Dealing with oil revenues: the Brazilian Experience

1. 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

2. Disclaimer: The opinions herein expressed do not necessarily reflect the opinions of the Brazilian Senate.

3. Summary • Historical Background • Institutional framework • Revenues • Current Use • Future Use • Conclusions

4. 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.

5. Production

6. 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

7. 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

8. Revenues

9. 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

10. 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!

11. 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

12. Current distribution of revenues (2012)

13. 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

14. 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).

15. 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%!

16. 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)

17. Current distribution of revenues • Poor use of money • Municipalities (ample evidence of bad use) • Macroplan (2012) • Romão (2012) • Oliveira (2011) • Freitas (2009) • Postali (2008)

18. 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

19. 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

20. 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

21. Future distribution of revenues • Higher share of the central government • Smaller share to producing municipalities • More even distribution

22. 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

23. 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.

24. 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.

25. 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

26. 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

27. THANK YOU! springer@senado.gov.br