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National Petroleum Revenue Management Sharing Act, RPPL 8-36 2011

EIGHTH OLBIIL ERA KELULAU
RPPL NO. 8-36
Eighth Regular Session, November 2010 (Introduced as House Bill No. 8-113-8, HD1, SD3, PD1)


AN ACT


To Enact a National Petroleum Revenue Management and Sharing Act for the Republic of Palau to govern the establishment, maintenance and operation of the Petroleum Revenue Management Accounts; establish criteria for the equitable sharing of Petroleum Revenue among the National Government and States Governments; and for other related purposes.


THE PEOPLE OF PALAU REPRESENTED IN THE OLBIIL ERA KELULAU DO ENACT AS FOLLOWS:


Chapter 1
INTRODUCTION


Section 1. Legislative findings.
(1) The Eighth Olbiil Era Kelulau hereby finds and recognizes the following:


(a) In order to carry out the responsibilities vested in the National Government by Article VI of the Constitution, to “...take positive action to attain these national objectives and implement these national policies: conservation of a beautiful, healthful and resourceful natural environment; promotion of the national economy; protection of the safety and security of persons and property; promotion of the health and social welfare of the citizens...”, it is imperative that it enact a comprehensive petroleum revenue management law prescribing transparent and efficient procedures and manners by which certain revenue derived from the exploitation of Petroleum is to be paid, equitably shared between state governments and national government, and prudently saved for the benefit of current and future generations alike; and


(b) “Each state shall be entitled to revenues derived from the exploration and exploitation of all living and non-living resources, except highly migratory fish, and fines collected for violation of any law within the marine area extending from the land to twelve (12) nautical miles seaward from the traditional baselines” (Constitution, Article XII, Section 6 (a); and


(c) the Olbiil Era Kelulau shall have the power to “to levy and collect taxes, duties and excises, which shall be uniformly applied throughout the nation” (Constitution, Article IX, Section 5(1); and


(d) “The National Government shall be entitled to all revenues derived from the exploration and exploitation of all living and non-living resources, except highly migratory fish, and fines collected for violation of any law beyond the areas owned by the state” (Constitution, Article XII, Section 6 (b); and


(e) “Subject to the approval of the Olbiil Era Kelulau, the state legislatures shall have the power to borrow money to finance public programs or to settle public debt” (Constitution, Article XI, Section 4); and


(f) “There shall be a National Treasury and a state treasury for each of the states. All revenues derived from taxes or other sources shall be deposited in the appropriate treasury. No funds shall be withdrawn from any treasury except by law.” (Constitution, Article XII, Section 1); and


(g) “The President shall submit an annual unified national budget to the Olbiil Era Kelulau for consideration and approval..... no appropriation bill may be enacted by the Olbiil Era Kelulau until a bill appropriating money for the budget has been enacted.” (Constitution, Article XII, Section 3(a).


Section 2. Intent and Purpose. It shall be the intent and purpose of this Act to establish a petroleum revenue management and sharing law, incorporating international guidelines and practices in the field, that will promote the prudent management of Petroleum Revenue in a transparent and fiscally sustainable manner, by reducing the impact on the economy of volatile and uncertain petroleum revenues, promoting the equitable sharing of the benefits derived from the exploitation of Petroleum, and accumulating savings to support economic development in preparation for the time when Petroleum will be exhausted.


Section 3. Name and Constitutional Recognition.
(1) This Act shall be formally known as “the National Petroleum Revenue Management and Sharing Act” or by its short name “the Petroleum Revenue Act.”


(2) This Act recognizes the right of the Olbiil Era Kelulau to levy and collect taxes, duties and excises, which shall be uniformly applied throughout the nation, and to implement policies for the promotion of the national economy and the social welfare of the citizens. This Act further recognizes the rights of:


(a) the National Government to all revenue derived from the exploitation of Petroleum located beyond the areas owned by a State; and


(b) a State Government to revenues derived from the exploitation of Petroleum located in areas owned by such State.


Section 4. Application and Paramountcy.
(1) This Act applies to the payment, management, use and oversight of Petroleum Revenue derived from Petroleum Operations within the Territory.


(2) Where there is any conflict between the provisions of this Act and:


(a) any Applicable Law; or


(b) any terms or conditions contained in any lease, license or other arrangement, on the collection, use and management of petroleum revenue, the provisions of this Act shall prevail.


Section 5. Interpretation and Definitions.
(1) All references to this Act and Applicable Law hereunder, shall include any amendment, variation, modification or replacement as may be made to same from time to time.


(2) In this Act the following definitions shall apply:


(a) “Act” means this Petroleum Revenue Act enacted by the Olbiil Era Kelulau, together with the regulations hereunder.


(b) “Applicable Law” means this Act, together with any act, regulation, by-law, code, rule or enactment lawfully enacted and promulgated by a Government, and any international convention or treaty to which a Government is a signatory, having application to any matter which may be incidental to a matter dealt with pursuant to this Act.


(c) “Approved Bank” means any foreign commercial bank, or its branches or agencies, in a foreign location, which is rated Aa3 or higher by the Moody’s rating agency or rated AA– or higher by Standard & Poor’s rating agency.


(d) “Approved Foreign Government” means the national government of any foreign country, which is rated Aa3 or higher by the Moody’s rating agency or rated AA– or higher by Standard & Poor’s rating agency.


(e) “Approved Multilateral Organization” means any reputable international organization whose membership comprises governments and other international organizations, which is rated Aa3 or higher by the Moody’s rating agency or rated AA– or higher by Standard & Poor’s rating agency.


(f) “Budgeted Expenditure” means expenditure included in the National Budget or a State Budget as approved by the Olbiil Era Kelulau and the State legislature for a financial year.


(g) “Budgeted Revenue” means revenue included in the National Budget or State Budget approved by the Olbiil Era Kelulau and the State legislature for a financial year.


(h) “Compact Trust Fund” means the trust fund established pursuant to the Compact of Free Association between the United States of America and the Republic.


(I) “Code of Ethics” means the Code of Ethics Act, Chapter 6 of Title 33 of the Palau National Code.


(j) “Constitution” means the Constitution of the Republic of Palau ratified on July 9, 1980 and entered into force on January 1, 1981, as amended in the 1993 and the 2008 constitutional referenda.


(k) “Consumer Price Index” means the Consumer Price Index for All Urban Consumers, as published by the Bureau of Labor (United States Department of Labor Statistics) or such other successor agency.


(l) “Custody Bank” means the institution at which the Petroleum Revenue Accounts are opened pursuant to this Act.


(m) “Distribution Account” means the account established pursuant to Chapter 2.


(n) “Dollars” means United States Dollars.


(o) “Government” means the National Government or the State Government as applicable and “Governments” means both of them.


(p) “Gross Petroleum Revenue” means as defined in Chapter 2, Section 7.


(q) “International Financial Reporting Standards” means the accounting standards issued by the International Accounting Standards Board, and shall include the International Accounting Standards issued by the International Accounting Standards Committee.


(r) “Heritage Fund” means the Heritage Fund of Palau established pursuant to Chapter 7.


(s) “Management Agreement” means the agreement between the Government and the Custody Bank for the custody, management and operation of the Petroleum Revenue Accounts as set forth in Chapter 10.


(t) “Ministry” means the Ministry of Finance and Administration, or any successor public authority from time to time designated by the National Government to administer all or part of the activities subject to this Act.


(u) “Minister” means the Minister of Finance and Administration, or any successor public official from time to time designated by the National Government to administer this Act.


(v) “MPIIC” means the Ministry of Public Infrastructure, Industries and Commerce, or any successor public authority from time to time designated by the National Government to administer the Petroleum Act.


(w) “National Budget” means the estimate of revenues and expenditures of the National Government comprised within the Unified Budget submitted to the Olbiil Era Kelulau in each financial year for the following financial year as provided for in the Constitution.


(x) “National Government” means the government of the Republic of Palau, acting through its appropriate representatives, officials or ministers, in accordance with, and pursuant to, the Constitution.


(y) “National Petroleum Funds” means the Petroleum Revenue Stabilization Fund and the Petroleum Revenue Heritage Fund.


(z) “National Treasurer” means the Director of the Bureau of National Treasury, or any successor public official from time to time designated by the National Government to perform similar functions and activities.


(aa) “National Treasury” means the Bureau of National Treasury within the Ministry of Finance, or such successor public authority as may be designated by the National Government to perform similar functions and activities.


(bb) “National Treasury Account” means the general account of the National Treasury.


(cc) “Net Petroleum Revenue” means Petroleum Revenues less any amount to which a State is entitled pursuant to Chapter 3, Section 10.


(dd) “Person” includes any individual, firm, partnership, joint venture, corporation, body politic, government agency, estate, trust, or other association, however organized.


(ee) “Petroleum” means crude oil, natural gas, and any other naturally occurring hydrocarbon or mixture of such hydrocarbons, whether in a gaseous, liquid or solid state.


(ff) “Petroleum Act” means the Petroleum Act, enacted by the Olbiil Era Kelulau, together with the regulations hereunder.


(gg) “Petroleum Funds” means the Petroleum Revenue Stabilization Fund, the Petroleum Revenue Heritage Fund, and the State Saving Fund.


(hh) “Petroleum Revenue” means Gross Petroleum Revenues less any amount debited to the Distribution Account pursuant to Chapter 2, Section 8(1)(a).


(ii) “Petroleum Revenue Accounts” means the Distribution Account, the Stabilization Fund, the Heritage Fund, and any State Saving Fund.


(jj) “Petroleum Operations” means the exploration, development, extraction, production, field separation, transportation, storage, sale or other disposal of Petroleum; but does not include any transportation or other operations beyond the point of export or, in the case of petroleum which is processed within the Territory, beyond the point of entry into a refinery or liquefaction or natural gas treatment plant.


(kk) “Production” means the activities involved in the extraction of Petroleum as defined in Applicable Law.


(ll) “Public Official” means an Employee, Former Employee or Public Official, as defined pursuant to the Code of Ethics Act, 33 PNC Section 601(o).


(mm) “Republic” means the Republic of Palau.


(nn) “Saving Ratio” means as defined in Chapter 5, Section 14(2).


(oo) “Stabilization Fund” means the Petroleum Revenue Stabilization Fund of Palau established pursuant to Chapter 6.


(pp) “State Budget” means the estimate of revenues and expenditures of a State prepared by the State Government and submitted to the State legislature in each financial year for the following financial year as provided for the Constitution, Article XII, Section 3(b).


(qq) “State Government” means the government of each State of the Republic, acting through its appropriate representatives, officials or ministers, in accordance with, and pursuant to, the Constitution.


(rr) “State Saving Fund” means a saving fund opened at Custody Bank in accordance with Chapter 3, Section 11.


(ss) “State Territory” means the land territory and internal waters within a State and its territorial seas extending to 12 nautical miles from the lower water mark as set forth in the Constitution.


(tt) “State Treasurer” means the treasurer, or any successor public official from time to time designated by the State Government to perform similar functions and activities.


(uu) “State Treasury” means the treasury and finance department, or such other public authority as may be designated by the State Government to perform similar functions and activities.


(vv) “State Treasury Account” means the general account of a State Treasury;


(ww) “Sustainable Benchmark Revenue” means the estimated sustainable income determined in accordance with Chapter 4, Section 12(5).


(xx) “Territory” means “all terrestrial and oceanic areas over which the Republic of Palau has sovereignty and jurisdiction which”...consist of all the islands, atolls, reefs, and shoals that have traditionally been in the Palauan archipelago, including Ngeruangel Reef and Kayangel Island in the north and Hatohobei Island (Tobi Island) and Hochaihie (Helen’s Reef) in the south and all land areas adjacent and in between, and also consist of the internal waters and archipelagic waters within these land areas, the territorial waters around these land areas and the airspace above these land and water areas extending to a two hundred (200) nautical miles exclusive economic zone, unless otherwise delimited by bilateral agreements or as may be limited or extended under international law.” (Constitution, Article I (1)(a)), and shall include the Republic of Palau’s continental shelf areas as determined by the United Nations Commission on the Limits of Continental Shelf (UNCLOS) as set forth in Chapter 1, Section 1(a) and Article I , Section 2(a) of the Constitution, and any modification thereof.


(yy) “Trust Agreement” means the agreement between the National Government and a State Government for the custody and management of the State Saving Fund.


(zz) “Unified Budget” means the estimate of revenues and expenditures of the Republic prepared by the National Government and submitted to the Olbiil Era Kelulau in each financial year for the following financial year as provided for in the Constitution, Article XII, Section 3(a).


Chapter 2
DISTRIBUTION ACCOUNT


Section 6. Establishment of the Distribution Account.
(1) There is hereby established a Distribution Account, within the national treasury, as a designated account at a Custody Bank to be selected pursuant to this Act, which shall receive and disburse all Gross Petroleum Revenue due to the Republic and derived from Petroleum Operations in accordance with the provisions of this Act.


(2) Petroleum Revenue credited to the Distribution Account shall be transferred to the National Treasury, the State Treasuries, and the Petroleum Funds in accordance with this Act.


(3) Except as provided for in this Chapter 2, no other use of Gross Petroleum Revenue credited to the Distribution Account shall be permitted.


Section 7. Deposits into the Distribution Account.
(1) The following Gross Petroleum Revenue shall be credited to the Distribution Account:


(a) any cash bonus, rental fee, royalty, petroleum rent tax, and corporate income tax payment and other payment of similar nature made by a Person in respect of Petroleum Operations pursuant to the Petroleum Act;


(b) any amount received by the Government from the sale of Petroleum taken in kind pursuant to the Petroleum Act, net of commissions and brokerage fees if any;


(c) in the event that the National Government, directly or through a public agency, publicly owned corporation, or similar entity as may be designated by the National Government in accordance with the Petroleum Act, participates in, or carries out, Petroleum Operations within the Territory or otherwise:


(I) any amount received from such direct participation; and


(ii) any amount paid by such public agency, publicly owned corporation or entity as dividend, cash bonus, rental fee, royalty, petroleum rent tax, corporate income tax, and other payment of similar nature.


(d) any amount received by the Government relating, directly or indirectly, to Petroleum Operations not covered in Section 7(1)(a) to (c), except for decommissioning funds, personal income tax, social contributions, customs duties, penalties, fines, administrative and service fees, and other payments of similar nature provided for in Applicable Law; and


(e) any transfer from the Heritage Fund in accordance with Chapter 7, Section 22(2).


(2) All payments into the Distribution Account shall be made by direct transfer by the Persons liable to make such payments.


Section 8. Withdrawals from the Distribution Account.
(1) Withdrawals from the Distribution Account may be made for the following purposes:


(a) any payment listed in Chapter 2, Section 7(1) received by a Government in excess of a Person’s liability to pay; and


(b) any amount to be transferred to the Petroleum Funds and to the accounts of the National Treasury and State Treasuries in accordance with this Act.


(2) To the extent practicable, the Management Agreement shall provide for the automatic, formula-based execution by the Custody Bank of the transfers from the Distribution Account to the National Treasury Account, the State Treasury Accounts, and the Petroleum Funds as set forth in Chapter 10, Section 34.


Section 9. Fees and Charges. Reasonable and customary fees and charges for the establishment, holding and management of the Distribution Account by the Custody Bank set forth in the Management Agreement, shall be charged to the National Treasury Account. The Minister shall include such charges and fees as current expenditure for the National Budget in relevant financial year.


Chapter 3
SPECIAL RIGHTS


Section 10. Special Rights of the States.
(1) A share of Petroleum Revenue credited to the Distribution Account in a financial year and arising from Petroleum Operations carried out in a State Territory, shall be transferred to the State Treasury Account and/or subject to Chapter 3, Section 11, the State Saving Fund of such State, in accordance with the Management Agreement, as follows:


(a) Petroleum Revenue paid pursuant to any lease, license, agreement or other arrangements issued or entered into by the State following the enactment of this Act:


(I) 100 percent of any rental fee;


(ii) 50 percent of any cash bonus;


(iii) 15 percent of the Petroleum Revenue remaining after deducting the amounts set forth in paragraphs (I) and (ii) above; and


(b) Petroleum Revenue paid pursuant to any lease, license, agreement or other arrangements issued or entered into by the State prior to the enactment of this Act:


(I) 100 percent of any royalty; and


(ii) 100 percent of any rental fee.


(2) To the extent practicable, the Management Agreement shall provide for the automatic, formula-based execution by the Custody Bank of the transfers from the Distribution Account to the State Treasuries Accounts and the State Saving Funds as set forth in Chapter 10, Section 32.


(3) No appropriation from the Olbiil Era Kelulau or a State legislature shall be required to effect the transfers referred in Chapter 3, Section 10(1).


Section 11. State Saving Fund.
(1) Subject to Chapter 3, Section 11(3), following the discovery of commercial quantities of Petroleum in a State Territory but before commencement of Production from any block within the State Territory, the Minister shall instruct the Custody Bank to open a State Saving Fund which shall be held in trust by the National Government for such State.


(2) The objective of the State Saving Fund, whether permanent saving, short-term stabilization, long-term saving, or a combination of the foregoing, and any special rule applicable to its management, shall be defined in a Trust Agreement to be entered into between the National Government and the State Government prior to the opening of the State Saving Fund, which shall include:


(a) the right of the State Government to dispose of any monies standing to the balance of the State Saving Fund;


(b) the manner of proof, deadlines, authorization and certifications of transactions; and


(c) that all gains, interest, losses, customary fees and other charges associated with the establishment, holding, and management of the State Saving Fund shall be credited or debited to the same as they are earned or incurred.


(3) Prior to the commencement of commercial Production from any block within a State Territory, or following the establishment of a State Saving Fund pursuant to Chapter 3, Section 11(1), the State Government may, by notice in writing to the Minister:


(a) elect to administer all of its entitlement under Chapter 3, Section 10(1) directly, in which case all monies to which the State is entitled under Chapter 3, Section 10(1) shall be transferred to the State Treasury Account; or


(b) request that a share of its entitlement under Chapter 3, Section 10(1) be transferred to the State Treasury Account, and any residual amount be credited to the State Saving Account to be managed in accordance with this Act and the Trust Agreement.


Chapter 4
ANNUAL PLANNED WITHDRAWALS


Section 12. Determination of the Annual Planned Withdrawals.
(1) The Unified Budget for a financial year shall include an Annual Planned Withdrawal, being the amount to be withdrawn from the Distribution Account, in accordance with Chapter 4, Section 12, to finance public expenditure included in the National Budget and State Budgets for the financial year. No transfer shall be made from the Distribution Account with respect to the Annual Planned Withdrawal unless such budgets have been approved by the Olbiil Era Kelulau and the relevant State legislatures.


(2) The Annual Planned Withdrawal shall be the lower of:


(a) the sum of the National Planned Withdrawal and the State Planned Withdrawals determined in accordance with Chapter 4 , Section 12(3) to (5) below; and


(b) the Sustainable Benchmark Revenue as determined in accordance with Chapter 4, Section 12(5).


(3) The National Planned Withdrawal for a financial year shall be the sum of:


(a) all Budgeted Expenditure for the financial year, including block grants, if any, and unpaid Budgeted Expenditure carried forward from the previous financial year; less


(b) all Budgeted Revenue for the financial year that is not Petroleum Revenue, including all transfers from the Compact Trust Fund, grants and interests earned on monies deposited or invested in financial assets held by the National Government, other than the National Petroleum Funds.


(4) A State Planned Withdrawal for a financial year shall be the sum of:


(a) all Budgeted Expenditure for the financial year, and unpaid Budgeted Expenditure carried forward from the previous financial year; less


(b) all Budgeted Revenue for the financial year that is not Petroleum Revenue, including block grants and other transfers from the National Budget, grants, technical assistance, and interest earned on monies deposited or invested in financial assets held by the State Government, including any State Saving Fund.


(5) The Sustainable Benchmark Revenue for a financial year is the maximum amount that can be appropriated from the Petroleum Revenue Accounts in the financial year and leave sufficient resources in the Petroleum Revenue Accounts for an amount of equal real value to be appropriated in all later financial years as determined in accordance with the formula set forth in subsection (a) below.


(a) The estimated sustainable income for a financial year shall be calculated according to the following formula:
RPPL%208-36%202011%20-%20National%20Petroleum%20Revenue%20Management%20Sharing%20Act00.png


where:


(I) Et is the estimated Sustainable Benchmark Revenue for the financial year.


(ii) r is the average long-term nominal rate of return, being the expected annual rate of return on the National Petroleum Funds over the period of calculation of the Sustainable Benchmark Revenue, calculated on the basis of a portfolio composed of assets proportionate to the assets held in the National Petroleum Funds at the date of the calculation, and adjusted for inflation using the variation rates of the official price indexes of the currencies in which the National Petroleum Funds asset portfolios are invested. The long-term real rate of return shall not exceed 5 percent.


(iii) V is the estimated closing balance of the National Petroleum Funds at the end of the previous financial year.


(iv) R0 .. Rt are the budget projections for expected annual Net Petroleum Revenue for the financial year (R0) and future financial years (R1 to Rt) as determined in accordance with this Act.


(v) I is the discount rate used to determine the present value of future Net Petroleum Revenues, which shall always be no less than two percentage points higher than the long-term real rate of return.


(vi) n is the number of years until no further deposits of Net Petroleum Revenue are expected to be made into the Petroleum Revenue Accounts.


(b) all assumptions upon which the calculations of the Sustainable Benchmark Revenue are made shall be prudent and reflect internationally accepted financial principles and methods. All such assumptions, including any changes in subsequent calculations, shall be clearly identified and documented in the reports to be submitted to the Olbiil Era Kelulau pursuant to this Act.


(6) Withdrawals from the Distribution Account for the purposes of refund of tax in the event of overpayment shall not be considered as part of the appropriation approved under Chapter 4, Section 12(1).


Section 13. Transfers of the National Planned Withdrawals and State Planned Withdrawals to the Treasuries.
(1) The total amount transferred from the Distribution Account and from the Stabilization Fund in a financial year to:


(a) the National Treasury Account shall not exceed the amount of the National Planned Withdrawal as approved by the Olbiil Era Kelulau for the financial year; and


(b) any State Treasury Account shall not exceed the State Planned Withdrawal for such State as approved by Olbiil Era Kelulau for the financial year.


(2) No budget approval shall be granted by the Olbiil Era Kelulau and no transfer shall be made from the Distribution Account to the National Treasury Account or the State Treasury Accounts in a financial year unless the Minister has first provided the Olbiil Era Kelulau with:


(a) a report detailing the calculation of the Sustainable Benchmark Revenue for the financial year for which the transfer is proposed to be made and the Sustainable Benchmark Revenue for the preceding financial year, which shall be prepared or certified by a reputable independent auditor; and


(b) where the proposed Annual Planned Transfer for a financial year exceeds the Sustainable Benchmark Revenue for the financial year:


(I) a report, prepared or certified by such auditor, estimating the amount by which the Sustainable Benchmark Revenue for subsequent financial years will be reduced as a result of the transfer from the Distribution Account of an amount in excess of the estimated Sustainable Benchmark Revenue for the financial year in which the transfer is proposed to be made; and


(ii) a detailed explanation of the impact on the economic development and fiscal sustainability of transferring Petroleum Revenue in excess of the estimated Sustainable Benchmark Revenue.


(3) The National Treasurer shall provide written notification, countersigned by the Minister, to the Custody Bank of the amounts approved by the Olbiil Era Kelulau in respect of the National Planned Withdrawal and State Planned Withdrawals for the financial year in accordance with the Management Agreement, including any change thereof resulting from amendments to the Budget Law during the financial year.


(4) During the course of a financial year, any Petroleum Revenue standing to the balance of the Distribution Account after all transfers to the State Treasury Accounts, the State Saving Funds (if any), the Stabilization Fund and the Heritage Fund pursuant to Chapters 3, 6 and 7 have been made, shall be transferred as follows:


(a) a share corresponding to the product of such balance and the ratio between each State Planned Withdrawal and the Annual Planned Withdrawal, to the State Treasury Accounts of the relevant State; and


(b) any balance remaining on the Distribution Account after all transfers pursuant to Chapter 4, Section 13(4)(a) have been made, to the National Treasury Account.


(5) To the extent practicable, the Management Agreement shall provide for the automatic, formula-based execution by the Custody Bank of the transfers from the Distribution Account to the National Treasury Account and the State Treasuries Accounts referred to in Chapter 4, Section 13(4)(a) and (b).


Chapter 5
SAVING RATIO


Section 14. Determination of the Saving Ratio. The Saving Ratio to be used in determining the share of Net Petroleum Revenue to be transferred to the National Petroleum Funds pursuant to this Act shall be calculated according to the following formula:
RPPL%208-36%202011%20-%20National%20Petroleum%20Revenue%20Management%20Sharing%20Act01.png


where:


(a) eNPR is the Petroleum Revenue for a financial year as estimated by the Ministry in accordance with Chapter 8 less the amount corresponding to the Special Rights of the States set forth in Chapter 3, Sec. 10; and


(b) APW is the Annual Planned Withdrawal authorized by the Olbiil Era Kelulau in the financial year.


Chapter 6
PETROLEUM REVENUE STABILIZATION FUND OF PALAU


Section 15. Establishment of the Stabilization Fund.
(1) Following the discovery of commercial quantities of Petroleum in the Territory but no later than the commencement of Production from any block within the Territory, the Minister shall establish, at a Custody Bank to be selected pursuant to this Act, the Petroleum Revenue Stabilization Fund of Palau, to be known as the “Stabilization Fund”.


(2) The objective of the Stabilization Fund shall be to mitigate the impact on or sustain public expenditure capacity during periods of unanticipated shortfalls in Petroleum Revenue whether caused by a fall in Petroleum prices or through adverse changes in production levels.


Section 16. Deposits into the Stabilization Fund.
(1) Subject to Chapter 6, Section16(2), all transfers made to the Stabilization Fund from the Distribution Account in a financial year shall be equal to 50 percent of the value obtained by multiplying the Saving Ratio by any Net Petroleum Revenue credited to the Distribution Account during the fiscal year.


(2) As soon as the sum of all transfers of the Net Petroleum Revenue made from the Distribution Account to the National Treasury Account and the State Treasury Accounts in a financial year equals the amount of the Annual Planned Withdrawal authorized by the Olbiil Era Kelulau for the financial year, 50 percent of the value of all subsequent transfers of Net Petroleum Revenue out of the Distribution Account shall be made to the Stabilization Fund.


(3) The share of the savings earmarked for stabilization purposes under Chapter 6, Section 16(1) and (2), shall be reviewed every three years by the Minister, and any recommended change shall be approved by the Olbiil Era Kelulau, provided that such share shall not exceed 70 percent.


(4) The amount accumulated in the Stabilization Fund shall not exceed a predetermined threshold as recommended by the Minister and approved by Olbiil Era Kelulau and such threshold shall be reviewed from time to time to reflect macroeconomic conditions. Once the predetermined threshold is attained, subsequent transfers to the Stabilization Fund pursuant to Chapter 6, Section 16(1) and (2) shall be limited to amounts necessary to maintain the target threshold, and any excess amount shall be transferred to the Heritage Fund.


(5) To the extent practicable, the Management Agreement shall provide for the automatic, formula-based execution by the Custody Bank of the transfers from the Distribution Account to the Stabilization Fund as set forth in Chapter 10, Section 34.


(6) At the end of a financial year:


(a) the National Treasurer shall ensure that any amount transferred to the National Treasury Account from the Distribution Account and the Stabilization Fund in the financial year that remains unspent is credited to the Stabilization Fund; and


(b) the State Treasurers shall ensure that any amount transferred to their State Treasury Accounts from the Distribution Account and the Stabilization Fund that remains unspent is credited to the Stabilization Fund.


(7) All amounts credited to the Stabilization Fund pursuant to Chapter 6, Section 16(6) shall become part of the general pool of revenues to be used for stabilization purposes in accordance with this Act.


(8) At the beginning of a financial year interest earned on the investment portfolio of the Heritage Fund may be credited to the Stabilization Fund in accordance with Chapter 7.


Section 17. Withdrawals from the Stabilization Fund.
(1) Subject to Chapter 4, Section 13(1), monies standing to the balance of the Stabilization Fund at any time during a financial year may be transferred to the National Treasury Account and the State Treasury Accounts to respond to short-term treasury management needs. Instructions to the Custody Bank in respect of such transfers shall be signed by the National Treasurer, and countersigned by the Minister or the State Treasurer as appropriate.


(2) Subject to Chapter 4, Section 13(3), monies standing to the balance of the Stabilization Fund at any time during a financial year may be transferred to the National Treasury Account and the State Treasury Accounts if, due to a fall in Petroleum prices or production levels, the sum of all transfers of Net Petroleum Revenue to be made during a financial year to the National Treasury Account and to the State Treasury Accounts are expected by the Minister to be lower than the National Planned Withdrawal and the State Planned Withdrawals authorized by the Olbiil Era Kelulau for the financial year.


(3) Notwithstanding the provisions of Chapter 6, Section 17(1) and (2), the sum of all withdrawals from the Stabilization Fund made in a financial year pursuant to Chapter 6, Section 17 shall in no event be more than 40 percent of the balance standing to the credit of the Stabilization Fund at the beginning of the financial year.


Section 18. Exceptional Withdrawals.
(1) In, and only in, exceptional circumstances, may an amount additional to the National Planned Withdrawal be transferred from the Stabilization Fund to the National Treasury Account in a financial year.


(2) For the purposes of Chapter 6, Section 18(1), exceptional circumstances means:


(a) devastation caused by man-made environmental disasters, including any accidental spill of Petroleum;


(b) natural disasters, including hurricanes, earthquakes, famines, and droughts;


(c) devastation caused by civil turmoil; and


(d) acts of war which, in the opinion of the National Government, affect a significant proportion of the population or require urgent remedial actions, and for which additional financial support is required, inter alia, through the transfer and application of funds from the Stabilization Fund.


(3) The additional amount referred to in Chapter 6, Section 18(1):


(a) may only be transferred pursuant to an Act of the Olbiil Era Kelulau authorizing the transfer of such additional amount for that financial year in accordance with Applicable Law; and


(b) shall in no event exceed 80 percent of the monies standing to the balance of the Stabilization Fund at that time of such authorization.


(4) The Bill mentioned in subsection (3) above shall not be voted upon on its final reading unless 14 days have elapsed since the Minister has provided the Olbiil Era Kelulau with a report containing a fully reasoned explanation of the need for the transfer of the additional amount, together with a detailed plan of expenditure. The Olbiil Era Kelulau shall debate the report of the Minister as a matter of urgency and determine the appropriation of the additional amount.


(5) Upon receipt of an original written instruction of the Minister, the National Treasurer may instruct the Custody Bank, in the manner provided in the Management Agreement, immediately to transfer an amount other than the National Planned Withdrawal to the National Treasury Account. The National Treasurer’s written instruction to the Custody Bank shall be countersigned by the Minister and the President of the Republic.


Section 19. Gains, Interests, Losses, and Charges. All gains, interest, losses, customary and reasonable commissions, fees and other charges associated with the management of the Stabilization Fund and the of its portfolio of assets shall be credited or debited to the same as they are earned or incurred.


Chapter 7
PETROLEUM HERITAGE FUND OF PALAU


Section 20. Establishment of the Heritage Fund.
(1) Following the discovery of commercial quantities of Petroleum in the Territory but no later than the commencement of Production from any block within the Territory, the Minister shall establish, at a Custody Bank to be selected pursuant to this Act, the Petroleum Heritage Fund of Palau, to be known as “Heritage Fund”.


(2) The object of the Heritage Fund is to provide a permanent endowment to support economic development and the welfare of future generations long after the Petroleum has been depleted.


Section 21. Deposits into the Heritage Fund.
(1) All transfers made to the Heritage Fund from the Distribution Account in a financial year shall be equal to 50 percent of the value obtained by multiplying the Saving Ratio by any Net Petroleum Revenue credited to the Distribution Account during the fiscal year.


(2) In the event that the share of savings earmarked for stabilization purposes is amended pursuant to Chapter 6, Section 16(3), the share of savings earmarked for the Heritage Fund shall be adjusted accordingly.


(3) One financial year after the end of Production from any area in the Territory, the balance standing to the credit of the Stabilization Fund shall be transferred to the Heritage Fund, and the Stabilization Fund shall be closed.


(4) To the extent practicable, the Management Agreement shall provide for the automatic, formula-based execution by the Custody Bank of the transfers from the Distribution Account to the Stabilization Fund as set forth in Chapter 10, Section 34.


Section 22. Withdrawals from the Heritage Fund.
(1) There shall be no withdrawal of the principal of the Heritage Fund, which shall be used only for those income-producing investments specifically designated by this Act as eligible for permanent fund investments.


(2) All income from the Heritage Fund, less:


(a) an amount sufficient to offset the effect of inflation on the principal during that financial year, as determined in accordance with Chapter 7, Section 22(4); and


(b) losses, commissions, fees and other charges set forth in Chapter 7, Section 23(3); shall be deposited into Stabilization Fund, to the extent permitted under Chapter 6, or the Distribution Account if the Stabilization Fund has been closed pursuant to Chapter 7, Section 21(3).


(3) The National Treasurer shall compute the income of the Heritage Fund annually as of the last day of the financial year in accordance with generally accepted accounting principles, excluding any unrealized gains or losses.


(4) The National Treasurer shall calculate the amount to transfer to the principal under Chapter 7, Section 22(2) by:


(a) computing the average of the monthly Consumer Price Index for each of the two previous calendar years;


(b) computing the percentage change between the first and second calendar year average; and


(c) applying that rate to the value of the principal of the Heritage Fund on the last day of the previous financial year.


Section 23. Gains, Interests, Losses, and Charges. Subject to Chapter 7, Section 22 (3), all gains, interest, losses, customary and reasonable commissions, fees and other charges associated with the management of the Heritage Fund and the investment of its portfolio of assets shall be credited or debited to the same as they are earned or incurred.


Chapter 8
ESTIMATED PETROLEUM REVENUE


Section 24. Calculation of estimated Petroleum Revenue.
(1) The following criteria shall be applied to estimate the value of Petroleum Revenue for the purposes of preparing the Unified Budget, National Budget, and State Budgets, and calculating the Sustainable Revenue Benchmark:


(a) the expected average price of a barrel of crude oil produced from within the Territory shall be determined with reference to the forecast price for Dated Brent FOB Sullom Voe, or other representative crude oil reference price, as published by an internationally recognized forecasting agency, adjusted by a price differential reflecting the difference in quality between the reference crude oil and the different types of crude oil produced within the Territory, and transport costs. The expected future average price for natural gas shall be the reference future average price adopted in natural gas contracts, or other suitable price marker, adjusted pursuant to the terms set forth for crude oil;


(b) the expected future sales of crude oil and natural gas shall be based solely on the anticipated production from producing fields or fields for which a development plan has been approved in accordance with Applicable Law and a final investment decision has been made by the relevant license holder, and shall be consistent with the production estimates provided by the license holder;


(c) estimates of operating expenditures, depreciation of capital expenditures, and other expenditure the deduction of which is allowed under Applicable Law for the purpose of determining the tax liability of a taxable entity shall be based on the projections contained in annual budgets and in development plans approved in accordance with Applicable Law; and


(d) all assumptions made shall be prudent and reflect internationally recognized accounting principles and practice.


(2) The estimates referred to in Chapter 8, Section 24 (1) shall be jointly prepared by the Ministry and the MPIIC, and shall be clearly explained in the reports to be submitted to the Olbiil Era Kelulau pursuant to this Act.


Chapter 9
INVESTMENT OF THE PETROLEUM FUNDS


Section 25. The Investment Management Board.
(1) Prior to the opening of the Petroleum Funds, an Investment Management Board shall be established in accordance with this Act.


(2) The Investment Management Board shall be responsible for:


(a) defining the Investment Policy and Strategy of the Petroleum Funds in accordance with the Investment Policy set forth in Schedule 3;


(b) setting performance benchmarks for desired returns from, and appropriate risks of, the investments of the Petroleum Funds;


(c) defining the investment instructions to be provided to the Custody Bank pursuant to the Management Agreement;


(d) evaluating the performance of the Custody Bank;


(e) selecting the Custody Bank;


(f) establishing the minimum qualification criteria for Fund Managers, selecting Fund Managers, defining their mandate, approving the terms of their appointment, and evaluating their performance; and


(g) defining the terms of the Management Agreement which shall, in all material respects, comply with this Act.


(3) In defining the Investment Policy and Strategy of the Petroleum Funds, the Investment Management Board shall exercise the judgment and care that an institutional investor of ordinary prudence, discretion and intelligence would exercise in the management of large investments entrusted to it, with due regard to the safety of the principal, the optimization of income over the long-term, and the particular objectives of the Petroleum Funds, namely short-term stabilization and permanent saving.


(4) A copy of the Investment Policy and Strategy, in a form readily understandable by the general public, shall be published by the Minister after the approval of the Unified Budget by the Olbiil Era Kelulau.


(5) The Investment Management Board, its members, staff, agents and delegates, shall not be liable for anything done or omitted to be done in good faith and without negligence in the performance of their duties.


Section 26. Composition of Investment Management Board.
(1) The members of the Investment Management Board shall be:


(a) the Minister (who shall be the chairperson);


(b) the National Treasurer (who shall be the chairperson in the absence of the Minister of Finance);


(c) the Executive Commissioner of the Financial Institutions Commission;


(d) the Administrator of the Civil Service Pension Plan;


(e) the Administrator of the Social Security Administration; and


(f) two members, who may not hold any other Government office, position or employment, either elective or appointive, appointed by the other five members of the Investment Management Board from the public.


(2) The public members of the Investment Management Board shall be appointed within one month from the constitution of the Investment Management Board, and must have recognized competence and wide experience in investment and management of large portfolios of assets, finance and financial market risk analysis.


(3) The Minister of Finance and the National Treasurer shall appoint an alternate in writing in the event that they are unavailable for any proceedings of the Investment Management Board.


(4) A quorum for a meeting of the Investment Management Board shall be five members and must include at least one of the public members. All decisions shall be made by the affirmative vote of a majority of the members present and voting, and if there is an equality of votes, the chairman shall have the casting vote. All such votes shall be in writing.


(5) The Investment Management Board shall decide its own rules and procedures which shall comply with the provisions of this Act and shall be publicly disclosed.


Section 27. Disclosure of interest.
(1) A member of the Investment Management Board who has an interest in a matter for consideration by the Board:


(a) shall disclose the nature of that interest and such disclosure shall form part of the record of the consideration of the matter; and


(b) shall not participate in the deliberations of the Investment Management Board in respect of that matter.


(2) Failure by a member of the Investment Management Board to disclose an interest in a matter before the Investment Management Board shall result in the termination of such member’s appointment.


(3) In addition to their obligations under this Act, all members of the Investment Management Board shall be bound by the Code of Ethics and other Applicable Law for members of Government boards or other Government entities of similar nature or purpose.


Section 28. Tenure of Office.
(1) A public member of the Investment Management Board shall hold office for three years, and may not be appointed again until four years after his term expires.


(2) A member of the Investment Management Board may at any time resign from office by notifying the Minister in writing.


(3) A member who is absent for two consecutive meetings of the Investment Management Board without sufficient cause ceases to be a member of the Investment Management Board and shall be immediately replaced in accordance with this Act.


(4) The Minister may remove the public member of the Investment Management Board from office only for cause. A removal by the Minister shall be in writing and shall state the reason for the removal. A member who is removed by the Minister may not participate in Investment Management Board business and may not be counted for purposes of establishing a quorum after the member receives written notice of removal from the Minister.


(5) A vacancy on the Investment Management Board shall be promptly filled by appointment by the Minister. An appointee to a vacancy shall have recognized competence and wide experience in investment and management of large portfolios of assets, finance and financial market risk analysis. An appointee shall hold office for the balance of the term for which the appointee’s predecessor on the Investment Management Board was appointed.


(6) A vacancy on the Investment Management Board shall not impair the authority of a quorum of the Investment Management Board to exercise all the powers and perform all the duties of the Investment Management Board.


Section 29. Funding.
(1) The Minister shall estimate the amounts reasonably necessary to meet the budget of the Investment Management Board in a financial year and shall include such estimate as current expenditure in the National Budget for the financial year.


(2) An honorarium determined by the Minister, and approved by the Olbiil Era Kelulau, shall be paid to the public members of the Investment Management Board.


(3) The Ministry shall provide the secretariat for the Investment Management Board and any other administrative support or technical staff required by the Investment Management Board for the performance of its functions.


Section 30. Permitted Investments.
(1) All investments of the Petroleum Funds shall comply, in all material respect, with the Investment Policy and Strategy defined by the Investment Management Board and with the following principles:


(a) sufficient liquidity to ensure the availability of cash from the Stabilization Fund to respond to stabilization needs;


(b) optimizing returns, subject to specified levels of acceptable risk for the investment horizon;


(c) transparent, modern and diversified management of the financial assets that are part of the investment portfolio;


(d) limiting investment to only low-risk investments for a specified minimum number of initial years of the establishment of the Petroleum Funds; and


(e) risk diversification by ensuring that, as practically possible, a variety of different financial assets are held in the Petroleum Funds and that a limit is set for the maximum investment that may be made in any single financial asset.


(2) The Investment Policy and Strategy shall include, as a minimum:


(a) the types of permitted investments, including categories of assets and instrument,


(b) ratings and classifications of permitted investments, based on ratings from no less than two internationally recognized credit rating agencies;


(c) rules relating to asset diversification including sectors and issuers, and, in the case of fixed-income assets, horizon and maturity;


(d) the acceptable level of market value fluctuation during the term of the investment;


(e) the acceptable level of exposure to foreign exchange risk; and


(f) the rules established to ensure sufficient liquidity for the Annual Planned Withdrawals requirement.


(3) Not less than ninety percent of the amounts in the Petroleum Funds shall be invested only in qualifying instruments described in Subsection (4) below.


(4) Investments shall be held only in the form of the following instruments, known as qualifying instruments:


(a) cash bank deposits with an Approved Bank,


(b) negotiable direct obligations issued by an Approved Foreign Government;


(c) securities issued or fully and directly unconditionally guaranteed or insured by any Approved Foreign Government;


(d) negotiable direct obligations issued by, and securities issued or fully and directly unconditionally guaranteed or insured by, any Approved Multilateral Organization;


(e) bankers acceptances, and floating rate certificates of deposit issued by or unconditionally guaranteed or insured by an Approved Bank;


(f) investments in money market funds, the assets of which shall be limited to securities of the type described above; and


(g) other financial instruments of similar risk, profitability and liquidity.


(5) Not more than ten percent of the amount in the Petroleum Funds may be invested in financial instruments other than qualifying instruments and may only be invested in such non-qualifying financial instruments if such instruments are:


(a) not issued domestically;


(b) liquid and transparent; and


(c) traded in a financial market of the highest regulatory standard.


(6) The range of qualifying instruments shall be reviewed by the Minister, and approved by the Olbiil Era Kelulau, five years after the establishment of the Petroleum Funds, having regard to the size of the Petroleum Funds and the level of institutional capacity.


(7) The investments of the Petroleum Funds shall be made in stable and freely convertible currencies.


(8) The Petroleum Funds may not invest domestically, whether directly or indirectly, any such investment being reserved to the National Development Bank or other similar institution mandated for this purpose.


Section 31. Implementation of the Investment Policy and Strategy.
(1) The National Treasurer shall implement the Investment Policy and Strategy by written instructions to the Custody Bank given in accordance with the Management Agreement.


(2) The National Treasurer shall keep the investments of the Petroleum Funds under constant review and shall provide the Investment Management Board with all information in respect of such investments as the Investment Management Board may reasonably request in order to discharge its obligations.


Chapter 10
MANAGEMENT OF THE PETROLEUM REVENUE ACCOUNTS


Section 32. Responsibility of the Minister.
(1) The Minister shall have overall responsibility for the management of the Petroleum Revenue Accounts, including:


(a) appointing the Custody Bank and terminating its appointment;


(b) appointing the Fund Managers and terminating their appointment;


(c) opening the Petroleum Revenue Accounts;


(d) executing the Management Agreement with the Custody Bank;


(e) executing the Trust Agreement with a State Government;


(f) ensuring that the calculations of the Petroleum Revenue, National Planned Withdrawal, State Planned Withdrawals, Saving Ratio, and Sustainable Benchmark Revenue are made in accordance with this Act;


(g) setting investment constraints beyond those specified in this Act;


(h) setting the target return on investment of the Petroleum Funds for the financial year;


(I) presenting the Investment Policy and Strategy to the Olbiil Era Kelulau at the time of presentation of the Unified Budget;


(j) preparing a report containing detailed calculations of the Sustainable Revenue Benchmark for a financial year and presenting the same to the Olbiil Era Kelulau at the time of presentation of the Unified Budget;


(k) ensuring that regular independent audits of the Petroleum Revenue Accounts are carried out in accordance with this Act;


(l) ensuring the preparation of the statements and reports on the operations, management and performance of the Petroleum Revenue Accounts; and


(m) ensuring the publication of the audit reports and status reports.


(2) The Minister shall have the power to delegate to any Public Official, agency, advisor or consultancy, the execution of any of the functions assigned to him under this Act.


Section 33. Appointment of the Custody Bank.
(1) The Minister shall ensure that the Petroleum Revenue Accounts are opened and maintained with an internationally recognized financial institution to be referred to as the Custody Bank, its branch or agency, in an internationally recognized financial center, both as recommended by the Investment Management Board.


(2) The Custody Bank shall be given the highest rating by two internationally recognized risk analysis agencies, and shall maintain such rating throughout the duration of the Management Agreement.


(3) the Minister shall transfer the Petroleum Revenue Accounts to another institution if:


(a) the Custody Bank ceases to be qualified under Chapter 10, Section 33 (1) and (2) or resigns its mandate; or


(b) the Minister, with the approval of the Investment Management Board, deems it appropriate and prudent.


(4) Upon the transfer of the role of Custody Bank from one institution to another, the Minister shall, within seven days of such transfer, provide a full written explanation of the reasons to the Olbiil Era Kelulau and the Office of the Public Auditor, and shall publicize the explanation in accordance with Chapter 13.


Section 34. Content of the Management Agreement.
(1) All Petroleum Revenue Accounts shall be managed in accordance with this Act and the Management Agreement.


(2) The Minister shall ensure that the procedures set forth in any Management Agreement are transparent, efficient and comply, in all material respects, with this Act.


(3) The Management Agreement to be executed by the Minister, on behalf of the Government, and the Custody Bank shall contain provisions related to the following:


(a) the payment to the Custody Bank of usual and customary fees and charges for the establishment, holding and management of the Petroleum Revenue Accounts, including related advisory, audit, custodial, investment holding, and similar fees and charges;


(b) the manner of proof, the certification and deadlines for all automated transfers from the Distribution Account to the National Treasury Account, all State Treasury Account, the Stabilization Fund, the Heritage Fund, and any State Saving Fund;


(c) the manner of proof, the certification, authorizations, and deadlines for all other transactions with and between the Petroleum Revenue Accounts;


(d) the authorization for, manner of proof, and certification of investment transactions;


(e) the manner of proof and certification of returns on investments of the Stabilization Fund, the Heritage Fund, and any State Saving Fund;


(f) the manner of proof and certification of payments of Petroleum Revenues into the Distribution Account made by the Persons liable to make such payments;


(g) the provision of regular statements of accounts by the Custody Bank; and


(h) such other matters as the parties may agree, as may reflect international good practice in the field, be reasonable in the circumstances, and not contrary to this Act.


(4) The Management Agreement shall provide that:


(a) the provisions of this Act shall be an integral part of the agreement;


(b) transfers from Petroleum Revenue Accounts shall only be effected in accordance with this Act, and any dealing by the Custody Bank contrary to the foregoing shall be deemed invalid and render the Custody Bank liable for the same if the Custody Bank had knowledge of the circumstances contrary to the provisions of this Act which make such dealings invalid;


(c) Custody Bank may only resign its mandate on not less than 12 months written notice to the Minister (or such lesser period as the Minister shall decide);


(d) the Ministry may terminate the Custody Bank’s mandate with or without notice, and that upon termination of such mandate the Custody Bank will execute such transactions as the Minister shall instruct;


(e) the Custody Bank acknowledges the restrictions provided for in Chapter 11, and that the Custody Bank does not, and shall not, have any claim on the Petroleum Revenue Accounts and the moneys and investments therein, and shall include a similar acknowledgment in regard to all Persons holding investments for the Petroleum Funds;


(f) all deposits and withdrawals to and within the Petroleum Revenue Accounts shall be made by electronic transfer;


(g) to the extent practicable, transfers from the Distribution Account to the Stabilization Fund, the Heritage Fund, the State Saving Funds, the National Treasury Account and the State Treasuries Accounts pursuant to Chapters 3, 4, 6, and 7, shall be formula-based, and shall be made by the Custody Bank daily (or at such other regular interval) at a time to be specified in the Management Agreement, without the need for further instructions by the Government. The balance of the Distribution Account after any such transfer shall be zero;


(h) save for exceptional withdrawals from the Stabilization Fund pursuant to Chapter 6, Section 18, withdrawals from any Petroleum Revenue Account shall require the signature of the National Treasurer (and the State Treasurer if appropriate) and shall be countersigned by the Minister.


(5) The Management Agreement shall be subject to the approval of the Management Investment Board.


Section 35. Appointment of the Fund Managers.
(1) The Minister may enter into an agreement with one or more internationally recognized Fund Managers with skills, experience, reputation, and credit rating appropriate to their mandate, to advise it on the implementation of the Investment Strategy and Policy.


(2) Fund Managers shall be selected on the basis of minimum qualification criteria established by the Investment Management Board and following a competitive tender process in accordance with Applicable Law.


(3) A Fund Manager may be given the discretion to make investments of all or part of the Petroleum Funds, in accordance with the Investment Strategy and Policy, and for that purpose the Minister may authorize custody of a portion of the Petroleum Funds to the Fund Manager concerned.


(4) The agreement referred to in Chapter 6, Section 18(1) shall be subject to the approval of the Investment Management Board and shall deal with:


(a) the matters set forth in Chapter 10, Section 34 ;


(b) the payment to the manager of usual and customary fees and charges by usual and customary means; and


(c) such other matters as may accord with international best industry practice and be reasonable in the circumstances, and in a manner consistent with, and not contrary to, this Act.


(5) Fund Managers fees and charges that are not deducted from investment returns shall be included as expenditure in the National Budget.


Chapter 11
PROHIBITIONS


Section 36. Encumbrances on the Assets of the Petroleum Revenue Accounts.
(1) The amounts in the Petroleum Revenue Accounts are held in trust for the People of Palau and shall remain the property of the Republic at all times.


(2) No legal or beneficial interest in the Petroleum Revenue Accounts, and present or future Petroleum Revenues payable to such accounts pursuant to this Act, can be created or exist, in any manner or by any means, including a grant, sale or other disposal, option, mortgage, charge, pledge or lien; and any circumstance, or alleged circumstance, including the act of any Person, to the contrary shall be deemed invalid.


(3) The Petroleum Funds, and present or future Petroleum Revenues payable to them under this Act, cannot be made available or used, for the satisfaction of any sovereign or commercial debt of the Governments, and any circumstance, or alleged circumstance, including the act of any Person, to the contrary shall be deemed invalid.


Section 37. Encumbrances on Petroleum Reserves.
(1) In order to preserve revenue streams from Petroleum and ensure the objective of this Act, borrowing against the Petroleum reserves shall be prohibited.


Chapter 12
USE OF PETROLEUM REVENUE


Section 38. Petroleum Revenues to be Part of the Budget.
(1) Petroleum Revenues, their use and expenditure shall:


(a) be part of the National Budget and State Budgets;


(b) be subject to the same budgetary process that is necessary to ensure the efficient allocation and monitoring of any use of public resources;


(c) promote the equitable distribution of the national wealth among citizens;


(d) be guided by a long-term development strategy, macro-economic stability, and fiscal sustainability considerations; and


(e) be aligned with a medium-term expenditure framework as approved by the Olbiil Era Kelulau and the State legislatures in accordance with Applicable Law.


(2) Outside of the National Budget and State Budget allocations, extra budgetary activities and statutory earmarking of Petroleum Revenues for any special considerations shall be prohibited.


(3) The Petroleum Revenue Accounts may only be used in accordance with this Act. Except as expressly provided for in this Act, any appropriation or other disposition of the monies standing to their balances shall not be authorized.


Chapter 13
ACCOUNTING AND AUDIT


Section 39. Accounting.
(1) The National Treasurer shall maintain accounts and records of all Petroleum Revenue Accounts, in Dollars and in accordance with International Financial and Reporting Standards in force, to reflect their operations and financial condition.


(2) The National Treasurer shall ensure that budgeted Petroleum Revenue and Petroleum Revenue actually credited to the Distribution Account are reconciled at least monthly, and a written report is provided to the Minister and the Governors of each State.


(3) The National Treasurer shall prepare annual accounts of the Petroleum Revenue Accounts for a financial year, which shall be audited in accordance with Chapter 13, Section 40 and 41, and presented to Olbiil Era Kelulau within six months after the end of the financial year as set forth in Chapter 14.


Section 40. Internal Audits.
(1) The Minister shall, not later than two months after the end of the financial year, submit to the Public Auditor for audit, statements and relevant documents for the Petroleum Revenue Accounts receipts and withdrawals.


(2) The Public Auditor shall, no later than two months after the submission of the statements referred to in Chapter 13, Section 40 (1), submit his report on the statements to the Olbiil Era Kelulau.


(3) The Public Auditor shall determine if:


(a) the accounts have been properly kept;


(b) the payments due to the Petroleum Distribution Account, the National Treasury Account, the State Treasuries Accounts, the Stabilization Fund, the Heritage Fund, and any State Saving Fund have been made in accordance with this Act; and


(c) the Petroleum Funds are managed in accordance with this Act.


Section 41. External Audits.
(1) The Minister shall ensure that the operations of the Petroleum Revenue Accounts are audited annually by a credible independent auditor.


(2) The appointment of the external auditor shall not exceed three years for each contract and is renewable for not more than two contract periods in succession.


(3) The procurement of the services of the independent auditor shall be in accordance with the Public Procurement Act.


Chapter 14
TRANSPARENCY AND PUBLIC ACCESS TO INFORMATION


Section 42. Reports on the Petroleum Revenue Accounts.
(1) No later than 20 days after the end of each quarter, the National Treasurer shall submit to the Investment Management Board quarterly management information reports and analyses on the performance and activities of the Petroleum Funds and the operations of the Distribution Account, including transfers to and within accounts, cash balances and all investments therein (including initial price and current value).


(2) The Investment Management Board shall prepare, in summary form and content readily understandable by the general public, a quarterly statement and explanation of the management reports prepared by the National Treasurer, and the Minister shall ensure the prompt publication of such quarterly statements and management reports in a manner easily accessible to the general public.


(3) No later than six months from the end of a financial year the Minister shall submit an Annual Report on the Petroleum Revenue Accounts to the Olbiil Era Kelulau, prepared in a manner that makes it readily adaptable for dissemination to the public, which shall include the information set out in Schedule 4.


(4) The Annual Report for the Distribution Account and the Petroleum Funds shall include the following information for the financial year for which the Annual Report is prepared:


(a) financial statements certified by a credible, independent auditor, comprising:


(I) an income and expenditure statement;


(ii) a balance sheet, including a note listing the qualifying instruments of the Petroleum Funds, valued at market value;


(iii) details of all appropriations and transfers from the Petroleum Funds;


(iv) details of all appropriations and transfers from the Distribution Account; and


(v) notes to the financial statements, as appropriate;


(b) a report signed by the Minister describing the activities of the Petroleum Revenue Accounts in the financial year, including all material Investment Policy and Strategy decisions made by the Investment Management Board, and drawing attention to particular issues or matters that may be of concern or interest to the Olbiil Era Kelulau;


(c) a statement by the National Treasurer drawing attention to any accounting issues or practices used in the preparation of the Annual Report that may materially affect the interpretation of amounts or activities shown within it;


(d) the income derived from the investment of Petroleum Fund assets during the financial year compared with the income of the previous three financial years;


(e) a comparison of the nominal income on the investment of Petroleum Fund assets with the real return after adjusting for inflation;


(f) a comparison of the income derived from the investment of Petroleum Fund assets with the benchmark performance indices established by the Investment Management Board for the financial year;


(g) a comparison of the estimated sustainable income for the financial year with the actual amount of the National Planned Withdrawal and State Planned Withdrawals for the financial year;


(h) in the event of borrowings from a Government, the liabilities shall be reflected in the presentation of Petroleum Funds accounts so as to give a true representation of the past and expected future development of the Governments net financial assets and rate of savings; and


(I) the name of the Custody Bank and a list of Persons holding positions relevant for the operation and performance of the Petroleum Fund, including:


(I) the Minister;


(ii) the National Treasurer; and


(iii) the members of the Investment Management Board.


(5) The sources of the information described in Schedule 4, whatever their form, and including all reports and statements, shall be annexed to the Annual Report in unedited form.


Section 43. Transparency as a fundamental principle.
(1) Subject to Chapter 14, Section 43(2), the management of Petroleum Revenue and Petroleum Revenue Accounts shall reflect at all times the highest internationally accepted standards of transparency and good governance for similar activities.


(2) Information or data, the disclosure of which could materially prejudice the performance of the Petroleum Funds, may be declared by the Minister as confidential, subject to the negative resolution of the Olbiil Era Kelulau.


(3) The declaration of confidentiality shall provide a clear explanation of the reasons for treating the information or data as classified, taking into account the principles of transparency and the right of the public as regards access to information.


(4) The declaration of confidentiality shall not limit access to information by the Olbiil Era Kelulau, the State legislatures, the Public Auditor, the Investment Management Board, and any other Public Official who may reasonably need access to such information in order to discharge their duties under Applicable Law.


(5) Any information that is classified at the time when it could have been published, as well as the reason for it being treated as classified, shall be made available to the public upon request three years after the date on which it could have been published unless the reasons for it being classified are still valid.


Section 44. Non-compliance with an obligation to publicize information. A Person who fails to comply with any obligation to publish information provided for in this Act, or causes another Person to fail to comply with, or in any manner hinders or causes another Person to hinder the compliance with these obligations, commits an offence and is liable on summary conviction to a fine of up to three hundred thousand Dollars.


Section 45. Penalties.
(1) A Person who fails to do anything required by this Act, or unlawfully discloses any document or information pertaining to the operations of the Petroleum Revenue Accounts or uses the information or document for personal benefit or advantage, shall be guilty of a criminal offense and shall be liable upon conviction to: a fine of up to one million Dollars, to a term of imprisonment for not more than five years, or to both a fine and imprisonment.


(2) A Person who instructs, or purports to instruct, or attempts to instruct, the Custody Bank to transfer moneys from the Petroleum Revenue Accounts other than in accordance with this Act, shall be guilty of a criminal offense and shall be liable upon conviction to: a fine of not more than five hundred thousand dollars, to a term of imprisonment for not more than two years, or to both a fine and imprisonment.


(3) A Person who:


(a) willfully hinders or deters any Person from the proper exercise of his functions or the performance of his obligations under or in respect of this Act;


(b) makes, or offers to make, any inducement to any such Person to secure an advantage for himself or another, or to influence any such Person; or


(c) threatens, or otherwise seeks unlawfully to influence, any such Person, commits an offense and is liable on summary conviction to a fine of up to five hundred thousand Dollars and to a term of imprisonment for up to five years or to both.


(4) Penalties provided under this Act shall not limit a Person’s liability under Applicable Law.


Chapter 15
GENERAL PROVISIONS


Section 46. Effective Date. This Act shall take effect upon its approval by the President of the Republic of Palau or upon its becoming law without such approval, except as otherwise provided by law.


PASSED: October 28, 2011


Approved this 17th day of November , 2011.


/s/
HE Johnson Toribiong
President
Republic of Palau


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