mobutu Sese Seko. Today, Tshesekedi is credited with uniting the voice of the opposition in the Democratic Republic of Congo.

Tshisekedi has also demanded an end to "arbitrary judicial cases" against opposition leaders like Moise Katumbi, who was sentenced in absentia to three years in jail for property fraud, making him ineligible to contest the upcoming presidential poll.

mg/cmk (AFP, Reuters)

 

ANALYSISBy Herman J. Cohen

Bemba was in jail for the 8 years during his trial at the ICC. He should be sentenced to time already served so he can return to the DRC where his leadership is needed, argues Hank Cohen.

Jean-Pierre Bemba was vice-president of the Democratic Republic of the Congo (DRC) from 2003 to 2006. He is the popular political leader of the Congo's Equateur Province in the country's northwest, an area the size of France.

Between 1998 and 2002, the DRC was in a state of civil war, with several African countries involved militarily in support of the government or in support of various rebel movements. During this period, Jean-Pierre Bemba was President of the MLC party (Movement for the Liberation of the Congo). His party also had an armed wing of several thousand fighters who supported the government against various rebel movements.

The fighting in the DRC stopped in 2002, leading to a negotiated new constitution, and a transitional government from 2003 to 2006. During this period, Bemba was one of four transitional vice-presidents under the transitional president, Joseph Kabila. The first postwar democratic election was held in 2006, with Bemba obtaining the most votes in the first round, before losing to Kabila in the second round with 42% of the vote.

Before this though in 2002-2003, with a ceasefire in place in the DRC, Bemba decided to send his militia to neighbouring Central African Republic (CAR) in support of President Ange-Félix Patassé who was facing a number of armed rebellions.

Patassé had previously helped Bemba organise his armed force in the DRC. The civil war in the CAR was particularly nasty in the actions committed against civilian populations by the different armed factions, including Bemba's.

In view of crimes allegedly committed by his militia in the CAR, Jean-Pierre Bemba was indicted by the International Criminal Court in The Hague for "crimes against humanity" in 2008.

The indictment said that Bemba's militia engaged in pillaging, rape and other crimes against civilians, including cannibalism. The prosecution document did not accuse Bemba of inciting his fighters to commit crimes against civilians. However, the prosecution accused him of failing to engage in proper supervision in order to prevent the crimes allegedly committed by his men.

After eight years of deliberations, the Court convicted Bemba of war crimes and crimes against humanity this March. In July, the court handed down a sentence of 18 years in prison, eight of which have already been served. His defence has decided to appeal.

I have read documents produced by both the prosecution and the defence. As a former military officer, I believe that the commander of troops is responsible for everything his soldiers do, or fail to do. But in the case of Bemba, I believe there are mitigating circumstances. The most important being that for much of the time his troops were in the CAR, he was in South Africa engaged in negotiations for the political transition and elections in the DRC.

It is not my place to argue about Bemba's guilt or innocence. However, I firmly believe that the nature of the offence should not be the cause of a long prison sentence as in the cases of Liberia's former president Charles Taylor and Chad's former president Hissène Habré, both of whom actively encouraged atrocities against civilian populations. Bemba's main offence was apparently neglect.

Bemba has already served eight years in prison during the long period of the trial. Given the nature of accusations against him, I believe those eight years are sufficient and that he should be sentenced to time already served.

Apart from the issue of justice, Bemba is needed in the DRC to resume his role as a political leader of a major ethnic region in Equateur Province. His vote tally in the 2006 election indicated that he is enormously popular and has significant leadership qualities. This is especially important at the present time because the DRC is going through a period of constitutional and political crisis.

President Kabila's second and final term officially ends in December 2016, but he is showing signs of not wanting to leave and of possibly finding ways to remain in power indefinitely. This is a period when the opposition needs to be unified in order to maintain maximum pressure against the regime, and Bemba is needed to stand with the opposition in support of constitutional democracy.

My message to the International Criminal Court is short: Bemba has already served his time; now let him to return to the DRC to serve his people.

Herman J. Cohen is a former US Assistant Secretary of State for Africa.

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