The OPEC Fund for International Development

The Formative Years

Ibrahim F. I. Shihata

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136889493
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Entwicklungsökonomie

The OPEC countries' collective policy is to offer external development assistance free from political or commercial ties, with the purpose of expressing the solidarity of one group of developing countries with the rest. Since 1976, this policy has found vigorous practical expression in the operations and activities of the OPEC fund.

First published in 1983, this book describes the Fund's organisational evolution into a fully-fledged international body, detailing the fund's achievements in providing loans and grants to over 80 countries with operations based on principles that have influenced the whole development movement. Concrete examples are outlined, such as where the fund has acted as a catalyst for development, or a spokesman for a group of countries in international negotiations.

1
THE ESTABLISHMENT AND EVOLUTION OF THE OPEC FUND

Dr Ibrahim F.I.Shihata and Antonio R.Parra

The OPEC Fund for International Development is one of seven inter-governmental development finance institutions¹ created exclusively by developing countries and financed to a substantial extent, and in one case exclusively, by four states in the Arabian peninsula.² The latter states have come, since 1973, to lead the aid-giving process on the world scene in terms of the proportion of their official development assistance to their gross national product, as reported annually by the Development Assistance Committee of the Organization for Economic Cooperation and Development³ The largest among these states, Saudi Arabia, became in 1981 the world’s largest donor in absolute terms according to the same source.⁴

The trend in OPEC ‘surplus’ countries to provide development funds on concessional terms to other developing nations through specialized institutions was started in the Gulf area by Kuwait who established, in the early sixties, two national agencies for this purpose⁵ and led, in 1967, the attempt to create a regional Arab fund. The Arab Fund for Economic and Social Development was created in 1968 and became operational in 1972. The United Arab Emirates established its Abu Dhabi Fund in 1971 on the same pattern as the Kuwait Fund.

The movement was greatly strengthened after the rise in oil revenues in 1973/74 which led to the expansion of the national funds in Kuwait and the UAE, and the creation of new national funds in Saudi Arabia and Iraq, as well as to expansive aid programs by Qatar and Libya. Other oil-exporting developing countries soon joined the movement. Iran and Venezuela entrusted the task to national agencies in charge also of direct investments,⁶ while Algeria and Nigeria created trust funds for this purpose within the African Development Bank. By March 1975, when the heads of States of the members of the Organization of the Petroleum Exporting Countries (OPEC) met in Algiers, all but three members (Ecuador, Gabon and Indonesia) had been involved already in the aid-giving process in different degrees and forms. Their total ODA commitment to other developing countries in that year was reported as US$7.690 billion and their actual disbursement as US$6.239 billion or 2.92% of their combined GNP.⁷

By that time, most of the OPEC donor countries had their national aid agencies in operation, and had participated in a number of multilateral aid efforts and institutions.⁸ When the participants in the Algiers Summit considered the issue of strengthening co-operation with other developing countries, the idea of establishing a collective OPEC aid facility spontaneously became the center of discussion.⁹ The Summit Conference referred the general issue to a joint committee of OPEC finance ministers where specific proposals for establishing that facility were to be discussed in detail

The ministers of finance held their first meeting pursuant to this directive in Vienna in mid-November, 1975. They constituted themselves into a formal ‘Ministerial Committee on Financial and Monetary Matters’ and decided to recommend to their governments the ‘Establishment of a new facility for the provision of additional financial support’ to other less developed countries (LDCs) ‘under the aegis of OPEC’.¹⁰ The ministers, who initially envisaged that members’ contributions to the facility during 1976 would total US$1 billion, entrusted to a subcommittee of ‘Experts on financial and monetary matters’ the task of examining the specific proposals for the institutional shape such a facility would assume. The experts were specifically instructed to discuss possible alternatives and to prepare, on the basis of their findings, a first draft of an agreement for the establishment of the OPEC aid facility envisaged by the Ministerial committee.

The Alternative Proposals

Within the above broad mandate, a wide variety of proposals and options in respect of the form of the proposed facility was reviewed by the committee of experts during the succeeding weeks. These proposals and options reflected in varying degrees the different circumstances and outlook of OPEC’s small but diverse membership.¹¹

Chief among the interests at play in this process were the practical constraints felt above all by the Gulf Arab members of OPEC, who had their own national aid agencies and had been contributors to a host of multilateral institutions and arrangements. They foresaw that because of their relative wealth, or rather financial liquidity, they could end up bearing most of the financial burden the new facility would impose, especially if it were to become a long-term proposition,¹² Some of them might also have been particularly uncertain about the implications of a long-term association in an aid-giving process with fellow members who were newcomers in this field.

Caution as to the duration of the facility for these influential members went hand-in-hand with a desire to avoid creating a large bureaucracy, which not only might duplicate the work of existing institutions and constitute a needless drain on members’ qualified human resources, but also involve considerable expense and contribute, like all bureaucracies, to its own indefinite existence. These practical issues, balanced against the consensus among members of the need for swift implementation of a facility that would enhance the role of OPEC in the Third World and promote OPEC’s solidarity with it,¹³ were decisive in determining the character and structure of the new facility.

The proposals put forward, usually in the form of draft agreements, covered the full range of existing institutional approaches to aid-giving, from setting up an autonomous international lending agency along the lines of the traditional multilateral development funds to the creation of a short-term grant account. However, none of these proposals, which also included the possibility of establishing a trust fund with the World Bank or a special account within OPEC itself, gained the degree of general acceptance necessary for implementation.

Option 1: A Multilateral Development Agency. The reasons for lack of general enthusiasm for the idea, which was initially propagated by Iran, of setting up the facility as an independent multilateral lending entity similar to the traditional development finance agencies¹⁴ have already been implied above. Although the facility in this form might have most fully enhanced OPEC’s multilateral image, particularly by making possible loans in its own name, its characteristics included a self-perpetuating nature (such an entity would, barring liquidation, have to continue in existence until all its loans had been repaid) and tendencies to generate, on the one hand, a large bureaucracy and, on the other, long-term expectations from potential beneficiaries. An indefinite commitment to multilateral OPEC aid efforts was therefore implied, that some major donors among members were not at that time prepared to accept.

Option 2: A Special Account. A completely different proposal was advanced by Venezuela in October 1975. This envisaged a special account held and administered by one or more of members’ central banks, for the purpose of channelling balance of payments aid to LDCs in the form of outright grants. To use the words of the Venezuelan position paper, the proposal consisted essentially of a ‘balance sheet where the income item will consist solely of the contributions of member countries and the expenditure item will be the grants destined to developing countries’.¹⁵ This account would be set up for an initial period of two years. Purely operational matters would be decided upon by an ad hoc committee of representatives of the institutions chosen to administer the account, while overall supervision would be exercised by the finance ministers.

Although the facility in this form could have been swiftly implemented at minimal administrative cost, the proposal had its short-comings. Since the facility’s day-to-day administration would have been entrusted to only one or possibly two institutions of member countries, it would inevitably have become identified with those institutions and member countries, rather than with OPEC as a whole. Moreover, most members wished to have the facility’s duration flexible, an option better preserved by providing for a lending agency whose repayments could eventually be rolled-over in future operations. If, in addition, aid were to be provided in grant form, the benefits of continuous contacts with borrowers under long-term loans would be lost.

The Venezuelan proposal was also unattractive to several other OPEC countries for a more sensitive reason. This reason lay in the basis on which Venezuela proposed to calculate the level of each member’s contribution to the facility on the one hand, and the scope and direction of assistance from the facility on the other hand.

Each member’s contribution, Venezuela said, should be determined by multiplying a pre-determined fraction of the price of oil by the member’s total oil export volume. In other words, the share of each member’s financial participation in the account would equal its share in OPEC’s overall exports.¹⁶ Beneficiaries of grants from the account would, on the other hand, be the net oil importing developing countries whose major supply sources were OPEC countries. The amount allocated to each beneficiary would be in proportion to the ratio of its net oil imports to the total net oil imports of all eligible beneficiaries.

This aspect of the proposal of Venezuela (which was itself for many years the world’s biggest oil exporter and is still one of OPEC’s major exporters) was for obvious reasons unattractive to the other large producers, whose share in total oil export volume, it could readily be argued, did not necessarily correspond exactly to their relative ability to pay, other factors having to be taken into consideration. Iran, however, agreed at the time that each member should contribute 10 cents (US) for each barrel exported, over a 3 year period.¹⁷

Needless to say, by linking contributions and benefits closely with oil trade, the proposal seemed to involve tacit acceptance of responsibility by OPEC members for a situation they had always disclaimed. Moreover, in practice the main beneficiaries of OPEC assistance under the proposal would have been the better-off industrializing LDCs with a high level of oil imports. These countries, it has been argued, are less deserving of such assistance than the poorer LDCs.

Option 3: OPEC’s Own Special Account. Another possibility considered by the sub-committee of experts was to establish the facility as a special account owned and possibly also administered, by the OPEC organization itself. In this form, it would have been similar to the short-lived Special Arab Aid Fund for Africa (SAAFA) of the League of Arab States, and also the Organization of Arab Petroleum Exporting Countries’ (OAPEC) Special Account, both set up in 1974 as direct and short-term responses to the financial problems occasioned by the price rises for African and Arab oil importing countries, respectively.

SAAFA was administered by its parent organization until April 1976 when this function was transferred to the Arab Bank for Economic Development in Africa (BADEA). In December of the same year, SAAFA’s capital was merged, at Kuwait’s suggestion, with that of BADEA. The OAPEC Special Account, which also ceased operations in 1976, was from the beginning administered not by OAPEC but by the Arab Fund for Economic and Social Development.

A similar OPEC Special Account could have been set up by virtue of a resolution of the OPEC Conference of oil ministers, the Organization’s supreme authority, establishing the facility as a new specialized organ of OPEC.¹⁸ While from a procedural point of view this would have been a simple matter, it raised a jurisdictional issue. The problem did not relate to OPEC’s principal functions, and had after all, been referred for solution to the finance ministers, not the oil ministers who constitute the OPEC Conference; further consideration of the possibility was therefore effectively blocked.

Option 4: A Trust Fund A fourth option, that of setting up the facility as an international trust fund administered by the World Bank, was put forward by Saudi Arabia in November 1975. Under this proposal, contributions of members would be held by the World Bank as trustee in a special account set up within the Bank for this purpose, The resources of the trust fund would be used to provide soft loans for specific development projects and programs and for balance of payments support The World Bank would process applications for assistance from the fund, and submit recommendations thereon to a small management committee composed of representatives of the fund’s contributing parties. The committee would decide on the basis of such recommendations, also taking into account OPEC finance ministers’ broad policy directives. Administration of the loans provided from the fund would be undertaken by the trustee who would provide quarterly reports on the fund to its contributors.

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