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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.

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dealing with oil revenues the brazilian experience

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

Disclaimer: The opinions herein expressed do not necessarily reflect the opinions of the Brazilian Senate.
  • Historical Background
  • Institutional framework
  • Revenues
  • Current Use
  • Future Use
  • Conclusions
historical background
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.
institutional framework
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
  • 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
revenues outlook
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
revenues outlook1
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!

revenues outlook2
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
current distribution of revenues
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
current distribution of revenues1
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).
current distribution of revenues2
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%!
current distribution of revenues3
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)
current distribution of revenues4
Current distribution of revenues
  • Poor use of money
    • Municipalities (ample evidence of bad use)
      • Macroplan (2012)
      • Romão (2012)
      • Oliveira (2011)
      • Freitas (2009)
      • Postali (2008)
current distribution of revenues5
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
current distribution of revenues6
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
current distribution of revenues7
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
future distribution of revenues
Future distribution of revenues
  • Higher share of the central government
  • Smaller share to producing municipalities
  • More even distribution
future use of revenues
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
future use of revenues1
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.
future use of revenues2
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.
  • 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
  • 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