Policy Options for Revenue Distribution Andrew Bauer Senior Economic Analyst, NRGI Yangon, Myanmar June 30, 2015
Revenue distribution options Government natural resource revenues Sub-national entities National government budget Citizens State-owned companies Special funds Local governments All National oil companies Sovereign wealth funds Affected communities Elderly Development banks Pension funds Landowners Poor Infrastructure funds
Outline The budget process Extra-budgetary funds State-owned companies Subnational transfers
The budget cycle Budget formulation Budget oversight Budget approval Budget execution
Extra-budgetary institutions What is an extra-budgetary fund or institution? Examples: State-owned companies Pension funds Sovereign wealth funds Multi-year investment funds Earmarked special funds Slush funds
Why create an EBF? Manage fiscal surpluses or comply with fiscal rules Secure source of funding for underfunded expenditure items Depoliticize certain allocations and prevent budget cuts (e.g., pensions) Circumvent poorly functioning budget institutions Avoid public scrutiny
Sovereign wealth funds: Help or hindrance? Some have helped countries escape the resource curse. Chile Norway Timor-Leste 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., Malaysia) Africa (e.g., Equatorial Guinea) What has made the difference are the rules, institutions and oversight.
Horror Stories -$1.18 Billion USD -$5 Billion USD -$20 Billion USD
Good Governance of NRFs 1. Set clear fund objectives 2. Establish deposit and withdrawal rules 3. Establish investment rules 4. Clarify good institutional structure 5. Require extensive disclosure and audit 6. Establish strong independent oversight
www.resourcegovernance.org/nrf
National Oil/Mining Company mandates Commercial Sell government share of crude oil Manage state equity participation Operational Participate in exploration and production activities Regulatory Development Negotiate petroleum licenses Regulate the sector Monitor compliance to regulations Capacity building in the oil industry Local content promotion Corporate social responsibility initiatives
National Oil/Mining Company mandates in Myanmar (examples) Commercial MOGE Myanmar Gems Enterprise Operational No. 1, No. 2, and No. 3 Mining Enterprises Regulatory Development MOGE No. 1, No. 2, and No. 3 Mining Enterprises MOGE (subcontractors)
Some NOC budget impacts Angola 32 billion USD (2007-11) Mexico Over 40 billion USD Nigeria 7 billion (2010) Venezuela 4.4 billion USD (2012)
Fiscal relationship between NOCs/NMCs and the budget in Myanmar NOCs/NMCs: Retain costs 45% of net costs transferred to State Fund Account (SFA) (includes 20% corporate income tax) Working capital covered by company; 20% of working capital can be transferred from the government to cover losses Fewer transfers to the budget than before changes in 2013
Some NOC/NMC revenues in Myanmar (FY 2012/13) Company Myanma Oil and Gas Enterprise (MOGE) Myanma Petroleum Products Enterprise (MPPE) No. 1 Mining Enterprise No. 2 Mining Enterprise No. 3 Mining Enterprise Myanmar Gems Enterprise Estimated revenues USD 2.06 billion USD 680 million USD 10 million USD 30 million - USD 10 million USD 210 million Estimated retained by SOE USD 621 million USD 474 million USD 8 million USD 2 million USD 50 million
High-level results In 2012/13, these six SOEs generated approximately USD 1.85 billion for the government, the vast majority from oil. In 2012/13, MOGE s expenditures (USD 1.4 billion), including costs and reinvestment, were higher than government s health (USD 846 million) or education (USD 903 million) expenditures. Much of the rents are captured by SOEs and military-affiliated companies (e.g., MEC, UMEHL). EITI should help determine flows.
Policy options Revenue retention rules (e.g., Ghana, Kuwait) Publicly list SOE shares (e.g., Brazil, Norway) Independent and professional boards (e.g., Brazil, Norway) Systematic external audits (e.g., Mexico) Parliamentary oversight
How can local governments and communities benefit from extraction? Tax collection from companies Intergovernmental transfers from the national government Company CSR contributions Local content Local equity Employment Local procurement Skills and technology transfer
Resource revenue assignments Administered by central government Transfers to subnational levels Shared taxation + intergovernmental transfers Transfers to the central government Algeria Saudi Arabia Mexico Indonesia Iraq Peru Australia Canada Malaysia USA United Arab Emirates
Blora and Bojonegoro (Indonesia)
Indonesian Revenue Sharing Flow (oil) Petroleum Revenue District Treasury Central Government Treasury Revenue Sharing for Local Governments (15.5% of o.r.) Central Government (84.5% of oil revenue) Province (6% + 0.1% to education budget) Other Districts in the same Province (3% + 0.2% to education budget) Producing District (6% + 0.2% to education budget) Central Government Budget
Revenue sharing in Myanmar? Large scale mining in all but Chin state and Yangon Oil pipelines and exploration in nearly every state and region Significant under-reporting of extractive activities (at least 12 times more mining than officially reported) Tax assignments: 133.5 million kyat in mineral taxes directly collected by subnational governments in 2014/15, compared to over 2 trillion kyat collected by national government Transfers: 1.6 trillion khat transferred to subnational governments in 2014/15 Chin, Kachin and Kayah governments received highest per capita transfers; Mandalay, Yangon and Mon received the lowest
Objectives of revenue sharing Improved public service delivery by filing the financing gap Equalization between regions National government control (conditional grants) Risk-sharing and fiscal stabilization
Objectives of resource revenue sharing Compensation Conflict mitigation Social license to operate Regional claims
How to determine a fair and efficient allocation of resource revenues? Vertical distribution Which revenue streams Horizontal distribution (derivation vs. indicator) Recipients Stabilization Earmarking Consensus-building and oversight Transparency
Three key points A B C No best practice in fiscal decentralization, except rules, transparency and oversight Fiscal transfers should be linked to expenditure responsibilities To reduce conflict and ensure stability, any specific allocation regime for oil, gas or mineral revenues should serve one or several nationally-agreed objectives
Thank You! Contact: abauer@resourcegovernance.org