Background materials for UN workshop on oil and gas in Iraq Dead Sea Marriott Resort, Jordan (April 4-6, 2006)

1. Module 3
Decentralization of oil and gas revenues
Prepared by David Péloquin
Background materials for
UN workshop on oil and gas in Iraq
Dead Sea Marriott Resort, Jordan
April 4-6, 2006

2. 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

3. 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

4. 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

5. 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

6. Need for equalization / revenue-pooling?
Stylized example of fiscal disparities resulting from oil & gas
New oil & gas
revenues
flowing to
SNGs
Relatively even capacity
to raise revenues
Significantly uneven capacity
to raise revenues
“A” “B” “C” “D”“A” “B” “C” “D”
Without decentralized
oil & gas revenues
With decentralized
oil & gas revenues
6

7. Need for equalization / revenue-pooling?
Some oil & gas producing federations have large fiscal disparities
7
Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countries
before 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
1.385
0.428
7.499
0.913
0.123 0.127 0.087 0.020

8.  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)
Need for equalization / revenue-pooling?
Why worry about fiscal disparities?
8

9.  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)
Need for equalization / revenue-pooling?
Federations have adopted widely differing equalization systems
9

10.  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
Need for equalization / revenue-pooling?
Federations have adopted widely differing equalization systems
10

11. Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanisms
With equalization payments
from national government
“Upward equalization”:
payments funded from
revenues of national
government
“A” “B” “C” “D”
Without
equalization
“A” “B” “C” “D”
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12. “Fraternal equalization”:
high-revenue SNGs
contribute to a “pool”
“Fraternal equalization”:
high-revenue SNGs
contribute to a “pool”
that is distributed to
low-revenue SNGs
Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanisms
With revenue-pooling among
sub-national governments
“A” “B” “C” “D”
Without
equalization
“A” “B” “C” “D”
12

13. Need for equalization / revenue-pooling?
Alternative equalization / revenue-pooling mechanisms
With “downward”
equalization
“A” “B” “C” “D”
Without
equalization
“A” “B” “C” “D”
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“Downward equalization”:
high-revenue SNGs make
transfers to federal government
(or take on certain federal
responsibilities)

14. Need for equalization / revenue-pooling?
Most oil & gas producers aim for only partial equalization
14
Estimated per capita fiscal disparities relating to oil & gas revenue in selected federal countries
after 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
0.895
0.0120.123 n/a

15. Dohuk
Ninevah
SuleimaniyahErbil
Diyala
Salahuddin
Qadisiyah
BabilKarbala
Najaf
Muthanna
Dhi Qar
Misan
Basra
Wasit
Anbar
Legend
Oil 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

16. Dohuk
Ninevah
SuleimaniyahErbil
Diyala
Salahuddin
Qadisiyah
BabilKarbala
Najaf
Muthanna
Dhi Qar
Misan
Basra
Wasit
Anbar
Tam’im
Baghdad
Dohuk
Ninevah
Suleimaniyah
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
Fiscal disparities in a decentralized Iraq?
A stylized illustration of potential fiscal disparities in Iraq
16
4,000 2,690.31Misan
4,000 2,383.45Tam’im
3,000 1,592.65Wasit
4,000 1,455.75Diyala
4,000 1,135.73Basra
3,000 1,050.99Dhi Qar
1,000 932.38Muthanna
3,000 812.93Erbil
1,000 528.40Najaf
1,000 463.91Salahuddin
1,000 231.50Suleimaniyah
1,000 202.12Ninevah
USD millions USD per capita
Resulting oil & gas revenues

17. Fiscal disparities in a decentralized Iraq?
A stylized illustration of potential fiscal disparities in Iraq
17
Resulting per capita oil & gas revenues among governorates (USD thousands)
without equalization / revenue-pooling
0
1
2
3
4
Baghdad
Babil
Anbar
Qadisiyah
Karbala
Dohuk
Ninevah
Suleimaniyah
Salahuddin
Najaf
Erbil
Muthanna
DhiQar
Basra
Diyala
Wasit
Tam’im
Misan

18. 0
1
2
3
4
Baghdad
Babil
Anbar
Qadisiyah
Karbala
Dohuk
Ninevah
Suleimaniyah
Salahuddin
Najaf
Erbil
Muthanna
DhiQar
Basra
Diyala
Wasit
Tam’im
Misan
Fiscal disparities in a decentralized Iraq?
Possible equalization / revenue-pooling options
Post-equalization disparities with all of federal government oil & gas revenues
committed to equalization pool
18
Federal revenues used to
make equalization payments
to less well-off governorates

19. 0
1
2
3
4
Baghdad
Babil
Anbar
Qadisiyah
Karbala
Dohuk
Ninevah
Suleimaniyah
Salahuddin
Najaf
Erbil
Muthanna
DhiQar
Basra
Diyala
Wasit
Tam’im
Misan
0
1
2
3
4
Baghdad
Babil
Anbar
Qadisiyah
Karbala
Dohuk
Ninevah
Suleimaniyah
Salahuddin
Najaf
Erbil
Muthanna
DhiQar
Basra
Diyala
Wasit
Tam’im
Misan
Fiscal disparities in a decentralized Iraq?
Possible equalization / revenue-pooling options
Post-equalization disparities with all of federal government oil & gas revenues
and 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

20. 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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