1 Fiscal Federalism in Iraq: OIL and GAS

The oil situation: a snapshot

3 OIL in the WORLD: a snapshot Oil and Democracy Oil and Economic Growth Oil and Conflict

4 OIL AS A LIMITED COMMODITY… (The “Hubbert Peak”)

5 …AS WELL AS HIGHLY PROBLEMATIC Environmental effects: Greenhouse gasses… Security consequences: conflict and oil Democracy consequences: oil rich countries have high levels of inequality, no major incentives for income redistribution (the ownership society versus the contributing society; again on the price of citizenship) Strong currency problems (exports more difficult) Corruption

6 OIL DEPENDENCE IN THE WORLD Only a few countries are energy independent (most recently, Brazil) Oil demand is increasing (fast growing economies; China, India) No relevant progress in other sources of energy (what happened to the electric car?)

The complexities of oil OIL PRODUCTION AND INSTITUTIONAL DESIGN

8 The uncertainties of the oil market Often (public) owners cannot assess the magnitude of potential revenues from oil & gas Governments may have limited technical expertise Resulting “asymmetry of information” regarding likelihood of finding new deposits, their extent and production lives

9 Legislatures / government ministries may play key policy making roles Overall resource management –e.g. pace of development Security of supply Structure of oil & gas market –e.g. domestic, export, distribution, role of state oil companies Oil & gas fiscal regimes –including incentives for investment Sharing of resulting revenues Environmental and safety standards

10 Institutional framework Independent agencies may administer those policies State oil companies manage state’s commercial interests (and may also play certain policy and regulatory roles)

11 Institutional framework Institutions may exist at both federal and regional levels in federal countries with resulting need to: –determine respective roles and responsibilities –ensure harmonization and/or coordination

The OIL situation in Iraq Management of resources and fiscal instruments

13 More than 95% public revenues in Iraq derive from oil

So who is the owner?

15 Fiscal Provisions in the Iraqi Constitution Article 111: Oil and gas is the property of all the Iraqi people in all the regions and governorates THEREFORE: –Equalization of natural resources –Redistribution of revenues (via the taxation system, excess profit tax, local taxes…)

16 ARTICLE 112 (I) The federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas… …extracted from current fields –What is the institutional framework? –Current fields versus new fields?

17 Institutional framework Federal government and producing regions must work together Possible institutions: –Joint Commissions (executives from central government and the regions) –Independent Commissions stated in art. 106 The participation of the private sector (112.2)

18 ARTICLE 112 (II) Oil revenues must be distributed “in a fair manner”, AND “In proportion to the population distribution in all part of the country” – Census? – What distribution mechanisms: Transfers vs tax system?

19 Distributing oil through the tax system INCOME: –Personal Income Tax –Corporation Income Tax –Estate tax (“Death tax”) –also taxes Wealth- WEALTH: –Property taxes CONSUMPTION: –Sales taxes –Value Added taxes (VAT) –Excise OTHER TAXES: environmental taxes (Carbon Tax), Custom Duties…

20 Distributing oil through transfers Who designs transfers? Institutional problems The need to ensure that transfers are unconditional Oil producing regions experience additional costs that should be taken into account (environmental costs…)

21 WHAT NOW? No Oil and Gas Law yet But: PETROLEUM LAW OF THE KURDISTAN REGION (IRAQ 29TH JUNE 2007) No clear agreement of how revenues should be distributed No other relevant sources of revenue (such as taxes…)

22 WHAT NOW? Oil & gas rents are particularly significant in Iraq: –world’s third largest reserves of oil (with many parts of Iraq still not fully explored for additional reserves) –highly favourable geology translates into very low extraction costs and large rents Oil and gas rents are also particularly important to Iraq: –oil & gas account for about two-thirds of GDP, oil & gas generate 98% of public revenues, provide 97% of export earnings

23 WHAT NOW? Natural resources amount for more than 95 per cent of total Iraq’s revenues BUT: they are unevenly distributed AND: they do not seem to have contributed to Iraq’s stability in the past

24 WHAT NOW? There is no political autonomy without financial means But, there is no possible solidarity system without ensuring an adequate distribution of natural resources Solving their distribution will mean (in the short term) solving Iraq’s financing of the Federation

25 Break-out questions Do you think in the long run it is better to finance the Iraqi State only with oil revenues? Should taxes play a bigger role in financing the Iraqi State and the (future) regions? If so, what taxes? How should Iraq deal with differences in resources and fiscal capacities among its regions? How should oil revenues be allocated among oil producing regions, non producing regions, and the center? Oil is not just about revenues, but also about management and regulation. How should these be dealt with in practice?