Many national governments in Latin America have been sharing mining and hydrocarbon revenues with subnational authorities for years. In some of these countries, the amount shared is quite significant. But what are the most effective models? New NRGI case studies on Peru and Bolivia systematically analyze the revenue sharing arrangements and point to a few elements for success.
The national governments of Colombia, Bolivia, Peru and Brazil transferred over $79 billion of oil revenues and almost $15 billion of mining revenues to subnational governments between 2007 and 2012, while prices for these commodities soared. The way these countries decentralize significant resource revenues to subnational governments varies considerably. Some of them share royalties, while others share other types of tax revenues. Some transfer revenues only to producing regions, while others also make transfers to non-producing areas.
NRGI has conducted comparative analysis of revenue sharing models for some time; we use it to advise governments, inform debates among civil society organizations, and also in training and capacity building.
Bolivia, a major producer of natural gas, presents a particularly interesting case. The 2005 Hydrocarbons Law establishes two payments hydrocarbon companies must make to the Bolivian state: royalties and a “Direct Tax on Hydrocarbons” (known by its Spanish acronym IDH). A significant portion of both payments is transferred to subnational governments: 44 percent of IDH and 67 percent of royalties go directly to subnational governments. The national government shares revenue through formula-based transfers that prioritize producing areas, but also makes transfers to compensate poorer, non-producing areas.
The system also includes a fund for indigenous peoples, allocations to public universities for research investments, and cash transfers to vulnerable groups such as the elderly, pregnant women and families with children in primary school.
Has this system been effective in improving living conditions locally, increasing investment and public services in these areas? What problems have come up? Would this system work for other countries? These are some of the questions NRGI’s Latin America team has been grappling with during trainings and through its participation in international debates.
In early March, the Externado University in Colombia held a training course in Sincelejo, a small city in the department of Sucre. The training focused on the recently reformed Colombian Royalty System, an institutional framework designed specifically for the management of royalties from oil and mining, which includes transfers to subnational governments. Although the three-day training homed in on Colombia, there were two modules that provided examples from other Latin American countries. This allowed participants to discuss options that could plausibly be applied in Colombia and also identify problems that are common across countries.
In this discussion, Bolivia’s policy of directly distributing a share of gas revenues to vulnerable citizens through cash transfers was up for debate. Would this work for Colombia? Would it be effective in reducing poverty and inequality? Have these benefits been obtained in Bolivia or have funds not reached target populations? All of these questions and concerns were part of a lively debate on new options for Colombia.
The Peruvian case was useful to open up a debate on the current low price context, which has meant a sharp fall in revenues transferred to subnational governments. What can officials do to address this? How can they spend the revenues still available more effectively and on projects that maximize impact on local living standards? Participants at Sincelejo emphasized the importance of planning and prioritizing investment projects that focus on sustainable, productive sectors.
It is still early to say how the discussions will affect debates and related policies in Colombia, but the enthusiasm and rigor that participants brought to the discussions leave me excited about reforms at the local level.
Claudia Viale is a Latin America Officer with NRGI.