dealing with oil revenues: the brazilian experience managing revenues and optimizing the benefits of...
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Dealing with oil revenues: the Brazilian Experience
Managing Revenues and Optimizing the Benefits of Coal
and Gas Resources in Mozambique
Paulo Springer de FreitasLegislative Advisor – Brazilian SenateMaputo, 27-28 February, 2013
Disclaimer: The opinions herein expressed do not necessarily reflect the opinions of the Brazilian Senate.
Summary Historical Background Institutional framework Revenues Current Use Future Use Conclusions
Historical background Until 1990’s: Brazil small producer
Avarege production in the early 1990’s: 750 thousand bbd
2006: self-sufficiency (1.8 million bdd) 2011: 2.1 million bdd (peak)
2007: discovering of the pre-salt layer Potential to increase proved reserves from
15 billion boe to 30 billion boe. Might reach 100 billion boe.
Production
Institutional framework Up to 1997: Petrobras (state-owned oil
company) had monopoly of E&P and refining 1997: Law 9.478, introduced regime of
concessions and ended the monopoly 2010: Law 12.251 “re-statization” for future
E&P in pre-salt areas. Introduction of Production Sharing Regime (PSR). Petrobras will have at least 30% of each
consortium Important consequences on revenue generation
Revenues In Brazil, two main revenues:
Royalties Gross receipts tax (10% concessions, 15% PSR) More distortionary, but no information assimetry
problem “Participação Especial” (Special
Participation) Tax on profits More efficient, allows more risk sharing, but
subject to informational assimetry problems
Revenues
Revenues outlook But... things can go wrong! PSR strenghned Petrobras’ role
But can Petrobras do all the investment? Will need to invest USD 140 billion
between 2012 and 2016 Estimates of up to USD 1 trillion until
2020
Revenues outlook Petrobras faces some constraints
Local content Price control on gasoline “Have” to invest in refineries
As important as thinking about what to do with the revenue is to create a favorable environment to generate revenue!
Revenues Outlook Oil production fell from 2.193 million
bbd to 2.139 million (-2%) from 2011 to 2012
Forecast for 2020 fell from 6 million bbd to 5.4 million bbd Must remind though that such forecasts are
very volatile
Current distribution of revenues (2012)
Royalties+PERoyalties
(%)
Special Participation (%)
Total (USD billion)
Total 100,00 100 15.718
Central Government 30,00 50 6.174
Producers - Total 61,25 50 8.921
States 26,25 40 5.472
Municipalities 26,25 10 2.785
Affected Municipalities 8,75 0 664
All local governments 8,75 0 623
Municipalities 7,00 0,0 498,0
States 1,75 0,0 124,5
Current distribution of revenues
Central Government Theoretically: Ministries of Science
and Technology; Environment and Defense (Navy)
Actually: meeting primary surpluses targets
Important for Brazil achieving macroeconomic stability
Current distribution of revenues Local level (states and municipalities)
No constraint except when there are state or municipal laws
Problems Concentration of revenues
State of Rio de Janeiro receives 75% of the revenues directed to the states. Espírito Santo gets other 15% (there are 27 states in Brazil).
Current distribution of revenues
Problems Concentration of revenues
25 Municipalities (of + 5.500 in the country) concentrate 70% of the revenue
16 in Rio de Janeiro, 5 in Espírito Santo and 4 in São Paulo.
Too fast growth Revenue for municipalities increased
1531% between 1999 and 2011! In some cases, increase reached 156000%!
Current distribution of revenues Problems
Too much money! Up to US$ 10.000 per capita of revenue
Average of US$ 800 per capita, among 20 biggest receivers
Poor use of money State of Rio de Janeiro
63% pension system 27% debt payment Only 5% environment (long term benefits)
Current distribution of revenues
Poor use of money Municipalities (ample evidence of bad
use) Macroplan (2012) Romão (2012) Oliveira (2011) Freitas (2009) Postali (2008)
Current distribution of revenues Poor use of money
Municipalities Lack of long term planning Increase in public sector jobs twice as high as
the Brazilian average; Revenues used to pay permanent expenses
High risks for financial administration Exhaustion and price volatility
Fiscal irresponsibility Emphasis on current expenses, leaving few
resources for investment
Current distribution of revenues Poor use of money
Municipalities (ample evidence of bad use) Worse conditions on water and sewage supply
compared to other cities in the same state Mediocre performance in national wide
educational tests HDI below the average of their states High crime rates Low investment in culture, leisure and
environment
Current distribution of revenues Bad use of money
Anecdotal evidence of corruption and waste.
Good use of money Municipalities
Of course, there are also examples of good use Some programs in health, public education and
crime prevention But they are ad hoc examples, not being part of a
systematic policy
Future distribution of revenues
• Higher share of the central government
• Smaller share to producing municipalities
• More even distribution
Royalties+SP/Oil Concession PSR Concession PSR
Total 100,00 100 100 100
Central Government 30,00 22 50 100
Producers - Total 61,25 29 50 0
States 26,25 22 40
Municipalities 26,25 5 10
Affected Municipalities 8,75 2 0
All local governments 8,75 49 0 0
Municipalities 7,00 24,5 0,0
States 1,75 24,5 0,0
Royalties (%) SP/Oil (%)
Future use of revenues Still under discussion in the Congress All revenues belonging to the Central
government resulting from exploration in the pre-salt layer will be deposited in the Social Fund 50% education Rest in culture, sports, public health,
science and technology, environment
Future use of revenues Social Fund
Spend only interest income (or other earnings) But there may be exceptions, allowing to spend the
principal Too many areas to spend
For states and municipalities 100% of revenues in the future contracts
under the regime of concession will go to education
Revenues from PSR will keep unconstrained.
Future use of revenues For states and municipalities
Expenses on education: Unlike the Social Fund, might be unsustainable in
the long run In the next 20 years, the most important
source of revenues should come from PSR contracts
Likely to repeat the same problems as today.
More disperse distribution might help.
Conclusions Need to provide an institutional
framework favorable to raise revenues Large evidence of misuse of revenues
by local governments Lack of capacity Lack of planning Too much money in too few time Lax controls
Conclusions Future may be better
Higher participation of the Central government Earmarked revenue to education
Although most of the revenue will not be earmarked Oil Fund (The Social Fund) More homogeneous distribution among states and
municipalities
