1. Local Government and the Extractive Industry Andrew Bauer Senior Economic Analyst, NRGI SPP-NRGI Course – Budapest, Hungary April 2016

2. Essential Questions What is the role of local governments in managing the extractive industry and its revenues? What is the optimal distribution of resource revenues to subnational governments? How should local governments manage resource revenues?

3. What is the role of government in managing the extractive sector and benefits from the sector? Fiscal regimes Exploration and production licensing Project approvals and monitoring Environmental and social protection Revenue collection Revenue management Spending

4. Subnational tax authority - Mining Country Government structure Corporate income tax Royalties Property / land taxes NSNSNS Australia FederalX X*X X Brazil FederalX X X Canada FederalXXX*X X China UnitaryX X X Ghana UnitaryXXX India FederalX X X Indonesia Regionalized unitary X X XX Malaysia FederalXX X X Philippines Regionalized unitary XXXX** X Russia FederalXXXX United Arab Emirates Federal X X X

5. Indonesia licensing story

6. Benefit sharing

7. Resource revenue sharing

8. Objectives of revenue sharing Improved public service delivery by filing the financing gap Equalization between regions Risk-sharing and fiscal stabilization

9. Objectives of resource revenue sharing Recognizing local claims on natural resources Compensating for the negative impacts from extraction Promoting economic development in resource-rich regions Mitigating or preventing violent conflict

10. Global experiences Raising standards of living in resource-rich regions – Australia, Brazil, Canada, UAE, United States Greater peace and security – Indonesia (Aceh and West Papua), Kazakhstan, Mongolia, Nigeria, Papua New Guinea, Southern Iraq

11. Global experiences Wasteful spending – Canada, Colombia, Peru Inefficient allocation of scarce resources / greater regional inequality – Brazil, United States Exacerbate conflict – Iraq (Kurdish region), Peru

12. Biggest challenges Finance not following function – mismatch between revenue and expenditure assignments Non-payment to subnational authorities due to lack of legal clarity, transparency and oversight Lack of consensus building All politics… no economics

13. 1.Insist on clear objectives 2.Keep expenditure responsibilities in mind 3.Choose appropriate fiscal tools and revenue streams 4.Align formula with objectives 5.Smooth fiscal expenditures and make spending predictable 6.Make formula simple and enforceable 7.Build a degree of flexibility into the system 8.Achieve national consensus on the formula 9.Codify the formula in law 10.Make revenue sharing transparent and verify amounts 10 recommendations

14. 1. Clarify objectives Recognizing local claims on natural resources Compensating for the negative impacts from extraction Promoting economic development in resource-rich regions Mitigating or preventing violent conflict

15. 2. Keep expenditure responsibilities in mind

16. What can be fiscally and administratively decentralized? Tax authority Expenditure responsibilities Legislation and regulation Implementation Monitoring and oversight

17. Expenditure responsibilities Defense Foreign affairs Banking Unemployment insurance Air and rail Environment Roads and highways Utilities Health Social welfare Primary and secondary education Police Agriculture

18. Outcomes of “fiscal mismatch”

19. 3. Choose appropriate fiscal tools and revenue streams

20. Which resource taxes are generally decentralized in unitary states? Corporate income tax Royalties Withholding tax VAT Property tax Surface fees

21. Derivation-based intergovernmental transfers

22. Revenue streams – Royalties – Signature bonuses – Profit taxes – Property taxes – Goods and service taxes – Border taxes – Dividends from government equity – Production entitlements – Fines and penalties

23. Revenue streams Onshore only (most countries) Offshore also (Australia, Brazil, Canada, Italy, Malaysia)

24. 4. Align the formula with the objectives

25. How are oil revenues shared in Indonesia? Petroleum Revenue Central Government Treasury Revenue Sharing for Local Governments (15.5% of o.r.) Central Government (84.5% of oil revenue) Producing District (6% + 0.2% to education budget) Province (3% + 0.1% to education budget) Other Districts in the same Province (6% + 0.2% to education budget) Central Government Budget District Treasury

26. Blora and Bojonegoro (Indonesia)

27. Mongolia (oil and mining)

28. Other examples Philippines minimum one percent royalty to indigenous peoples Ecuador – Only to Amazonian region – 40% equally shared; 60% by population Bolivia – 11 percent royalty to four provinces – 1 percent shared between Beni and Pando – IDH – 4 percent to each producing department and 2 percent to non- producing

29. 7. Achieve national consensus

30. 10. Make revenue sharing transparent and verify

31. Transparency and oversight

32. Monitoring volume of production

33. Budget revenue and expenditure 5 years Revenues “Smoothed” expenditures Surplus Deficit Managing Subnational Oil Revenues: Volatility

34. Budget revenue and expenditure 50 years Surplus “Smoothed” expenditures Managing Subnational Oil Revenues: Savings and ‘Parking’

35. Texas Permanent University Fund $17.2 billion Alberta Heritage Savings Trust Fund $16.2 billion Abu Dhabi Investment Authority $773 billion Alaska Permanent Fund $52.4 billion Selected subnational sovereign wealth funds and trust funds

36. Permanent Wyoming Mineral Trust Fund $7 billion Northwest Territories Heritage Fund $0.001 billion Selected subnational sovereign wealth funds and trust funds Raglan Trust $0.015 billion

37. Discussion Questions Are local governments entitled to a portion of oil, gas or mineral revenues? Why or why not? Can resource revenue sharing help mitigate violent conflicts?

38. Thank You! Contact: abauer@resourcegovernance.orgabauer@resourcegovernance.org