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In nearly every country, subnational governments receive public funds through a combination of direct tax collection and transfers from the national government. In most, non renewable natural resource revenues are apportioned no differently than other revenues. However, in more than 30 countries—most of them resource-rich—distribution of non renewable natural resource revenues is governed by a set of rules that are distinct from those governing distribution of general revenues. 8 | SEPTEMBER 2016 In a majority of these countries, revenues from the oil, gas and mineral sectors are collected by the national government and transferred back to their area of origin or adjacent areas. Angola, Bolivia, Brazil, Cameroon, Canada (some regions), Chad, China, Colombia, the Democratic Republic of the Congo (DRC), Ecuador, Ethiopia, Ghana, Guinea, India, Indonesia, Iraq, Italy, Kyrgyzstan, Madagascar, Malaysia, Mexico, Mongolia, Niger, Nigeria, Papua New Guinea, Peru, the Philippines, South Sudan, Uganda, the United States (some regions) and Venezuela each have enacted a ‘derivation based’ intergovernmental transfer system for all or part of their mineral, oil or gas revenues. Some resource-rich subnational governments are extremely dependent on these transfers. In Nigeria and Peru, for instance, more than 80 percent of the budgets of some subnational governments depend on resource revenue transfers from the central government. A few countries also transfer some of their natural resource revenues to subnational governments using an ‘indicator-based’ formula. In these countries, the national government distributes natural resource revenues to subnational authorities based on a set of objective indicators—such as population, revenue generation, poverty level or geographic characteristics (e.g. remoteness)—irrespective of where the natural resources are extracted. Ecuador, Mongolia, Mexico and Uganda are examples of countries which use indicator-based resource revenue sharing formulas. In another set of countries—including Argentina, Australia, Canada, China, India, the United Arab Emirates and the United States— subnational governments collect substantial revenues directly from oil, gas or mining companies. Direct tax collection from the natural resource sector can constitute a significant proportion of local budgets. For example, from 2012 to 2014 more than RESOURCE REVENUE SHARING CAN RAISE STANDARDS OF LIVING AND REDUCE POVERTY IN PRODUCING REGIONS. IT CAN ALSO CONTRIBUTE TO LASTING PEACE IN REGIONS SUFFERING FROM RESOURCE RELATED VIOLENCE. Natural Resource Revenue Sharing | 9 25 percent of all fiscal revenues collected in Alberta, Canada came from direct petroleum taxation. In the United States, severance taxes from the oil sector in 2014 constituted 72 percent of total fiscal revenues in Alaska, 54 percent in North Dakota, and 39 percent in Wyoming. These resource revenue sharing systems can raise standards of living and reduce poverty in resource-rich regions, provide additional financing for governments in poor or underserved regions, and compensate affected areas for the social and environmental impacts of exploitation and depletion of natural resources. For example, after years of recession following the collapse of the fisheries, economic prosperity was restored to Newfoundland, Canada in the mid-2000s as a result of an accord that guaranteed the province a large share of the revenues generated from offshore oil. The US state of California levies a volume-based fee on oil and natural gas; this fee is remitted to the Department of Conservation as an environmental compensation payment. Resource revenue sharing can also help address local groups’ special claims on natural resources and contribute to lasting peace in regions suffering from resource-related violence. For example, local ‘rights’ to a share of resource revenues have been codified in constitutions or legislation in Argentina, Colombia, Malaysia and South Sudan. In Indonesia, special resource revenue sharing agreements with the regions of Aceh and West Papua helped end years of violent conflict. At the same time, revenue sharing systems can generate perverse incentives for subnational governments trying to transform natural resource wealth into well-being. Since non renewable natural resource revenues are notoriously volatile—responding sharply and unpredictably to fluctuations in commodity prices—and exhaustible, large transfers or collection of taxes linked to natural resource extraction can exacerbate boom-bust cycles in mineral producing regions, with disastrous consequences for economic growth and development. Studies carried out in Brazil, Colombia and Peru indicated that neither economic growth, nor housing, education or health outcomes improved following the collection of large oil or mineral revenue windfalls by subnational governments. In Brazil, access to piped water, trash collection and connection to sewage networks actually deteriorated as more oil revenues flowed into municipal coffers. Corruption and mismanagement within subnational governments as well as local Dutch disease—which refers to absorption of revenue windfalls through higher prices rather than more projects and services— have been suggested as explanations of these counterintuitive results. Poorly designed revenue sharing regimes can also exacerbate regional inequalities. For instance, the revenue sharing regime in Brazil disproportionately benefits oil-rich Rio de Janeiro, the nation’s third wealthiest state in terms of gross domestic product (GDP) per capita. What is more, poor design of a revenue sharing regime has exacerbated, rather than mitigated, violent conflict in some countries. In Peru, for example, the resource revenue sharing system contributed to violent protests. In an effort to secure additional fiscal transfers from the central government, some local leaders in mining regions aggressively attempted to gain control over municipalities where mines were located. These difficult experiences call for a better understanding of natural resource revenue sharing practices and policies so we can determine which are most likely to succeed. This comprehensive review of international experiences by the Natural Resource Governance Institute (NRGI) and the United Nations Development Programme (UNDP) draws out a number of trends in legal regimes and revenue sharing formulas, and explores which systems have been most effective. Based on this review, we provide 10 recommendations for designing and implementing efficient, fair and stable resource revenue sharing systems.

Natural Resource Revenue Sharing

Resource Key: AUHZXI97

Document Type: Report

Creator:

Author:

  • NRGI & UNDP

Creators Name: {mb_resource_zotero_creatorsname}

Place:

Institution: Natural Resource Governance Institute (NRGI) & United Nations Development Programme (UNDP)

Date: September 2016

Language:

In nearly every country, subnational governments receive public funds through a combination of direct tax collection and transfers from the national government. In most, non renewable natural resource revenues are apportioned no differently than other revenues. However, in more than 30 countries—most of them resource-rich—distribution of non renewable natural resource revenues is governed by a set of rules that are distinct from those governing distribution of general revenues. 8 | SEPTEMBER 2016 In a majority of these countries, revenues from the oil, gas and mineral sectors are collected by the national government and transferred back to their area of origin or adjacent areas. Angola, Bolivia, Brazil, Cameroon, Canada (some regions), Chad, China, Colombia, the Democratic Republic of the Congo (DRC), Ecuador, Ethiopia, Ghana, Guinea, India, Indonesia, Iraq, Italy, Kyrgyzstan, Madagascar, Malaysia, Mexico, Mongolia, Niger, Nigeria, Papua New Guinea, Peru, the Philippines, South Sudan, Uganda, the United States (some regions) and Venezuela each have enacted a ‘derivation based’ intergovernmental transfer system for all or part of their mineral, oil or gas revenues. Some resource-rich subnational governments are extremely dependent on these transfers. In Nigeria and Peru, for instance, more than 80 percent of the budgets of some subnational governments depend on resource revenue transfers from the central government. A few countries also transfer some of their natural resource revenues to subnational governments using an ‘indicator-based’ formula. In these countries, the national government distributes natural resource revenues to subnational authorities based on a set of objective indicators—such as population, revenue generation, poverty level or geographic characteristics (e.g. remoteness)—irrespective of where the natural resources are extracted. Ecuador, Mongolia, Mexico and Uganda are examples of countries which use indicator-based resource revenue sharing formulas. In another set of countries—including Argentina, Australia, Canada, China, India, the United Arab Emirates and the United States— subnational governments collect substantial revenues directly from oil, gas or mining companies. Direct tax collection from the natural resource sector can constitute a significant proportion of local budgets. For example, from 2012 to 2014 more than RESOURCE REVENUE SHARING CAN RAISE STANDARDS OF LIVING AND REDUCE POVERTY IN PRODUCING REGIONS. IT CAN ALSO CONTRIBUTE TO LASTING PEACE IN REGIONS SUFFERING FROM RESOURCE RELATED VIOLENCE. Natural Resource Revenue Sharing | 9 25 percent of all fiscal revenues collected in Alberta, Canada came from direct petroleum taxation. In the United States, severance taxes from the oil sector in 2014 constituted 72 percent of total fiscal revenues in Alaska, 54 percent in North Dakota, and 39 percent in Wyoming. These resource revenue sharing systems can raise standards of living and reduce poverty in resource-rich regions, provide additional financing for governments in poor or underserved regions, and compensate affected areas for the social and environmental impacts of exploitation and depletion of natural resources. For example, after years of recession following the collapse of the fisheries, economic prosperity was restored to Newfoundland, Canada in the mid-2000s as a result of an accord that guaranteed the province a large share of the revenues generated from offshore oil. The US state of California levies a volume-based fee on oil and natural gas; this fee is remitted to the Department of Conservation as an environmental compensation payment. Resource revenue sharing can also help address local groups’ special claims on natural resources and contribute to lasting peace in regions suffering from resource-related violence. For example, local ‘rights’ to a share of resource revenues have been codified in constitutions or legislation in Argentina, Colombia, Malaysia and South Sudan. In Indonesia, special resource revenue sharing agreements with the regions of Aceh and West Papua helped end years of violent conflict. At the same time, revenue sharing systems can generate perverse incentives for subnational governments trying to transform natural resource wealth into well-being. Since non renewable natural resource revenues are notoriously volatile—responding sharply and unpredictably to fluctuations in commodity prices—and exhaustible, large transfers or collection of taxes linked to natural resource extraction can exacerbate boom-bust cycles in mineral producing regions, with disastrous consequences for economic growth and development. Studies carried out in Brazil, Colombia and Peru indicated that neither economic growth, nor housing, education or health outcomes improved following the collection of large oil or mineral revenue windfalls by subnational governments. In Brazil, access to piped water, trash collection and connection to sewage networks actually deteriorated as more oil revenues flowed into municipal coffers. Corruption and mismanagement within subnational governments as well as local Dutch disease—which refers to absorption of revenue windfalls through higher prices rather than more projects and services— have been suggested as explanations of these counterintuitive results. Poorly designed revenue sharing regimes can also exacerbate regional inequalities. For instance, the revenue sharing regime in Brazil disproportionately benefits oil-rich Rio de Janeiro, the nation’s third wealthiest state in terms of gross domestic product (GDP) per capita. What is more, poor design of a revenue sharing regime has exacerbated, rather than mitigated, violent conflict in some countries. In Peru, for example, the resource revenue sharing system contributed to violent protests. In an effort to secure additional fiscal transfers from the central government, some local leaders in mining regions aggressively attempted to gain control over municipalities where mines were located. These difficult experiences call for a better understanding of natural resource revenue sharing practices and policies so we can determine which are most likely to succeed. This comprehensive review of international experiences by the Natural Resource Governance Institute (NRGI) and the United Nations Development Programme (UNDP) draws out a number of trends in legal regimes and revenue sharing formulas, and explores which systems have been most effective. Based on this review, we provide 10 recommendations for designing and implementing efficient, fair and stable resource revenue sharing systems.

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