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SEMINAR OIL AND GAS REVENUE MANAGEMENT Dodoma , 28th June 2015 Introduction • Cumulative gas discoveries in Tanzania so far stand at 55.08 TCF • Exploration is ongoing and there is likelihood of more discovery • Such discovery is expected to generate substantial revenue to the country • Thus, it is important to ensure optimal collection of the expected revenue and management of the expenditure thereof • If not well managed, such resource revenue may lead into a resource curse instead of blessing Introduction Major challenges in the Industry (Need to be addressed) Revenue from O/G are highly volatile and uncertain due to fluctuations in price and production volume Oil and gas are finite resource (so as the revenue thereof) Windfall revenue may lead to Dutch disease – too much spending, too little saving (inadequate absorption capacity) Rent seeking behavior, theft, embezzlement and corruption; Manage expectations: Many people believe that the discovery of 55.08TCF will bring windfall income TOMORROW. However, there are a lot that need to be done in terms of investment and operationalization of the existing contracts O/G Revenue Management Bill tabled to parliament COUNTRY EXPERIENCE Country Experience • The Oil and Gas Revenue Management Bill has been prepared by considering experiences from several countries and taking into account Tanzania economic environment and characteristics • Experience and studies have shown that: Many resource rich countries (especially in Africa) have not benefited from the resources resource-dependent economies grow more slowly than resource-poor economies Despite the resource endowment, there is still a significant amount of people living below the poverty line with endless civil wars Many countries face a risk of excess government expansion that could lead to boom-bust cycles Countries tend to divert focus from non-resources • Case study countries include: NIGERIA • Oil account for: – 20% of GDP – 95% of foreign exchange earnings – 65% of budgetary revenue • • • • • Despite all that, 60% of the population still lives below poverty line. Corruption, mismanagement of oil reserves and lack of diversification are major concern Before oil discovery, agric was 64% of GDP but now 17.3% Public spending higher than revenue and is irreversible, higher deficit, higher public debt Had an oil Fund BUT discontinued because of the embezzlement BRAZIL • 2015: CEO and five senior directors resigned in connection with the biggest ever corruption scandal in the state oil company – Petrobras • Investigation discovered $8.9bn of suspect payments, bribes and kickbacks to politicians and contractors • The current Brazilian President was the chairman of petrobras while much of the wrongdoing was taking place • Petrobras engaged in many of the construction activities and has suddenly frozen contracts and stopped payments • Consequences: Declining GDP, rising unemployment, mounting inflation, a devalued currency, and forced budget cuts (to the detriment of social services). BOTSWANA • Transformed from poorest country in the world to middle income country • Maintained a sustained economic growth largely attributed to diamond mining that constitutes 33% of GDP; 70-80% of exports; and 95% of government revenues. • WHY? – Good governance and transparency have played a big role in ensuring sustainable economic growth. – The good fiscal discipline has kept government expenditure from growing as fast as government revenues – Unlike other resource-rich African countries, Botswana is neither a highly indebted poor country nor had civil war in the recent years. GHANA • Ghana is a new and upcoming country in to the Petroleum Sector • Petroleum Management Act (2010) • This provide a framework for effective collection, allocation and management of petroleum revenue • Call for the establishment of a Fund at the Bank of Ghana (Petroleum Holding Fund) for reception and disbursement of the petroleum revenue due to the state • The Fund is divided in to two (Stabilization and Heritage Fund) • Withdraw and the use of the Fund should be approved by the parliament • Ghana National Petroleum Company is financed through the budget Ghana: Challenges • The choice of the fiscal rule (price based-revenue rule) has had a great consequence to Ghana economy since oil prices went below the projected price scenarios • Issued infrastructure bond guaranteed by the anticipated oil revenue only to find that the price declined drastically • The law empowers the Minister for Finance to determine the ceiling on the Ghana Stabilization Fund but does not provide guidelines for determining the ceiling(This is discretionary because parliament is unlikely to disapprove) • The law provides that the Government can relax restrictions after 15 years and allow spending on accumulated interest based on approval by a simple majority (This puts growth of the fund in danger) • The proposed Oil and Gas Revenue Management Policy have been developed taking into account challenges faced by Ghana so Tanzania does not experience them once we start commercial production ANGOLA • Oil was first discovered in Angola in 1955 in the onshore Kwanza basin near Luanda. • By 1973, oil had overtaken coffee as Angola’s principal export • All oil mineral rights belong to the state and that the state oil company Sonangol is the sole concessionaire of rights to all exploration and production activities. • The Companies – both foreign and domestic – that want to operate in Angola must, by law, enter into association with Sonangol, which can also participate directly in the oil block, either as an operator or as a partner ANGOLA REVENUE FLOW • Sonangol, being state-owned oil company, is at the centre of the oil industry in Angola. • To win contracts, multinationals must pay signature bonuses and are not publicly disclosed. • Sonangol both administers and regulates the oil industry, which creates a clear conflict of interest. – Sonangol is the concessionaire(the grantor), equity partner and operator in the industry. • As concessionaire, Sonangol signs the contracts and receives a share of the profits from the oil, which are then transferred to the treasury • Sonangol’s current structure is porous, providing potential opportunities for corruption and dubious financial transactions. ANGOLA - CHALLENGES • Angola is the second largest producer of crude oil in sub-Saharan Africa, behind Nigeria BUT one of the most corrupt in the African continent • Despite oil endowment, majority (about 70%) of Angolans live under absolute poverty. • Angolans are under-informed on oil revenue distribution and massive amount of money generated by the extractive industries; and majority of these revenues are illicitly siphoned off • The oil producing provinces of Cabinda and Zaire are not receiving 10% of the oil produced in the provinces as mandated by law • The effects of Dutch Disease are obvious in Angola. Public spending from oil revenues is concentrated on large infrastructure projects, with unclear procurement process • Little funding is going toward social spending and households • The government is doing little to grow the non-oil sector such as agriculture and small and medium enterprises in particular • Sonangol already operates like a sovereign wealth fund by reinvesting oil revenues in domestic and international ventures Malaysia • The Petroleum Development Act (1974) granted PETRONAS ownership and control of the nation’s petroleum resources. • PETRONAS is entrusted with the responsibility of developing and adding value to these resources and is also required to operate commercially and on profits. Key Players • There are three key players in the oil and gas industry in Malaysia and these are: – PETRONAS, the national oil and Gas Company responsible for development of the industry locally and stewardship of the country’s oil and gas resources. ( official PETRONAS website); – The Prime Minister’s Office which receives reports from PETRONAS and is responsible for allocating oil and gas revenue through the annual budget; and – Kumpulan Wang Amanah Negara (KWAN) responsible for storing oil and gas funds allocated for future saving and investment by the Prime Minister. Malaysia: Revenue Flow and NOC • Oil and gas is a significant contributor to government revenue, comprising of more than 40% of federal revenue annually. • PETRONAS provides a substantial source of income for the Malaysian government, with 45% of the government's budget dependent on PETRONAS' dividend. • A substantial amount of revenue from oil and gas goes into subsidizing various petroleum products, primarily petrol, diesel and natural gas. • Some revenue — about RM100 million a year — goes into the National Trust Fund for future savings and investment • The rest of the revenue is primarily spent on development and allocated through the annual budget. Malaysia: Revenue Flow and NOC • Under the Petroleum Development Act 1974, PETRONAS reports only to the Prime Minister but not to the Parliament • As PETRONAS is accountable only to the Prime Minister, its accounts are neither made public nor available to Parliament, rendering the state oil company’s operations extremely unclear • Transparency International has ranked PETRONAS as a lowperforming international oil company and middle-performing national oil company when it comes to revenue transparency issues • This means that PETRONAS discloses relatively little about payments and anti-corruption programmes • Unlike the case in Malaysia, the Tanzanian proposed Oil and Gas Revenue Management Bill is shaped in such a way that the NOC and the proposed revenue management system including the Sovereign Fund to exercise transparency in terms of reporting to public. INDONESIA • • • • • • • • • PERTAMINA (the NOC) owns and operates eight of the country’s nine oil refineries PETARMINA participated on behalf of the Government either through investing themselves or contracting a third party PETARMINA was conducting commercial activities, regulatory roles as well collection of revenue (Royalties, Tax and Government Profit share from the PSC) However, most of the revenue generated were used to increase PERTAMINA'S interests beyond oil and gas production such as steel and construction PERTAMINA incurred a debt of about 10 billion USD due to miss-investment and corruption and could no longer raise capital The Government had to take over the 10 billion debt which almost double the Indonesian’s foreign debt However, the President issued instructions that all revenue should be paid to the Government coffers and National Oil Company (PERTAMINA) receive 3% for operation In 2001, Indonesia separated regulatory role and commercial of the National Oil Company through Oil and Gas Law, 2001 and establish a upstream regulator BP MIGAS in 2002 but dissolved in 2012 due to misconduct and establish SKK MIGAS In 2014, PERTAMINA president and board members resigned in connection to “oil and gas mafia scandal”. The so-called "mafia" is believed to steal vast amounts of money in the trading of crude and oil products. Norway • The Norwegian Government Participate in Petroleum sector directly and indirect through: • State Direct Financial Interest-SDFI through PETORO AS, which is 100 percent state owned; and • STATOIL AS where it owns 67 percent share. • Petoro As, fully state owned limited company manages direct state participation - SDFI on behalf of the government • The direct state participation is an important source of revenue from the sector and account for the largest share of revenue received from the sector by the government • The SDFI arrangement is a field-specific instrument; the share is adapted to the profitability and resource potential of the individual production license at the time when licenses are awarded. • State’s ownership holding in oil production licenses is determined by the Ministry of Petroleum and Energy (MPE) after getting inputs from the Norwegian Petroleum Directorate (NPD) Norway: Revenue Flow • SDFI is funded over the State Budget and the Norwegian Parliament decides the Budget on a yearly basis • Net cash flow (after the companies in a joint venture have recovered their allowed cost) is transferred to the Government Pension Fund – Global • Petoro As is not allowed to spend any part of the revenue from SDFI and is required to keep different accounts for SDFI and the company expenditure/budget account • Every year Petoro As is required to submit their budget to the Ministry of Finance for scrutiny and eventually to the parliament for approval. Norway: Revenue Flow • Statoil ASA is the largest Norwegian oil company • Statoil ASA was initially set up as a State Oil Company in 1972 and 100 percent owned by the Norwegian Government but has undergone through many changes since then • The company was privatized in 2001 and became listed in both Oslo Stock Exchange and the New York Stock Exchange • One of the main reasons to undergo changes was because the company was becoming too powerful and was posing a risk to become a state within a state • However, the Norwegian Government still holds majority of the shares estimated at 67 percent Norway: Revenue Flow All revenue from petroleum sector goes to the government. These revenues include: – Dividends from the 67 percent government shares in Statoil that is paid directly to the government; – Revenues from SDFI that is managed by Petoro AS on behalf of the Government – All tax revenue received from the sector • The Ministry of Finance submits all the revenue from Petroleum sector to the Petroleum Fund. OIL AND GAS REVENUE MANAGEMENT ACT (DRAFT) Key issues • The Act has been prepared to implement key issues in the sector • O/G revenues derived from taxes and non taxes will be collected by TRA and TPDC respectively • Regulator: Assessment and audit of cost recovery and sales to determine taxes, Government Profit share( profit gas/ oil) and royalty • Establishment of the Fund • Oil and Gas Fund • • (Maintained at BoT) Revenue Holding Account Revenue Saving Account • Identify Source of the Fund (Not all O/G revenues, but …) • • • • • Royalties (cash & in kind) Government profit share ( profit gas/oil from all PSAs) Dividends from NOC Corporate Income tax from exploration, development ,production Return on investment • Other sources will be collected and spent consistent with the prevailing structure Oil and Gas Fund Mechanism Designated oil and gas revenues NOC Re-investment Revenue Holding Account THE PARLIAMENT (Budget Process) Consolidated Fund Revenue Saving Account BUDGET DEFICIT (Strategic Investment) Return on Fund’s Investments Key issues…..cont. • Management of the Fund • MOF – Overall management of O/G revenue and expenditure • Bank of Tanzania – Operational manager of the Fund • Portfolio Investment Advisory Board – skilled with specific knowledge • Restriction on the use of revenue of the Fund • Provide credit • As collateral for guarantees • Rent seeking or be the subject of corrupt practices or theft • Oversight and reporting on the Fund FISCAL RULES Fiscal Rules • These are limits imposed on overall government spending of revenue from O& G given their finite and distabilizing nature; • These rules aim at correcting distorted incentives and containing pressure to overspend, particularly in periods of higher oil and gas revenues, so as to ensure fiscal responsibility and debt sustainability • The following rules were considered to be appropriate: – Expenditure growth rules – Set a limit on amount to be spent – Non-resource primary balance rules – This link expenditure to non-oil and gas revenue as resources deplete • In the long run, the choice of fiscal rule will depend on the prevailing situation at the time Fiscal Rules • Objective of Fiscal rules • Financing of the Government Budget – ( by unlocking the economy) • Financing of the NOC • Fiscal stabilization • Saving for future generations Fiscal Rules….cont. • Principle of Fiscal rules a) safeguard of the economy against inherent volatility of the oil and gas revenue; b) presence of uncertainty of the timing and size of the revenue flow; c) adherence to fiscal convergence criterion for the East Africa Monetary Union; d) maintenance of expenditure growth that is consistent with the absorption capacity of the economy; Fiscal Rules….cont. • Principle of Fiscal rules……..cont. e) avoidance of borrowing where government holds financial savings; f) diversification and unlocking of the economy for sustainable development; g) ensuring revenues from collection efforts non-oil and gas sources are not neglected; and h) safeguard interests of future generation through expenditure on alternative investments, including human capital development and financial savings. Fiscal Rules….cont. • Fiscal rule 1: Exclusion of designated oil and gas revenue from the domestic revenue source in estimating fiscal deficit from the year 2016/17 onwards • Designated oil and gas revenue will be treated as part of financing; • maintenance of fiscal deficit excluding designated oil and gas revenue at 3% of the GDP when such revenue attains a level of at least 3 % of the GDP; FISCAL STABILIZATION INCLUDING GAS REVENUE (Volatile) Irreversible expenditure trend 16.00 Thousands Thousands NON RESOURCE 14.00 12.00 18.00 16.00 14.00 12.00 10.00 10.00 8.00 8.00 6.00 6.00 4.00 4.00 2.00 2.00 - 1 1 2 3 4 Domestic Revenue 5 6 7 8 Total Expenditure 9 10 2 3 4 Domestic Revenue Linear (Domestic Revenue) 5 6 7 8 Total Expenditure 9 10 USE NATURAL RESOURCES SUSTAINABLY BEFORE AFTER (Finite resource) Natural Capital 5% Natural Capital 34% Manmade Capital 33% Human Capital 33% Manmade Capital 54% Human Capital 41% Fiscal Rules….cont. • Operation of the Fund with fiscal rule – If revenue is less than 3% of GDP, all will be transferred to the Consolidated Fund for budget financing. – If revenue is greater than 3%, the excess will be transferred to the Revenue Saving Account of the Fund. – At least 60% of such transfer to Consolidated Fund will finance strategic development expenditure. Fiscal rule Cont. • From the projection it shows that if Tanzania does not discover more than 55.08 Tcf, the expected revenue will increase but will not be significant as to dominate government budget. The designated revenue excluding dividends is expected to be less than 3% OF GDP. O/G Revenue (%GDP) Borrowing (%GDP) 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2022/23 2024/25 2026/27 2028/29 2030/31 2032/33 2034/35 2036/37 2038/39 2040/41 2042/43 2044/45 If revenue projection remain the same, based on the fiscal rules, all revenue will be transferred to the consolidated Fund for budget financing. This will reduce donor dependency, and concessional loans and create fiscal buffer. Fiscal rule Cont. • After the depletion of resources, the government will continue to maintain fiscal deficit of 3% of GDP, which is sustainable and consistent with the EAMU. • Fiscal rule 2: maintenance of an orderly and reasonable growth of expenditure – annual growth of recurrent expenditure not exceeding growth of the nominal GDP – total government expenditure in a year not exceeding 40% of the GDP 2044/45 2043/44 2042/43 2041/42 2040/41 2039/40 2038/39 2037/38 2036/37 2035/36 2034/35 2033/34 600,000 500,000 20% 300,000 15% 200,000 10% 100,000 5% 0% % of GDP Development 2032/33 2031/32 2030/31 2029/30 2028/29 2027/28 Recurrent 2026/27 2025/26 2024/25 2023/24 2022/23 2021/22 2020/21 2019/20 2018/19 2017/18 2016/17 2015/16 2014/15 TZS Billion Fiscal rule Cont. Total Exp. to grow gradually but not more than 40% Total Expenditure (%GDP) 35% 30% 400,000 25% NOC Financing • Recurrent expenditure – normal budgetary process • 0.1% of GDP will be ring-fenced annually in the RSA for NOC strategic investment • In the event of special investment needs above 0.1%, money not exceeding 1% of GDP will be drawn from the RSA • All NOC operations and investments has to undergo normal budgetary process and oversight under the supervision of TR and the regulator (PURA) Exceptions and LGA Financing • The rules can be relaxed in the case of: – Occurrence of major disaster or war – Government major strategic investment • LGA to which O/G activities are undertaken will receive service levy and approved by the National Assembly • Fiscal rules will be established to guide expenditure and saving at LGA level FUND OPERATIONALIZATION • To avoid parallel budgets, spending of the O/G Fund shall be confined within the Government budget, (cabinet approval) and shall be incorporated in the MTEF and subjected to appropriation by Parliament. • The Fund shall not be an independent institution rather integrated and managed within the budget process operating as a government account governed by fiscal rules subject to the same oversight and approval process as other public revenues • The proposed system follow the best practice with oil and gas resource such as Norway, Malaysia, and upcoming countries such as Uganda and Ghana but customized to suit Tanzania environment CONCLUSSION AND RECOMMENDATIONS Many countries have established a Fund as a means to manage the revenues from Oil and Gas The Fund is important but not sufficient. what is needed is: Sound public financial management system Transparency Clear and predictable fiscal rule A robust oversight system within the national constitution It is important not to have more than one budgetary system and it is important to maintain one national Treasury, because duplicity will reduce transparency and increase risks of rent seeking CONCLUSION AND RECOMMENDATIONS • We should avoid to by-pass oversight system put in place by the constitution. • All public money must be unified and we should not exclude the oversight role of the parliament, because the people of Tanzania must have a say on their natural resource and they say it through the parliament. • When the resources becomes too big, there is a risk of creating a state within a state • A number of Oil Companies have done very well (Norway, Malaysia), but cases of abuse are also widespread (as seen above for the case of Brazil, Angola and Indonesia). • Therefore, OVERSIGHT is very important