oil and gas revenue decentralization in federal regimes

Module 3Decentralization of oil and gas revenues

Prepared by David Péloquin

Background materials forUN workshop on oil and gas in IraqDead Sea Marriott Resort, Jordan

April 4-6, 2006

Centralized or decentralized oil & gas revenues?

• Often stronger capacity at national level, including:– policy / administrative capacity (particularly in the absence of a

history of autonomous sub-national governments)– more developed governance (greater “critical political mass” from

more competitive elections, more scrutiny by media/civil society)• Stabilization role (given high volatility of oil & gas) usually

best played by “large” (i.e. central) governments• Typically uneven distribution of oil & gas would result in

large horizontal disparities under decentralization

A strong theoretical case can be made for centralization

2

Centralized or decentralized oil & gas revenues?

• Historical legacy of sub-national government (SNG) ownership (e.g.: UAE, US, Canada, Australia)

• Some oil & gas “externalities” are local in scope– e.g. (local) pollution costs feed calls for greater local benefits

• Substantial local bargaining clout (and/or other political economy considerations)– i.e. SNG ability to extract revenues even if not their formal

“owners” (e.g. Nigeria, Indonesia, Canada)

In practice, some degree of decentralization is often inevitable

3

Options for generating SNG revenues from oil & gas

• Direct revenue raising by SNGs (e.g. practiced in US, Canada, Australia) may not be practical where SNG policy / administrative capacity is weak

• May be more practical to rely on SNG revenue sharing (on part or full “derivation” basis) of oil & gas revenues collected by national government (e.g. as in Indonesia)

• Least volatile components of oil & gas revenues may be best candidates for sharing– e.g. volume-based royalties or taxes

Direct revenue-raising by SNGs or revenue sharing?

4

Options for generating SNG revenues from oil & gas

• To the extent that political economy considerations permit, should ideally avoid situations where:– SNGs can meet their expenditure responsibilities without raising

any tax revenues at all (i.e. while oil & gas revenues last)– very large revenue disparities would result among SNGs (i.e.

giving rise to “unlevel” fiscal competition among them)• If “required” degree of oil & gas devolution raises these

problems, need to consider equalization / revenue-pooling

How much oil & gas revenue should flow to SNGs?

5

Need for equalization / revenue-pooling?

Stylized example of fiscal disparities resulting from oil & gas

New oil & gasrevenuesflowing to

SNGs

Relatively even capacity to raise revenues

Significantly uneven capacityto raise revenues

“A” “B” “C” “D”“A” “B” “C” “D”

Without decentralizedoil & gas revenues

With decentralizedoil & gas revenues

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Some oil & gas producing federations have large fiscal disparities

7

Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countriesbefore equalization mechanisms applied (USD thousands)

Range (highest minus lowest)

Population-weighted standard deviation

0

2

4

6

8

10

12

UAE Canada USA Australia(includes mining)

Nigeria (1998 estimate)

Iraq

?

11.031

2.698

1.3850.428

7.499

0.9130.123 0.127 0.087 0.020

National unity Equity (“comparable treatment” of citizens by governments) Economic efficiency (e.g. to minimize fiscally-induced migration)

undue incentives for mobility from poorer (often rural) provinces to better-off (often urbanized) provinces may create social / economic tensions

Improved governance: level playing field for competition among “laboratories of federalism” large disparities may hamper accountability (if local authorities clearly lack

the resources to respond to the needs of their residents)


Why worry about fiscal disparities?

8

Some with relatively small fiscal disparities (e.g. U.S.) have decided they can live without any equalization at all…… whereas others with equally small disparities (e.g. Australia)

go to great lengths to equalize them Countries with large fiscal disparities – often related to oil and

gas (e.g. UAE, Canada) – aim for at most partial equalization…… and typically cannot “afford” to do more given clear limits to

redistribution (reflecting both fiscal and political constraints)


Federations have adopted widely differing equalization systems

9

In most cases, equalization is achieved through federal transfers (i.e. “upward” equalization) only

In a few cases, wealthier sub-national governments sometimes also contribute to equalization by: contributing into an equalization “pool” that is then distributed among less

wealthy SNGs (e.g. as in Germany) – i.e. “fraternal” equalization contributing part of their “excess” revenues to the federal government –

or taking on certain federal responsibilities (e.g. as in the UAE) – i.e. “downward” equalization


Federations have adopted widely differing equalization systems

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Alternative equalization / revenue-pooling mechanismsWith equalization payments from national government

“Upward equalization”: payments funded from revenues of national

government

“A” “B” “C” “D”

Withoutequalization

“A” “B” “C” “D”

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“Fraternal equalization”: high-revenue SNGs

contribute to a “pool”

“Fraternal equalization”: high-revenue SNGs

contribute to a “pool” that is distributed tolow-revenue SNGs


Alternative equalization / revenue-pooling mechanismsWith revenue-pooling among

sub-national governments

“A” “B” “C” “D”

Withoutequalization

“A” “B” “C” “D”

12


Alternative equalization / revenue-pooling mechanismsWith “downward”

equalization

“A” “B” “C” “D”

Withoutequalization

“A” “B” “C” “D”

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“Downward equalization”: high-revenue SNGs make

transfers to federal government (or take on certain federal

responsibilities)


Most oil & gas producers aim for only partial equalization

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Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countriesafter equalization mechanisms applied (USD thousands)

Range (highest minus lowest)

Population-weighted standard deviation

0

2

4

6

8

10

12

UAE Canada USA Australia(includes mining)

Nigeria (1998 estimate)

Iraq

?

8.992

0.087

2.698

1.385

6.137

0.8950.0120.123 n/a

Dohuk

NinevahSuleimaniyahErbil

Diyala

Salahuddin

Qadisiyah

BabilKarbala

Najaf

Muthanna

Dhi Qar

Misan

Basra

Wasit

Anbar

LegendOil fields

Pipelines

Tam’im

Illustrative assumptions• Public oil & gas revenues totalling

USD 30 billion annually• Revenues shared equally (50-50)

between federal and governorate governments

• Governorates’ share of revenues allocated on “derivation” basis (i.e. to producing governorates only)

Fiscal disparities in a decentralized Iraq?

A stylized illustration of potential fiscal disparities in Iraq

15

Baghdad

Dohuk

NinevahSuleimaniyahErbil

Diyala

Salahuddin

Qadisiyah

BabilKarbala

Najaf

Muthanna

Dhi Qar

Misan

Basra

Wasit

Anbar

Tam’im

Baghdad

Dohuk

NinevahSuleimaniyah

Salahuddin

Qadisiyah

BabilKarbala

Najaf

Muthanna Basra

Anbar

Dohuk

Suleimaniyah

Diyala

Qadisiyah

BabilKarbala

Najaf

Muthanna

Misan

Basra

Wasit

Anbar

Tam’im

Erbil

Dhi Qar

Baghdad

Legend

Oil & gas producers

Illustrative assumptions



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4,000 2,690.31Misan4,000 2,383.45Tam’im3,000 1,592.65Wasit4,000 1,455.75Diyala4,000 1,135.73Basra3,000 1,050.99Dhi Qar1,000 932.38Muthanna3,000 812.93Erbil1,000 528.40Najaf1,000 463.91Salahuddin1,000 231.50Suleimaniyah1,000 202.12Ninevah

USD millions USD per capita

Resulting oil & gas revenues



17

Resulting per capita oil & gas revenues among governorates (USD thousands)without equalization / revenue-pooling

0

1

2

3

4

Bagh

dad

Babi

l

Anba

r

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h

Karb

ala

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la

Was

it

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an

0

1

2

3

4

Bagh

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la

Was

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an


Possible equalization / revenue-pooling options

Post-equalization disparities with all of federal government oil & gas revenuescommitted to equalization pool

18

Federal revenues used to make equalization payments to less well-off governorates

0

1

2

3

4

Bagh

dad

Babi

l

Anba

r

Qadi

siya

h

Karb

ala

Dohu

k

Nine

vah

Sule

iman

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Sala

hudd

in

Naja

f

Erbi

l

Mut

hann

a

Dhi Q

ar

Basr

a

Diya

la

Was

it

Tam

’im

Mis

an

0

1

2

3

4

Bagh

dad

Babi

l

Anba

r

Qadi

siya

h

Karb

ala

Dohu

k

Nine

vah

Sule

iman

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Sala

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in

Naja

f

Erbi

l

Mut

hann

a

Dhi Q

ar

Basr

a

Diya

la

Was

it

Tam

’im

Mis

an


Possible equalization / revenue-pooling options

Post-equalization disparities with all of federal government oil & gas revenuesand 50% of governorates’ revenues committed to equalization pool

19

Federal revenues plus contributions from better-off governorates used to make equalization payments to less

well-off governorates

Key issues for discussion

• How much of Iraq’s oil revenues flow to its regions and governorates – and how much to the federal government?

• Should the federal government continue to collect oil & gas revenues but remit devolved revenues to the regions?– Or: Can/should regions raise those revenues themselves? Could

different regions opt for different arrangements?• To what extent should resulting revenue-raising disparities

among regions and governorates be addressed through:– equalization transfers from the federal government?– revenue-pooling (“fraternal” equalization) among regions?

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oil and gas revenue decentralization in federal regimes

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