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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 fieldProduction 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
Bu
dge
t re
ven
ue
and
exp
end
iture
5 years
Revenues
“Pro-cyclical“ expenditures
Fiscal Framework to Address Volatility
Bu
dge
t re
ven
ue
and
e
xpe
nditu
re
5 years
Revenues
“Smoothed” expenditures
Surplus
Deficit
Fiscal Framework to Address Volatility
Bu
dge
t re
ven
ue
and
e
xpe
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 RevenuePetroleum Revenue
Central Government Treasury
Central Government Treasury
Revenue Sharing for Local Governments (15.5% of o.r.)Revenue Sharing for Local
Governments (15.5% of o.r.) Central Government (84.5% of oil revenue)Central Government
(84.5% of oil revenue)
Producing District (6%
+ 0.2% to education budget)
Producing District (6%
+ 0.2% to education budget)
Province (6% + 0.1%
to education budget)
Province (6% + 0.1%
to education budget)
Other Districts in the same Province
(3% + 0.2% to
education budget)
Other Districts in the same Province
(3% + 0.2% to
education budget)
Central Government
Budget
Central Government
Budget
District TreasuryDistrict 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
