Sharing of natural resource revenues

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Transcript Sharing of natural resource revenues

Sharing of natural resource
revenues
Ehtisham Ahmad *
* Based on work with Giorgio Brosio. The views in this presentation are
personal and do not reflect those of the IMF, its management or Board of
Directors.
Issues

Instruments choice: assignment of own-revenues
from natural resources

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Efficiency considerations
Accountability
Macroeconomic issues
What does experience show?


Political economy considerations
Transparency for good governance
For discussion of Political Economy considerations see: Ehtisham
Ahmad and Giorgio Brosio (eds), 2006, Handbook of Fiscal
Federalism; and Ehtisham Ahmad and others: Emerging
Issues in Fiscal Federalism (forthcoming)
For transparency related issues: IMF, 2007, Guide on Resource
Revenue Transparency
Stylized facts
Characteristics of natural resource exploitation:

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Huge geographic concentration of production;
Sparsely populated regions may exercise small weight in
national politics;
Large disparities in per capita revenue of subnational units;
“Boomtowns” phenomenon;
Large, but unpredictable, fluctuations of price;
Growing demands from producing area to retain a (large)
share of oil rent create pressures, rivalries and strain on
national unity.
Instruments for sharing “economic rent”
between levels of government
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Separation of taxes: for example, royalties
to subnational governments and income tax to
central government, or vice versa;
Concurrence of taxes: each level of
government levies taxes on oil rent (tax base
sharing);
Revenue sharing: revenue is collected by one
(usually, the central) government only and
shared to other levels;
In kind sharing: contractors provide
infrastructure to the producing areas;
Intergovernmental transfers.
Illustration of instruments for sharing
rent

Separation of taxes:
Ri= tiBi,
where collection (or revenue), Ri, is equal to locally determined
share, ti, of the locally determined tax base, Bi., i is region/state

Concurrence of taxes:
Ri =(ti + li) Bi,
where Ri are the total collections in jurisdiction i of the shared
tax; li is the locally determined tax rate applied to the nationally
determined tax base, Bi.
Local revenue is

ri = li Bi.
Tax revenue sharing:
the tax bases, the tax rates and the revenue shares are
determined by the central government and the revenue is
allocated according to the principle of origin:
ri = α t Bi; or, ri = α Ri.
Instruments for sharing rents from petroleum with
subnational levels of government
Method
Own taxes
Determination of Sub national
the tax base
Sharing of tax
bases
National
Sharing of
revenue
National
Sharing of
Intergovernmental
revenue in kind Transfers
Mostly national National
Mostly national
Determination of Sub national
the tax rates
Sub national
(within limits)
Administration
Mostly national National
Sub national
National
National
By the
producing
firm
Origin
Mostly national
Origin
Criterion for
Origin
determination of
the beneficiary
jurisdiction
Origin
Need, equity or
other
Choice of Sharing Instruments
Arguments against subnational taxation of oil
rent:
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Complexity of administration: collection by the most
efficient means higher revenue;
Delays in revenue accruing to the center
Possible secessionist trends.
Arguments in favor of subnational taxation of
oil rent (the point of view of LGs):
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Benefits associated with taxing power;
Direct control of revenue
North American models—USA and Canada.
Choice of Sharing Instruments
Arguments against concurrent taxes
 Vertical tax competition can lead to greater
overall tax burden;

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This applies especially to royalties.
Complexity in coordination and administration
Assignment of natural-resource
revenue to subnational government
Arguments against sub-national
assignments (all natural resource revenues)
 Inefficiency in geographical allocation of
factors of production
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Inefficient spending due to limited absorption
capacity
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location of firms in oil producing areas with no
comparative advantage;
More resources than needed in Arauca (Colombia);
Cajamarca (Peru)
Possibilities of sub-national corruption;
Volatility in prices: sub-national governments
generally less able to absorb.
Assignment of some revenue to
subnational government
Arguments for assignment (of
some revenues, e.g., production
excises)
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Localities should finance additional costs
of investment in infrastructure.
Peak load pricing: expansion of capacity
paid by those who use it
Compensation for environmental damage
Examine adequate instruments for these
purposes.
Choice of sharing Instruments
Revenue-sharing is most used :
 Political-economy rationale—automatic
sharing in national resources
 But, difficult to agree on sharing
percentage
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Acheh discussion
Could enhance regional inequalities
Usually considered as part of a
“package”
Revenue sharing: Alleviate or exacerbate
political conflict?
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Sharing the “pie” stokes conflict (Nigeria)
Symmetric and contract federalism:
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Sharing of revenues with all levels of governments
(not only states/regions)
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Districts/Municipalities may have different political
objectives (Indonesia);
Central government could use intersecting policy
instruments,
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construction of national infrastructure by resource-rich
jurisdictions;
such as “trade and commerce” clause to build unity
Concurrent use of instruments, including
redistributive transfers
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Ensures that all regions and governments have
stake in the union—
with federal management of natural resources
What is the experience?
Issues
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What is the practice of sharing of
oil-revenue rents in multi-level
countries?
What do the numbers tell us?
How to ensure transparency and
equitable distribution?
Political economy and maintenance
of national unity
Instruments to collect natural resource
economic rents
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Instruments (as explained in the
previous lecture)
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Auctioning of exploration and exploitation
rights
Government equity in projects
Production sharing
Taxes/royalties
The best strategy for the government
depends on its degree of risk aversion.
Political economy constraints are
important; and
A combination of instruments may be
needed.
Tax instruments
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Fixed fees
Specific (or, ad valorem) royalties
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non-neutral but largely used
Income tax with-higher-than normal
tax rate
Progressive income tax
Resource rent tax

almost neutral allows extraction of total
rent
Instruments for sharing rents
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Separation of (own) taxes
Concurrence of taxes (tax base
sharing)
Revenue sharing
Intergovernmental transfers
Table 1. Classification of Oil Revenue Assignments in Unitary and Federal Countries
Full
decentralizat
ion
Shared revenue
bases
Algeria
Azerbaijan
Bahrain
Indonesia (until 2000)
Iran
Iraq (under discussion)
Kuwait
Libya
Norway
Oman
Qatar
Saudi Arabia
United Kingdom
Yemen
Unitary
countries
Federal
countries
Full centralization
United Arab
Emirates 1/
1/ Upward revenue-sharing arrangement.
C: Rather centralizing arrangement.
D: Rather decentralizing arrangement.
Revenue sharing
Colombia (D)
Ecuador (C)
Indonesia (since
2001) (C)
Kazakhstan
Canada
United States
Mexico (C)
Nigeria (D)
Russia (D)
Venezuela (D)
Sharing of oil revenues
Considered, or adopted in many
parts of the world (Nigeria,
Indonesia, Sudan)
• Political economy arguments widely
used
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Finance basic expenditures
“persuade” oil producing regions to
stay in the federation—political
economy
Could finance infrastructure in other
regions: national cohesion
Revenue-sharing mechanisms
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Oil revenue is collected centrally and
redistributed according to a formula
Convenient way to transfer fiscal resources to
subnational governments
Can be supplemented by transfers to address
equalization concerns or special regional
needs
But:
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drawbacks for macroeconomic management,
including volatility; and
May exacerbate tensions and conflict.
Difficulties with oil-revenue
sharing
•Volatility with respect to price (and production)
changes
• Difficulty in establishing a percentage
•Indonesia and Nigeria
• May generate unsustainable spending in upturns
• Inadequate revenues for basic spending in downturns
• Inefficiency in geographical allocation of factors of
production
• Location of firms with no comparative advantage
Table 2: Oil Revenue Volatility in Selected Countries, 1997-2000
Oil revenue
Volatility
(in percent of GDP) (in percent)
1/
2/
Total revenue
Volatility
and grants
(in percent)
(in percent of GDP)
2/
1/
Oil revenue
(in percent of
total revenue)
1/
Unitary countries 3/
Azerbaijan
Algeria
Bahrain
Colombia
Ecuador
Indonesia
Iran
Kuwait
Libya
Norway
Oman
Qatar
Saudi Arabia
Yemen
16.6
5.7
21.4
13.0
2.6
7.4
5.6
13.3
38.6
23.0
8.9
30.2
16.7
24.6
21.6
27.6
29.1
25.9
26.3
38.3
32.1
32.7
42.0
19.2
8.0
30.8
15.6
27.4
27.4
31.9
32.8
19.6
32.7
24.6
27.7
25.1
17.5
25.5
60.7
39.0
52.3
39.5
28.6
33.6
33.1
12.6
5.1
13.3
15.1
2.8
15.9
11.5
18.2
13.3
14.7
4.0
6.9
19.9
15.5
20.4
48.2
28.6
64.4
51.9
9.4
31.3
31.1
49.8
63.0
59.9
16.9
76.0
57.3
72.0
63.8
Federal countries 3/
Canada
Mexico
Nigeria
Russia
United Arab Emirates
United States
Venezuela
12.7
7/
5.3
23.8
3.8
18.2
8/
12.2
28.2
25.9
17.7
39.3
26.4
22.4
31.1
34.6
29.0
46.2
21.5
31.8
13.1
34.6
29.9
25.9
9.9
0.5
4.4
28.6
14.2
6.3
1.6
13.8
44.7
…
24.7
72.4
28.8
52.0
…
45.7
Source: Ahmad and Mottu , in Davis, Ossowski and Fedelino (eds.) 2003.
1/ Average during 1997-2000.
2/ Defined as the standard deviation in percent of the mean over the period 1997-2000.
3/ Unweighted average.
Coverage
General government
Central government
Oil and gas
Nonfinancial public sector
Nonfinancial public sector
Oil and gas. General government. 4/
Oil and gas. Central government. 5/
Oil and gas. 6/
Consolidated government
General government
4/
Central government
Central government
General government. 4/
Public sector. Excludes excises on gasoline
General government
Oil and gas. Federal government
General government
General government. 9/
Public sector (excl. nonrecurrent operations)
Chart 1: Volatiliy of Total Revenue in Selected Oil-Producing
Countries, 1997-2000
Standard deviation of total revenue (in percent of average)
30
25
20
15
10
5
0
0
10
20
30
40
50
Oil revenue as a share of total revenue
60
70
80
Assigning Revenue Bases
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Assignment of specific oil revenue bases
to subnational governments
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Tax bases may be overlapping
Subnational governments are accountable
National equalization system may take oil
revenue into account by not providing or
limiting equalization transfers to oil-rich
regions
Examples: Canada, United States
Assigning revenue bases (II)
 Cover
additional costs of investment
in infrastructure:
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expansion of capacity paid by beneficiaries
Compensation for environmental
damage
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environmental excise directly linked to
production
An oil fund/ “Alaskan dividends”
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Providing dividends to citizens
directly
Idea of “dividends” appears
politically appealing, especially if
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Assets managed externally
BUT
“Alaskan fund/ dividends”
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With significant deficits, diversion of oil
revenues would exacerbate catastrophic
fall of spending (e.g., proposals for Iraq)
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especially with limitations on
 Borrowing
 Non-oil revenue sources
May lead to a reduction in needed
investment or other priority public
expenditures
Amounts to be distributed as dividends
would be small (especially if there are
considerable external debts)
“Alaskan fund/ dividends” (contd.)
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May be difficult to target,
Political economy of by passing weak
administration may not be effective—
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Still need to be administered
Possibly weaker oversight of fund
May generate a parallel budget, with poor
transparency and oversight
Would take years for the dividend to grow
into any significant payments
Ensuring transparency
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All revenues through central account of
Treasury (TSA)
If stipulated;
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Regional shares to regional TSAs from Central
TSA
Transfer mechanisms clearly defined
(discussed by Boadway)
If Stabilization Fund, all resources
through budget, and no spending without
appropriations
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“Norwegian” model
Accountability and transparency
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Financial management system design:
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Transparency code
Penalties for misreporting and misuse
Probability of detection and oversight
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Independent audit (EITI)
Information flows
Centrally determined formats for
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Budget classification (GFS2001 and UN COFOG);
Tracking and reporting expenditures
Managing cash
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Importance of Treasury Single Accounts
Setting up separate funds could weaken
transparency
# Not inconsistent with decentralized operations
Consistent reporting and transparency
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Principles common to all level of
governments and agencies
Need for timely and complete information
on the finances of subnational
governments, as well as of the center:
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Including information on oil revenues
Assurance through improvement in reporting
and audit mechanisms
Require work on the budget classification,
common reporting formats
Macroeconomic considerations
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Focus on non-oil revenues
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Resources as wealth: consume revenues
consistent with permanent income
expectations
Ossowski and Barnett (2003) in Davis et al
Better position on the macroeconomic
stance, risks and long-run sustainability
Evaluation of fiscal risks and contingent
liabilities;
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including from sub-national operations
PPPs: evaluate full costs and benefits
Do resource related Funds help?
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Kuwait future generations; Iran
Preconditions important:
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Clear operational rules and responsibilities
Presentation of fund operations to Legislature
together with regular budget
No direct spending from the Fund (everything
to be appropriated in the budget)
Activities reported to Parliament
Neither Kuwait not Iran meet these
conditions
“Norwegian style” stabilization fund
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Clear oversight of investments
Subject to strict reporting and audit
Prevents parallel budget
arrangements
Transparent mechanisms, but
difficult to replicate with weaker
political systems
Conclusions
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Various instruments available for
“maximizing” the government’s take
Institutional arrangements vary—
political economy driving factor
Efficiency, revenue and
macroeconomic considerations
important
Ensure transparency and good
governance