oil and gas revenue decentralization in federal regimes
TRANSCRIPT
Module 3Decentralization of oil and gas revenues
Prepared by David Péloquin
Background materials forUN workshop on oil and gas in IraqDead Sea Marriott Resort, Jordan
April 4-6, 2006
Centralized or decentralized oil & gas revenues?
• Often stronger capacity at national level, including:– policy / administrative capacity (particularly in the absence of a
history of autonomous sub-national governments)– more developed governance (greater “critical political mass” from
more competitive elections, more scrutiny by media/civil society)• Stabilization role (given high volatility of oil & gas) usually
best played by “large” (i.e. central) governments• Typically uneven distribution of oil & gas would result in
large horizontal disparities under decentralization
A strong theoretical case can be made for centralization
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Centralized or decentralized oil & gas revenues?
• Historical legacy of sub-national government (SNG) ownership (e.g.: UAE, US, Canada, Australia)
• Some oil & gas “externalities” are local in scope– e.g. (local) pollution costs feed calls for greater local benefits
• Substantial local bargaining clout (and/or other political economy considerations)– i.e. SNG ability to extract revenues even if not their formal
“owners” (e.g. Nigeria, Indonesia, Canada)
In practice, some degree of decentralization is often inevitable
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Options for generating SNG revenues from oil & gas
• Direct revenue raising by SNGs (e.g. practiced in US, Canada, Australia) may not be practical where SNG policy / administrative capacity is weak
• May be more practical to rely on SNG revenue sharing (on part or full “derivation” basis) of oil & gas revenues collected by national government (e.g. as in Indonesia)
• Least volatile components of oil & gas revenues may be best candidates for sharing– e.g. volume-based royalties or taxes
Direct revenue-raising by SNGs or revenue sharing?
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Options for generating SNG revenues from oil & gas
• To the extent that political economy considerations permit, should ideally avoid situations where:– SNGs can meet their expenditure responsibilities without raising
any tax revenues at all (i.e. while oil & gas revenues last)– very large revenue disparities would result among SNGs (i.e.
giving rise to “unlevel” fiscal competition among them)• If “required” degree of oil & gas devolution raises these
problems, need to consider equalization / revenue-pooling
How much oil & gas revenue should flow to SNGs?
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Need for equalization / revenue-pooling?
Stylized example of fiscal disparities resulting from oil & gas
New oil & gasrevenuesflowing to
SNGs
Relatively even capacity to raise revenues
Significantly uneven capacityto raise revenues
“A” “B” “C” “D”“A” “B” “C” “D”
Without decentralizedoil & gas revenues
With decentralizedoil & gas revenues
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Need for equalization / revenue-pooling?
Some oil & gas producing federations have large fiscal disparities
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Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countriesbefore equalization mechanisms applied (USD thousands)
Range (highest minus lowest)
Population-weighted standard deviation
0
2
4
6
8
10
12
UAE Canada USA Australia(includes mining)
Nigeria (1998 estimate)
Iraq
?
11.031
2.698
1.3850.428
7.499
0.9130.123 0.127 0.087 0.020
National unity Equity (“comparable treatment” of citizens by governments) Economic efficiency (e.g. to minimize fiscally-induced migration)
undue incentives for mobility from poorer (often rural) provinces to better-off (often urbanized) provinces may create social / economic tensions
Improved governance: level playing field for competition among “laboratories of federalism” large disparities may hamper accountability (if local authorities clearly lack
the resources to respond to the needs of their residents)
Need for equalization / revenue-pooling?
Why worry about fiscal disparities?
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Some with relatively small fiscal disparities (e.g. U.S.) have decided they can live without any equalization at all…… whereas others with equally small disparities (e.g. Australia)
go to great lengths to equalize them Countries with large fiscal disparities – often related to oil and
gas (e.g. UAE, Canada) – aim for at most partial equalization…… and typically cannot “afford” to do more given clear limits to
redistribution (reflecting both fiscal and political constraints)
Need for equalization / revenue-pooling?
Federations have adopted widely differing equalization systems
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In most cases, equalization is achieved through federal transfers (i.e. “upward” equalization) only
In a few cases, wealthier sub-national governments sometimes also contribute to equalization by: contributing into an equalization “pool” that is then distributed among less
wealthy SNGs (e.g. as in Germany) – i.e. “fraternal” equalization contributing part of their “excess” revenues to the federal government –
or taking on certain federal responsibilities (e.g. as in the UAE) – i.e. “downward” equalization
Need for equalization / revenue-pooling?
Federations have adopted widely differing equalization systems
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Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanismsWith equalization payments from national government
“Upward equalization”: payments funded from revenues of national
government
“A” “B” “C” “D”
Withoutequalization
“A” “B” “C” “D”
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“Fraternal equalization”: high-revenue SNGs
contribute to a “pool”
“Fraternal equalization”: high-revenue SNGs
contribute to a “pool” that is distributed tolow-revenue SNGs
Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanismsWith revenue-pooling among
sub-national governments
“A” “B” “C” “D”
Withoutequalization
“A” “B” “C” “D”
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Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanismsWith “downward”
equalization
“A” “B” “C” “D”
Withoutequalization
“A” “B” “C” “D”
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“Downward equalization”: high-revenue SNGs make
transfers to federal government (or take on certain federal
responsibilities)
Need for equalization / revenue-pooling?
Most oil & gas producers aim for only partial equalization
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Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countriesafter equalization mechanisms applied (USD thousands)
Range (highest minus lowest)
Population-weighted standard deviation
0
2
4
6
8
10
12
UAE Canada USA Australia(includes mining)
Nigeria (1998 estimate)
Iraq
?
8.992
0.087
2.698
1.385
6.137
0.8950.0120.123 n/a
Dohuk
NinevahSuleimaniyahErbil
Diyala
Salahuddin
Qadisiyah
BabilKarbala
Najaf
Muthanna
Dhi Qar
Misan
Basra
Wasit
Anbar
LegendOil fields
Pipelines
Tam’im
Illustrative assumptions• Public oil & gas revenues totalling
USD 30 billion annually• Revenues shared equally (50-50)
between federal and governorate governments
• Governorates’ share of revenues allocated on “derivation” basis (i.e. to producing governorates only)
Fiscal disparities in a decentralized Iraq?
A stylized illustration of potential fiscal disparities in Iraq
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Baghdad
Dohuk
NinevahSuleimaniyahErbil
Diyala
Salahuddin
Qadisiyah
BabilKarbala
Najaf
Muthanna
Dhi Qar
Misan
Basra
Wasit
Anbar
Tam’im
Baghdad
Dohuk
NinevahSuleimaniyah
Salahuddin
Qadisiyah
BabilKarbala
Najaf
Muthanna Basra
Anbar
Dohuk
Suleimaniyah
Diyala
Qadisiyah
BabilKarbala
Najaf
Muthanna
Misan
Basra
Wasit
Anbar
Tam’im
Erbil
Dhi Qar
Baghdad
Legend
Oil & gas producers
Illustrative assumptions
Fiscal disparities in a decentralized Iraq?
A stylized illustration of potential fiscal disparities in Iraq
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4,000 2,690.31Misan4,000 2,383.45Tam’im3,000 1,592.65Wasit4,000 1,455.75Diyala4,000 1,135.73Basra3,000 1,050.99Dhi Qar1,000 932.38Muthanna3,000 812.93Erbil1,000 528.40Najaf1,000 463.91Salahuddin1,000 231.50Suleimaniyah1,000 202.12Ninevah
USD millions USD per capita
Resulting oil & gas revenues
Fiscal disparities in a decentralized Iraq?
A stylized illustration of potential fiscal disparities in Iraq
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Resulting per capita oil & gas revenues among governorates (USD thousands)without equalization / revenue-pooling
0
1
2
3
4
Bagh
dad
Babi
l
Anba
r
Qadi
siya
h
Karb
ala
Dohu
k
Nine
vah
Sule
iman
iyah
Sala
hudd
in
Naja
f
Erbi
l
Mut
hann
a
Dhi Q
ar
Basr
a
Diya
la
Was
it
Tam
’im
Mis
an
0
1
2
3
4
Bagh
dad
Babi
l
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r
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siya
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Karb
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vah
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iman
iyah
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Naja
f
Erbi
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Mut
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Dhi Q
ar
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a
Diya
la
Was
it
Tam
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an
Fiscal disparities in a decentralized Iraq?
Possible equalization / revenue-pooling options
Post-equalization disparities with all of federal government oil & gas revenuescommitted to equalization pool
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Federal revenues used to make equalization payments to less well-off governorates
0
1
2
3
4
Bagh
dad
Babi
l
Anba
r
Qadi
siya
h
Karb
ala
Dohu
k
Nine
vah
Sule
iman
iyah
Sala
hudd
in
Naja
f
Erbi
l
Mut
hann
a
Dhi Q
ar
Basr
a
Diya
la
Was
it
Tam
’im
Mis
an
0
1
2
3
4
Bagh
dad
Babi
l
Anba
r
Qadi
siya
h
Karb
ala
Dohu
k
Nine
vah
Sule
iman
iyah
Sala
hudd
in
Naja
f
Erbi
l
Mut
hann
a
Dhi Q
ar
Basr
a
Diya
la
Was
it
Tam
’im
Mis
an
Fiscal disparities in a decentralized Iraq?
Possible equalization / revenue-pooling options
Post-equalization disparities with all of federal government oil & gas revenuesand 50% of governorates’ revenues committed to equalization pool
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Federal revenues plus contributions from better-off governorates used to make equalization payments to less
well-off governorates
Key issues for discussion
• How much of Iraq’s oil revenues flow to its regions and governorates – and how much to the federal government?
• Should the federal government continue to collect oil & gas revenues but remit devolved revenues to the regions?– Or: Can/should regions raise those revenues themselves? Could
different regions opt for different arrangements?• To what extent should resulting revenue-raising disparities
among regions and governorates be addressed through:– equalization transfers from the federal government?– revenue-pooling (“fraternal” equalization) among regions?
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