1 Fiscal Federalism in Iraq: OIL and GAS. The oil situation: a snapshot.

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Fiscal Federalism in Iraq: OIL and GAS

The oil situation: a snapshot

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OIL in the WORLD: a snapshot

Oil and DemocracyOil and Economic GrowthOil and Conflict

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OIL AS A LIMITED COMMODITY…

(The “Hubbert Peak”)

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…AS WELL AS HIGHLY PROBLEMATIC

• Environmental effects: Greenhouse gasses…• Security consequences: conflict and oil• Democracy consequences: oil rich countries

have high levels of inequality, no major incentives for income redistribution (the ownership society versus the contributing society; again on the price of citizenship)

• Strong currency problems (exports more difficult)• Corruption

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OIL DEPENDENCE IN THE WORLD

• Only a few countries are energy independent (most recently, Brazil)

• Oil demand is increasing (fast growing economies; China, India)

• No relevant progress in other sources of energy (what happened to the electric car?)

The complexities of oil

OIL PRODUCTION AND INSTITUTIONAL DESIGN

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The uncertainties of the oil market

• Often (public) owners cannot assess the magnitude of potential revenues from oil & gas

• Governments may have limited technical expertise

• Resulting “asymmetry of information” regarding likelihood of finding new deposits, their extent and production lives

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Legislatures / government ministries may play key policy making roles

• Overall resource management– e.g. pace of development

• Security of supply• Structure of oil & gas market

– e.g. domestic, export, distribution, role of state oil companies

• Oil & gas fiscal regimes– including incentives for investment

• Sharing of resulting revenues• Environmental and safety standards

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Institutional framework

• Independent agencies may administer those policies

• State oil companies manage state’s commercial interests (and may also play certain policy and regulatory roles)

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Institutional framework

• Institutions may exist at both federal and regional levels in federal countries with resulting need to:– determine respective roles and

responsibilities

– ensure harmonization and/or coordination

The OIL situation in Iraq

Management of resources and fiscal instruments

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More than 95% public revenues in Iraq derive

from oil

So who is the owner?

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Fiscal Provisions in the Iraqi Constitution

• Article 111: Oil and gas is the property of all the Iraqi people in all the regions and governorates

• THEREFORE:– Equalization of natural resources– Redistribution of revenues (via the taxation

system, excess profit tax, local taxes…)

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ARTICLE 112 (I)

• The federal government, with the producing governorates and regional governments, shall undertake the management of oil and gas…

• …extracted from current fields

– What is the institutional framework?– Current fields versus new fields?

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Institutional framework

• Federal government and producing regions must work together

• Possible institutions:– Joint Commissions (executives from central

government and the regions)– Independent Commissions stated in art. 106

• The participation of the private sector (112.2)

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ARTICLE 112 (II)

• Oil revenues must be distributed “in a fair manner”, AND

• “In proportion to the population distribution in all part of the country”

– Census?

– What distribution mechanisms: Transfers vs tax system?

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Distributing oil through the tax system

• INCOME: – Personal Income Tax– Corporation Income Tax– Estate tax (“Death tax”) –also taxes Wealth-

• WEALTH:– Property taxes

• CONSUMPTION:– Sales taxes– Value Added taxes (VAT)– Excise

• OTHER TAXES: environmental taxes (Carbon Tax), Custom Duties…

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Distributing oil through transfers

• Who designs transfers? Institutional problems

• The need to ensure that transfers are unconditional

• Oil producing regions experience additional costs that should be taken into account (environmental costs…)

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WHAT NOW?

• No Oil and Gas Law yet

• But: PETROLEUM LAW OF THE KURDISTAN REGION (IRAQ 29TH JUNE 2007)

• No clear agreement of how revenues should be distributed

• No other relevant sources of revenue (such as taxes…)

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WHAT NOW?• Oil & gas rents are particularly significant in Iraq:

– world’s third largest reserves of oil (with many parts of Iraq still not fully explored for additional reserves)

– highly favourable geology translates into very low extraction costs and large rents

• Oil and gas rents are also particularly important to Iraq:– oil & gas account for about two-thirds of GDP,

oil & gas generate 98% of public revenues, provide 97% of export earnings

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WHAT NOW?

• Natural resources amount for more than 95 per cent of total Iraq’s revenues

• BUT: they are unevenly distributed• AND: they do not seem to have

contributed to Iraq’s stability in the past

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WHAT NOW?

• There is no political autonomy without financial means

• But, there is no possible solidarity system without ensuring an adequate distribution of natural resources

• Solving their distribution will mean (in the short term) solving Iraq’s financing of the Federation

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Break-out questions

• Do you think in the long run it is better to finance the Iraqi State only with oil revenues? Should taxes play a bigger role in financing the Iraqi State and the (future) regions? If so, what taxes?

• How should Iraq deal with differences in resources and fiscal capacities among its regions?

• How should oil revenues be allocated among oil producing regions, non producing regions, and the center?

• Oil is not just about revenues, but also about management and regulation. How should these be dealt with in practice?