Resource revenue management and

allocationAndrew Bauer

Economic Analyst, NRGI

Outline• Macroeconomic management in

resource-rich settings• Complications• Revenue allocation

StoriesChile Azerbaijan

The budget cycle

Budget formulation / Fiscal framework

But what if you’re in a resource-rich setting?

Challenges

• Short-term: Dutch disease and ‘absorptive capacity constraints’

• Medium-term: Volatility• Longer-term: Exhaustibility

Oil starts flowing

Inflow of foreign

currency

People and capital move from other sectors to the

oil sector

Value of domestic currency rises and/or

inflation rises

Export industries

become less competitive and decline

Dutch disease and ‘absorptive capacity’

Ranking City Country1 Caracas  Venezuela2 Luanda  Angola3 Oslo  Norway4 Juba  South Sudan5 Stavanger  Norway6 Zürich   Switzerland7 Geneva   Switzerland8 Bern   Switzerland9 Basel   Switzerland

10 Tokyo  Japan11 Copenhagen  Denmark12 Moscow  Russia13 Brazzaville  Congo14 Helsinki  Finland15 Beijing  China16 Nagoya  Japan17 Libreville  Gabon18 Shanghai  China19 Stockholm  Sweden20 Yokohama  Japan

Ranking of world’s most expensive cities for expats – ECA International

Volatility

Data: IMF

Volatility

Consequences of volatility

vs

ExhaustibilityProduction path for a 300 billion

barrel oil field

20182020

20222024

20262028

20302032

20342036

20382040

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

mill

ion

bare

lls p

er d

ay

Case Study The Island of NauruThe Risk of Boom-Bust Economies

Mining Bust90% unemployment

GDP per capita $2,000 USD

Mining BoomSecond highest GDP per capita in the world GDP per capita $40,000 USD

Bud

get r

even

ue a

nd e

xpen

ditu

re

5 years

Revenues

“Pro-cyclical“ expenditures

Fiscal Framework to Address Volatility

Bud

get r

even

ue a

nd

expe

nditu

re

5 years

Revenues

“Smoothed” expenditures

Surplus

Deficit

Fiscal Framework to Address Volatility

Bud

get r

even

ue a

nd

expe

nditu

re

50 years

Surplus

“Smoothed” expenditures

Fiscal Framework to Address Finite Nature of RRs and Dutch disease

2011 2013

2015 2017

2019 2021

2023 2025

2027 2029

2031 2033

2035 0

200

400

600

800

1000

1200

1400

Fiscal space

Government oil incomeFiscal space under bird-in-hand ruleFiscal space under PIH ruleFiscal space under an intermediate rule

Mill

ion

USD

Sources: IMF; own projections

How much to save and spend?

Fiscal Framework Compliance Mechanism: Fiscal Rules

• (Structural) (non-resource) balanced-budget rule – Chile, Norway

• Debt ceiling – Australia, United States• Expenditure rule – Botswana, Peru• Revenue rule – Ghana, Timor-Leste

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

-30

-20

-10

0

10

20

30

40

50

60

70

Norway: % expenditure change (kroners)Kuwait: % expenditure change (dinars)

% ch

ange

Expenditure volatility with and without a fiscal rule

• Principles sources of risk• Interest rates• Maturity (roll-over

problems)• Currency composition

(foreign exchange risk)• Institutional structure (Ministry

of Finance, central bank, or separate entity)

• Transparency and oversight• Reporting• Annual independent audits

to international standards• Parliamentary, media, and

civil society oversight

Operationalizing a fiscal rule: Debt management

Deposit Rules

Withdrawal Rules

National Resource Funds

Foreign investment Domestic Expenditure

Investment Rules

Operationalizing a fiscal rule: Sovereign wealth fund management

Some have helped countries escape the “resource curse.”• Chile• Norway• Some Persian Gulf states• Several U.S. states

Others have been mismanaged, not met objectives or become slush funds.Some in : • Central Asia (e.g., Russia)• Latin America (e.g.,

Venezuela)• MENA (e.g., Libya)• SE Asia (e.g., Brunei)• Africa (e.g., Equatorial

Guinea)

What has made the difference are the rules, institutions and broad-based

consensus.

SWF successes and failures

• Ghana• Norway• Mongolia (starting

discussion)• Sao Tome and

Principe• Timor-Leste

Building consensus around the macroeconomic framework and SWF governance

Exercise: Part I

• National oil company withdrawals or retention for investment, extra-budgetary projects or fuel subsidies • Gazprom (Russia)• GNPC (Ghana)• NNPC (Nigeria)

• Subnational or household distribution• Canada• Indonesia• Mongolia

Complications: Pre-savings challenges

National Oil Companies

Commercial

Regulatory

Operational

• Sell government share of crude oil or minerals

• Manage state equity participation

• Negotiate oil or mineral licenses • Regulate the sector• Monitor compliance to regulations

• Participate in exploration, development and production activities

Development • Capacity building in the industry• Local content promotion• Corporate social responsibility

initiatives

National Oil Companies – Mandates

Weak capacity

Lack of market checks

Lack of oversight

Poor or missing rules

Political interference

Poor decisions

Poor revenue collection

Weak oil sector and inefficient project development

Drain on public finances

Corruption, patronage and mismanagement

National Oil Companies – Risks

$32 Billion

Angola – extra-budgetary expenditures

Social Programs "Operating Assets"0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

PDVSA (Venezuela) Spending, $ billions, 2012

Source: Latin American Herald Tribune

Venezuela – social spending

NOCs – Fuel subsidies

SOC discretion

Legislated formula

Parliamentary

discretion

• Norway (Statoil): Behaves as a private entity• Russia (Gazprom): Improving efficiency, but “insatiable appetite for

investment”• Algeria (Sonatrach): Bulk of revenues (exports) are surrendered to the Bank of

Algeria for monetary objectives; source of patronage

• Mexico (Pemex): Parliament passes NOC budget every year• Kuwait (KOC): Capital expenditure set by government • Kuwait (KOC): Costs, 10% for NRF, 50 cents per barrel and revenue from sales

to refineries deducted from transfer to government• Ghana (GNPC): Max 55% of returns retained

NATIONAL MINING / OIL COMPANY COSTSREINVESTM

ENT

CONSOLIDATED FUND (BUDGET)

Executive discretion

NOC financing policy options

• Inappropriate or non-context specific rules • Alberta (Canada)• Kazakhstan• Timor-Leste• Venezuela

• No rules or weak compliance • Azerbaijan• Libya• Russia

Complications: Undermined systems

Stortinget

Ministry of Finance Supervision:Office of the

Auditor General

The Executive Board of Norges Bank Supervision: Norges Bank’s Supervisory Council and

Norges Bank’s external auditor

Norges Bank Investment Management (NBIM) Supervision: The Executive Board of Norges Bank and

Norges Bank’s internal audit

Internal and external managersSupervision: NBIM Control and Compliance Unit

Reporting of results and risks

Regulation/Delegation of duties and authorizations

Fund institutional structure in Norway

• PIAC in Ghana• Timor-Leste judiciary• Media and parliament in

Kuwait• IMF Article IV

• Alaska• Timor-Leste

transparency portal and reports

• Global: Santiago Principles; RGI; Truman

Independent oversight Transparency

Exercise: Part II

Government oil revenues

Sub-national jurisdictions

Producing jurisdictions

Neighboring jurisdictions

Other jurisdictions

National government

budgetCitizens

All

Elderly

Poor

State-owned companies Special funds

Stabilization- savings funds

Education funds

Infrastructure funds

Revenue allocation options

Case study: Blora and Bojonegoro (Indonesia)

Petroleum Revenue

Central Government Treasury

Revenue Sharing for Local Governments (15.5% of o.r.) Central Government

(84.5% of oil revenue)

Producing District (6%

+ 0.2% to education budget)

Province (6% + 0.1%

to education budget)

Other Districts in the same Province

(3% + 0.2% to

education budget)

Central Government

Budget

District Treasury

How are oil revenues shared in Indonesia?

Fully Decentralized

Fully Centralized Shared Resource Taxation

Inter-governmental Transfers

United Arab Emirates (UAE)

AlgeriaAzerbaijanBahrainKuwaitNorwayOmanQatarSaudi ArabiaYemen

ArgentinaBolivia*Canada Philippines*Kyrgyzstan*RussiaUnited States

Bolivia*ColombiaEcuadorGhanaIndonesiaIraqKazakhstanKyrgyzstan*Mongolia NigeriaPeruPhilippines*Russia (until 2010)Venezuela

Who has resource revenue sharing?

• Compensation to producing areas for costs of production (e.g. environmental damage; jobs lost)

• Equalization of benefits between richer and poorer regions

• Conflict reduction or prevention

• Decentralized accountability to citizens / improved spending efficiency

Why share oil, gas or mineral revenues?

• Clear objectives

• Indicator- vs. derivation-based formula

• Matching revenues with objectives, needs and expenditure responsibilities

• Generating incentives to spend well

How to share resource revenues?

Brazil (oil, gas and minerals): A case of derivation

• Shared taxation: Royalties, land fees and provincial corporate income tax go to provinces; some corporate income taxes go to the federal government

• Intergovernmental transfers through equalization payments (resource revenues left out of formula)

• Not much conflict over revenue sharing due to formula and shared benefits

• Large expenditure volatility and over-consumption in Newfoundland and Alberta (until recently)

• Provincial authorities captured by oil or mining industries in resource-rich provinces

Canada: A case of equalization (sort-of)

The case of Libya

Alaska (USA)

Mongolia

Bolivia

Direct distribution / cash transfers

• Are local governments entitled to a portion of oil, gas or mineral revenues? Why or why not?

• Can revenue sharing be used as a tool to reduce conflict between regions? If so, how?

• Should a share of oil, gas and mineral revenues be distributed directly to each citizen equally? Why or why not?

Discussion questions

Resourcerevenues

State-owned companies

National budget

Sub-nationalgovernments

Citizens

Natural resource funds

Conclusion: A revenue management system is complex

Conclusion: The budget cycle

Source: IMF

PIMI Index

Step 1: Development planning

Step 2: Budgeting

Step 3: Cost-benefit and technical review

Step 4: Competitive procurement

Step 5: Monitoring of project execution

Step 6: Operations and maintenance

‘Investing in investing’

Consumption Investment

Consumption or investment?

Spending:Balancing consumption and investment

• Rules are important for stability, efficiency and depoliticization– Allocation of revenues– Governance of sovereign wealth

funds, state-owned companies, and the budget

• Need consensus from relevant stakeholders on rules to promote compliance

• Strong institutional structure, independent oversight and transparency to enforce the rules

Takeaways: Managing revenues before they are allocated through the budget

Thank You!Contact:

abauer@resourcegovernance.org