Sharing of Natural Resource Revenues/
Petroleum Revenue Decentralization
International Experience and Iraq
Presented to:
Extractive Industries: Legal and
Fiscal Regimes, Revenue
Management, and Good
Governance
May 16-17, 2007, I 2-220
Wednesday 2:30-3:15 pm
Presented by:
Monali Chowdhurie-Aziz,
Senior Public Sector
Specialist, MNSED
Kai Kaiser, Senior Economist
Public Sector Group
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The World Bank
Fiscal Decentralization and Natural Resources
• Prevailing Issues in Range of Countries
– Nigeria, Russia, Indonesia, Iraq, Bolivia, Sudan, DRC, Malaysia,
PNG, etc.
• Challenges in applying developed country models for our
clients
– Weak Institutions and poor governance contribute to “resource
curse” at various levels of government
– Recent price increases and new discoveries in range of countries
with pressures for decentralization
– Claims to oil revenues highly contested with diverse states…
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The World Bank
Welcome to Southern Sudan
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The World Bank
Overview of Presentation
• Revenue Assignments in Decentralized/Inter-Governmental
Settings
• Political and Economic Arguments around Sub-National
Natural Resource-Revenue Allocation
• Some International Experience
– How do we define Success?
• Illustrative Challenges from Iraq
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The World Bank
Natural Resource Revenues Must Be Seen Within the Context
of Good Intergovernmental Design
Decentralization spans

Political/Legal
 Including Constitutional Assignments (e.g., DRC 2005)

Fiscal
 Shaped by country’s economic/revenue structure

Administrative
Natural-resources can add to the complexity…
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The World Bank
Five Fundamental Questions
Facing Any Decentralizing System
• Expenditure Assignments/Responsibilities
– Finance Follows Function Principle
• Revenues
– Own Source Revenues (autonomy of bases/rate setting)
• Role of Sub-Nationals in Negotiating Exploitation/Revenue Streams
– User Fees
• Intergovernmental transfers
– Derivation Based Revenue Sharing
– Transfers
• Fiscal Equalization
• Specific Purpose/Conditional Grants
• Subnational borrowing/debt
• Capacity Development: Organizational, Institutional and Human
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The World Bank
Expenditure Assignment Considerations
• Macroeconomic stability
– Takes on special importance with natural resource revenue
dependence
• Public Service Delivery
– Effectiveness/Efficiency
– Public Management Innovation
• Poverty Reduction
– Responsiveness
– Equalization
Expenditure assignments often span multiple tiers of
government
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The World Bank
Rationales for
Intergovernmental Transfers
•
•
•
•
•
Vertical imbalances
Horizontal imbalances
Inter-jurisdictional spillovers (externalities)
Enhancing national objectives at the subnational level
Paying for national programs implemented by subnational
governments
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The World Bank
(Sub-National) Natural-resource revenue assignments
tend to make inter-regional disparities prominent
• Assignment of Petro-Revenues to Sub-Nationals
– Shared versus Own Source (i.e., incorporates effort)
– How much is assigned to sub-nationals on derivation basis?
• Assignment of Other Revenues
– Property Tax?
– Income Tax? Other?
• Expenditure Needs
– Ideally funds follow function
• Transfer Design
– Vertical Shares/Pools?
– Horizontal Allocation Criteria
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The World Bank
0
Source:
Gabon
Iraq (Est.
Oman
U.A.E.
Kuwait
Nigeria
Angola
Qatar
Algeria
Congo,
Papua
Iran
Sudan
Syria
Yemen
Mexico
Chad
Congo,
Indonesia
Kazakhst
Norway
Russian
Malaysia
Australia
Revenue Structures Vary Significantly
Oil & Gas Revenues (Share of Total)
M ost Recent Available Year
100
80
60
40
20
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The World Bank
Arguments Around Natural Revenues Sharing
• Arguments for Greater Degree of Centralization
–
–
–
–
–
–
Stability: Natural Revenues Subject to high Degree of Volatility
Disparities: Known and potential endowments highly unequal
National Treasure: Belongs to all the people!
Local Capacity: National governments better placed to manage
Coherence in Natural-Resource Policy: Avoid distortion across regions
Revenue Transparency: Easier if revenues accrue to one “account”
• Arguments for Decentralization/Derivation Based
–
–
–
Cost-Reimbursement: Including Environmental Costs
Heritage Argument: Non-renewable resource
Political/Conflict Resolution Arguments:
• Often very important where legitimacy between central and sub-national
governments have been contested
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The World Bank
A “Good” Transfer System
•
Transfers should be transparent and predictable
–
–
•
Preference for formula-based
Natural-resource revenue rich settings need to place special emphasis
on transparency
Equalization transfers should include
–
A realistic measure of “need”
•
–
–
–
•
Population, Area, Cost, “Backwardness”
A realistic measure of “fiscal capacity”
Adequate sub-national revenue autonomy
Stable but flexible financing
No Single Transfer May Meet All Objectives
–
But, avoid proliferation of different grants
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The World Bank
Managing Transfers Across Levels
• Hierarchical Models
– 2nds tier has full autonomy over LG allocations
• Indonesian districts receive direct allocations
• Pakistan (with some modification)
• Nigeria: transfer allocations earmarked to locals, but concerns about state
interception
• National Models
– Direct allocations to second & third tiers
• E.g., Indonesia’s provinces & districts
• Guidelines for 3rd tier allocations
• Mixed/Asymmetric Models
– Special autonomy in Indonesia (Aceh/Papua)
– North/South Sudan
– Iraq’s Regions/KRG
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The World Bank
Intergovernmental Revenue Management
• Addressing Petroleum Revenue Volatility
– Transfers Based on Realizations or Actuals
• Sub-National Revenue Predictability
– Ex Ante Rules
– Stabilization Accounts
• Addressing Petroleum Revenue Non-Renewability
– Heritage Funds
• Who benefits and when?
• Transfer Transparency
– Commissions for Dispute Clarification/Resolution
– Reporting to Higher Levels
– Revenue Transparency and Accountability
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The World Bank
The Challenge of Sub-National Accountability
• Natural-Resources Revenues May be Especially Prone to
Weak Accountability
– Weak Bottom-Up Accountabilities
• No Representation Through Local Taxation
– Beneficiary Regions Subject to Windfalls
– Weak Top-Down Accountability
• Sub-National Allocation of Natural-Resources May Be Subject of
Political Bargains
• Petroleum Revenues May Be Inherently “Centralized”
– Allocation to Sub-National Governments May (Also) Fail to Trickle
Down
• Revenue-led Fiscal Decentralization Associated with Weak
Accountability for Outcomes
– Explore Linkages to Sectoral/Frontline Outcomes?
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The World Bank
Gauging “Performance” of Natural Resource Revenue
Sharing in an Intergovernmental Context
• Glue or Solvent for National Cohesion?
• Revenue Flows Translate Into Development Outcomes
– Finance Follows Function
– Accountabilities Promote Service Delivery
• Revenue Assignments/Collection Consistent with Coherent Revenue
Policy
– Effective in attracting investment to best placed locations
• Consistent with Good PFM at all Levels
– E.g., as benchmarked by PEFA
• Intergovernmental Arrangements Consistent with Fiscal/MacroEconomic Stability
– “Overgrazing” undermines stabilization/heritage arrangements
• Natural-Resource Rents Don’t Subvert Country’s Institutional
Development/Integrity
– Corruption Further Corrodes Representative/Legitimate Institutions
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The World Bank
Fiscal Decentralization in Iraq
• Legacy of centralization
– With some history asymmetric arrangements, notably Kurdistan
• High Dependence on Petroleum Revenues
– >95 percent of domestic revenues in 2006/2007
– Oil concentrated mainly in south
– Debates around “old” and “new” oil
• 2005 Constitution with Federal Vision
– Distinction between provinces and regions
– Tendency to overlap regions with ethnic identify
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The World Bank
Prevailing Asymmetric Arrangements in Iraq
Baghdad
MinFin/Central
Bank/Line Agencies
Sub-National Government in
Iraq’s 15 Governorates
MinFin Gov Treasuries
* Basra CB
Central Line
Agencies
Regional
Government
Provincial Councils
Governor’s Offices
KRG
Erbil/Dohuk, Sulaimania
Municipal/Other Local Government
Municipal/Other Local Government
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The World Bank
Petroleum is Concentrated in the South
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The World Bank
(Illustrative) Fiscal Gaps in Iraq?
Potential Per Capita Revenues (PC USD)
3,000
2,500
Projectopms by Peloquin
(April workshop)
2,000
Figures from Jakarta,
Metropolitan Capital of Indonesia
1,500
Oil
Shared
Own
1,000
500
0
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Sources: PC Oil Revenues are drawn from April workshop Module 3, Estimates for
Baghdad Own Source and Shared Revenues are proxied by Jakarta, Indonesia
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The World Bank
Political Economy of Management, Regulation and
Development of Hydro-Carbon Revenues
• In a Low Trust Environment
 Kurds view the development of their oil fields as having been
historically under-resourced.
 Historically Denied their share of revenues from the center
 Currently revenues are not transparent and are poorly managed at
the centre
• Suggested solutions
 Distinction between “old Fields’ and ‘new field” in the Constitution
 Contracting for “new field” in Kurdistan by KRG
 Allocate share of “actual” revenues to region based on population
 Variant of this has already been in place by allocating 17% of national
budget, minus a series of “sovereign” expenditures
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The World Bank
Political Economy of Management, Regulation and
Development of Hydro-Carbon Revenues
• Problems with Suggested Solutions
 Contradictory rules for oil exploration
 Optimal resource development requires policies for that
development of old and current are coordinated (and distinction
itself may be difficult in practice)
 Coordination is important if stabilization is left to the subnational
 Incentive for the one with the smaller budget to run a procyclical fiscal policy while the one with the larger budget
absorbs the costs of the counter-cyclical policy
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The World Bank
Petroleum Revenues and The Future of Iraq
• On-Going Constitutional and Legal Debates
– Revisions to 2005 Constitution
– Parallel to debates on Hydrocarbon Law, Revenue Sharing Law,
Law on Local Governments, and Revenues Sharing Law
• Concerns about lack of transparency
– Future of Development Fund for Iraq (DFI)
• Significant Pressures to Increase Revenue Flows to
Provinces/Regions
– Allure of concentrated oil wealth may increase incentives to create
regions around ethnic lines (Shiastan, Sunnistan)
– But also uncertainty about location of actual oil reserves behind “veil
of ignorance” and various myths of manna
– Need to come to some arrangements that accommodate all main
actors
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The World Bank
Areas of On-Going Engagement in Iraq
Around Natural-Resource Sharing
• Clarify options of intergovernmental sharing and transfers
to executive and legislative counterparts
– Emphasize that revenues should need to follow functions, not vice
versa, as well as principles of (rule-based) equalization
– Identify options for revenue management and revenue assignment,
as well as institutional arrangements to mediate these in practice
across interests of various regions
• Promote sub-national PFM capacity
– …in advance of new roles, responsibilities, and financing
– Promote bottom-up and top-down accountabilities
– Promote Revenues Arriving at Frontline Service Delivery
• Schools, Clinics, Communities around “outcomes”
• Limited Incentives for Revenue Diversification
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The World Bank
New institutional arrangements will have to mediate
respective concerns…given prevailing realities
Prospective but underappreciated institutions
• Public Commissions for Revenue Management
• 2005 Constitution Art. 106), including audit functions, to be regulated by
Law (pending)
• Public commission for “interest of regions”
• (Art. 105) (pending)
• Asymmetric arrangements may be the most practical
solution
– Overcentralization may itself be recipe for secession, less
transparency
– Question is whether decentralization dynamics work for or against
resource curse?
• E.g., contestation for revenue transparency, or overgrazing to maximize
own returns
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Q&A
Selected References
ESMAP (2005). Comparative Study on the Distribution of Oil Rents in
Bolivia, Colombia, Ecuador, and Peru. Washington, DC, ESMAP
(Joint UNDP/World Bank Energy Sector Management Assistance
Programme: 142.
ODI, 2006. Sub-National Implementation of the Extractive Industries
Transparency Initiative (EITI). London, Prepared for the EITI
Secretariat and DfID, London, Issues Paper, April.
Fiscal Decentralization and Sub-National Public Financial
Management in Iraq, Washington, DC: MNSED (mimeo)
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The World Bank
Annex: Alternatives Forms of Structuring
Intergovernmental Grant Programs
Vertical Shares:
Method of determining the total divisible pool
Horizontal Shares
Method of allocating
The divisible pool
Among eligible units
Specified share of
National or state
Government tax
Ad Hoc Decision
Reimbursement Approved
Expenditures
Origin of collection of tax
A
NA
NA
Formula
B
F
NA
Total or partial reimbursement of
costs
C
G
K
Ad Hoc
D
H
NA
Source: Adapted from Roy Bahl (2006)
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