Presentation on theme: "Dealing with oil revenues: the Brazilian Experience Managing Revenues and Optimizing the Benefits of Coal and Gas Resources in Mozambique Paulo Springer."— Presentation transcript:
Dealing with oil revenues: the Brazilian Experience Managing Revenues and Optimizing the Benefits of Coal and Gas Resources in Mozambique Paulo Springer de Freitas Legislative Advisor – Brazilian Senate Maputo, 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 1990s: Brazil small producer Avarege production in the early 1990s: 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.
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 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 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
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