What will Latin America do with its oil and gas windfall?
The central Asian oil state of Azerbaijan may be thousands of miles away from Latin America, but Latin American governments could learn from what it is doing with its oil revenues.

The country expects to pull in $130 billion-$200 billion in the next 20 years from oil transported through a 1,100-mile pipeline to the Turkish port of Ceyhan. So in 1999 Azerbaijan set up a state oil fund to manage this sudden inflow of wealth and save for a future when oil prices drop or when its stocks are used up.

In Latin America, countries such as Chile and Mexico also set up their own copper and oil stabilization funds in the late 1990s. Azerbaijan managed its oil fund in the same fashion as Latin America’s stabilization funds did until last year, when Azerbaijan decided to invest its oil riches instead. Backed by a $1.09 million grant from the US Trade and Development Agency, the state Oil Fund of Azerbaijan (SOFAZ) hired New York-based Overture Financial Services for advice on setting up and managing what’s known as a permanent fund for its investments.

“There is a strong understanding that they must accumulate and invest this money to prepare for the time when their oil reserves start depleting,” says Mark DeSario, CEO of New York-based Overture.

Azerbaijan officials went to Alaska in July to meet with the Alaska Permanent Oil Fund Corp., a public trust set up by the Alaska state government in 1976 to manage its oil wealth. Michael Burns, the Alaska fund’s CEO, says he explained to the Azerbaijan officials that putting the money into a permanent fund works better for the state than setting up a development bank to support businesses and create jobs directly.
The first step for the establishment of a permanent fund is having a clear mission, he says. “I think it is very important that a permanent fund be created with a clear vision of long-term goals, which is not to say you can’t change those goals over time,” he says.

Investment Goals
Azerbaijan aims to combine long-term investing with the flexibility to finance short-term projects such as infrastructure upgrades. This creates some structural issues, Overture’s DeSario says. “Permanent funds are constructed to invest earnings from non-renewable sources to produce manageable and predictable returns for future generations. Economic stabilization funds tend to be shorter-term in outlook,” he says. “The SOFAZ fund is contemplating a multi-compartment fund comprising of a long-term pool of assets, an operational pool and an emergency pool.” 

It’s not clear that Latin American countries will opt for this model. Chile is content to use its copper stabilization fund to reinforce counter-cyclical macroeconomic policies. The International Monetary Fund requires Ecuador to use its oil revenues for debt repayment. President Hugo Chávez ran down his country’s $6 billion oil stabilization fund after the national oil strike of December 2002, and now he spends Venezuela’s oil revenues on social projects, buying sovereign bonds of other Latin American countries such as Argentina, and even subsidizing oil exports to heavily indebted Caribbean countries such as Jamaica.

Chávez aside, most Latin American governments are trying to avoid blowing these additional revenues. But sometimes, emergencies arise. In August, Ecuador’s oil workers called a national strike. It cost the government some $400 million in lost oil revenues.

Overture’s DeSario says permanent funds could provide a model for Latin American countries that want to save their money for a time when the mines are tapped out and the oil stocks run dry. “Latin America sits on the cusp of significant growth driven by non-renewable resources. Now the region must decide how to convert those exhaustible assets into permanency to serve the constituents of those countries.” LF