- The Washington Times - Thursday, December 15, 2005

When the dust settles after Bolivia’s Dec. 18 election, the new president immediately will be hit with demands by citizens anxious to see personal benefits from the nation’s petroleum patrimony. The winner of that election and Bolivia itself will pay a very high price in further instability if these expectations cannot be met.

Qui bono? — who benefits — has been the central issue of Bolivian politics since the era of capitalization, when foreign oil companies were invited in the mid-1990s to partner with the government in developing oil and gas fields. Opening the way for these partnerships resulted in a tenfold increase in proven oil and gas reserves, as well as funding for Bolivia’s pension system and its once-a-year cash bonus for the elderly, the bonosol. This bonanza did not, however, stem the clash of rising expectations against the reality of delayed wealth creation, resulting in political turmoil. Now Bolivia has a new hydrocarbons law that mandates revision of existing contracts with foreign energy partners.

Lack of visible social progress heightened the understandable skepticism of the nation’s indigenous, people with five centuries of laboring in other extractive industries — silver and tin — only to see the riches go to a favored few at home and foreign interests abroad. Ironically, their anger reached the boiling point at the historical moment when a new extractive industry, natural gas, could actually make a decisive difference for Bolivia’s poor.

Much of the current political debate concerns ownership of hydrocarbons at the wellhead. Nationalization may satisfy national pride, but it is a poor formula for development. Foreign energy companies drove the growth in exploration because the existing contracts granted them the right to commercialize hydrocarbons as soon as they were extracted. If the government resumes control, the loss of this incentive will likely mean that exploration in Bolivia — now at a virtual standstill due to legal uncertainty — will end.

Nor will wealth creation come about as the result of a recent decree from La Paz apportioning hydrocarbons revenue among provincial governments. What assurance is there that these funds won’t simply be used to defray normal government expenses, like salaries and vehicle fuel, rather than for real development for Bolivia’s indigenous poor? For example, only about one-fortieth of the new hydrocarbons revenues collected by Bolivia’s government are allocated to the indigenous and “first nations.”

There has to be a better way, and there is. Instead of focusing on who owns the hydrocarbons and controls the flow of gas, why not focus instead on who controls the revenue? Why not capture the hydrocarbons revenues for a development fund to capitalize indigenous corporations?

Suppose Bolivia’s government split its hydrocarbon revenues 50/50 with a development fund controlled directly by Bolivian indigenous citizens. A back-of-the-envelope calculation shows this could yield U.S. $ 1 billion annually.

Instead of allowing these monies to drain away through various political filters, they could instead be invested directly into trust funds administered temporarily by multilateral lending institutions. Though still very much a work in progress, such projects in Cameroon and Chad are creating trust funds that local boards can draw upon in very transparent ways to target resources to the greatest social needs. In a similar way, a portion of Bolivia’s revenues could be invested directly in business enterprises controlled by the indigenous for the indigenous.

A similar model has worked very well on a vast scale in the U.S. State of Alaska. In the 1960s, proposals to develop vast petroleum fields in that state were met by Native Alaskans with skepticism bordering on intense hostility. After much negotiation, Native Alaskans accepted a deal embodied in the Alaskan Native Claims Settlement Act (ANCSA) of 1971 that gave them control over much of the revenues being produced from their lands, including lands allocated to the natives in settlement of their claims, as well as royalties from extractive activities and an eleven-year allocation from the U.S. Treasury in compensation for the land claims not directly satisfied.

What was the result? Poverty among Native Alaskans declined from 67 percent to 18 percent in one generation, while household income increased by 236 percent. Simultaneously, the State of Alaska received $36 billion in royalties and taxes, much of which has been invested in infrastructure and education as well as providing all Alaskans with an annual allocation from a general fund. Above all, the focus on revenues resulted in the capitalization of regional and village corporation, which have invested in oil and gas, mining, forestry, fisheries, tourism and other activities, earning $30 billion in corporate revenues shared with Native Alaskan employees, contractors and shareholders. Six of the 10 largest Alaskan enterprises are native corporations.

The government of Trinidad and Tobago is investing its petroleum revenues in all the elements of human development — education, transportation, health, housing, basic amenities and security — in a program dubbed Vision 2020. Perhaps by mixing these models — blending Trinidad’s focus on infrastructure with the Alaskan model — Bolivia could develop a comparably clear — “20/20” — vision for the future of its own indigenous people.

Whichever approach he adopts, the next Bolivian president needs to directly connect the incentives for foreign partners to produce new wealth with the development needs of the people.

Norman A. Bailey, a Washington economist specializing in Latin America and former senior director for International Economic Affairs of the National Security Council, is co-founder of the Indigenous Enterprise Institute.

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