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Resource revenue management and allocation

Resource revenue management and allocation. Andrew Bauer Economic Analyst, NRGI. Outline. Macroeconomic management in resource-rich settings Complications Revenue allocation. Stories. Azerbaijan. Chile. The budget c ycle. Budget formulation / Fiscal framework.

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Resource revenue management and allocation

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  1. Resource revenue management and allocation Andrew Bauer Economic Analyst, NRGI

  2. Outline • Macroeconomic management in resource-rich settings • Complications • Revenue allocation

  3. Stories Azerbaijan Chile

  4. The budget cycle

  5. Budget formulation / Fiscal framework

  6. 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

  7. Dutch disease and ‘absorptive capacity’ People and capital move from other sectors to the oil sector Oil starts flowing Inflow of foreign currency Export industries become less competitive and decline Value of domestic currency rises and/or inflation rises

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

  9. Volatility

  10. Volatility Data: IMF

  11. Consequences of volatility vs

  12. Exhaustibility Production path for a 300 billion barrel oil field

  13. Case Study The Island of Nauru The Risk of Boom-Bust Economies Mining Boom Second highest GDP per capita in the world GDP per capita $40,000 USD Mining Bust 90% unemployment GDP per capita $2,000 USD

  14. Fiscal Framework to Address Volatility Revenues “Pro-cyclical“ expenditures Budget revenue and expenditure 5 years

  15. Fiscal Framework to Address Volatility Revenues Surplus Budget revenue and expenditure “Smoothed” expenditures Deficit 5 years

  16. Fiscal Framework to Address Finite Nature of RRs and Dutch disease Surplus Budget revenue and expenditure “Smoothed” expenditures 50 years

  17. How much to save and spend? Sources: IMF; own projections

  18. 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

  19. Expenditure volatility with and without a fiscal rule

  20. Operationalizing a fiscal rule: Debt management • 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

  21. Operationalizing a fiscal rule: Sovereign wealth fund management Deposit Rules National Resource Funds Withdrawal Rules Investment Rules Domestic Expenditure Foreign investment

  22. SWF successes and failures • 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.

  23. Building consensus around the macroeconomic framework and SWF governance • Ghana • Norway • Mongolia (starting discussion) • Sao Tome and Principe • Timor-Leste

  24. Exercise: Part I

  25. Complications: Pre-savings challenges • 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

  26. National Oil Companies

  27. National Oil Companies – Mandates Commercial • Sell government share of crude oil or minerals • Manage state equity participation Operational • Participate in exploration, development and production activities Regulatory • Negotiate oil or mineral licenses • Regulate the sector • Monitor compliance to regulations Development • Capacity building in the industry • Local content promotion • Corporate social responsibility initiatives

  28. National Oil Companies – Risks Weak oil sector and inefficient project development Poor decisions Weak capacity Lack of market checks Poor revenue collection Lack of oversight Drain on public finances Poor or missing rules Corruption, patronage and mismanagement Political interference

  29. Angola – extra-budgetary expenditures $32 Billion

  30. Venezuela – social spending PDVSA (Venezuela) Spending, $ billions, 2012 Source: Latin American Herald Tribune

  31. NOCs – Fuel subsidies

  32. NOC financing policy options National Mining / Oil Company Costs Reinvestment Consolidated Fund (Budget) SOC discretion Executive discretion Parliamentary discretion Legislated formula

  33. Complications: Undermined systems • Inappropriate or non-context specific rules • Alberta (Canada) • Kazakhstan • Timor-Leste • Venezuela • No rules or weak compliance • Azerbaijan • Libya • Russia

  34. Fund institutional structure in Norway Stortinget Regulation/ Delegation of duties and authorizations Ministry of Finance Reporting of results and risks 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 managers Supervision: NBIM Control and ComplianceUnit

  35. Independent oversight Transparency • Alaska • Timor-Leste transparency portal and reports • Global: Santiago Principles; RGI; Truman • PIAC in Ghana • Timor-Leste judiciary • Media and parliament in Kuwait • IMF Article IV

  36. Exercise: Part II

  37. Revenue allocation options

  38. Case study: Blora and Bojonegoro (Indonesia)

  39. How are oil revenues shared in Indonesia? Petroleum Revenue Central Government Treasury District Treasury Revenue Sharing for Local Governments (15.5% of o.r.) Central Government (84.5% of oil revenue) Other Districts in the same Province (3% + 0.2% to education budget) Producing District (6% + 0.2% to education budget) Central Government Budget Province (6% + 0.1% to education budget)

  40. Who has resource revenue sharing?

  41. Why share oil, gas or mineral revenues? • 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

  42. How to share resource revenues? • Clear objectives • Indicator- vs. derivation-based formula • Matching revenues with objectives, needs and expenditure responsibilities • Generating incentives to spend well

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

  44. Canada: A case of equalization (sort-of) • 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

  45. The case of Libya

  46. Direct distribution / cash transfers Mongolia Alaska (USA) Bolivia

  47. Discussion questions • 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?

  48. Resource revenues State-owned companies National budget Sub-national governments Conclusion: A revenue management system is complex Citizens Natural resource funds

  49. Conclusion: The budget cycle

  50. PIMI Index Source: IMF

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