Fiscal Federalism in Iraq: OIL and GAS

1. Fiscal Federalism in Iraq: OIL and GAS

2. The oil situation: a snapshot

3. OIL in the WORLD: a snapshot Oil and Democracy Oil and Economic Growth Oil and Conflict

4. OIL AS A LIMITED COMMODITY…(The “Hubbert Peak”)

5. …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

6. 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?)

7. The complexities of oil OIL PRODUCTION AND INSTITUTIONAL DESIGN

8. 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

9. 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

10. 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)

11. 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

12. The OIL situation in Iraq Management of resources and fiscal instruments

13. More than 95% public revenues in Iraq derive from oil

14. So who is the owner?

15. 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…)

16. 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?

17. 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)

18. 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?

19. 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…

20. 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…)

21. 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…)

22. 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

23. 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

24. 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

25. 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?