Managing Mineral Wealth in Middle-Income Countries: Some examples from Latin America

1. Managing Mineral Wealth in Middle-Income Countries:Some examples from Latin America Steven Webb World Bank – September 2009 Drawing on case studies by Richard Auty (Trinidad), Simon Cueva (Ecuador), Alberto Diaz (Mexico), Patricio Navia (Chile), and Carlos Toranzo (Bolivia)

2. Country summaries

3. Value-Chain Framework 1. (a) setting up state-owned enterprises (SOEs) and allocating resources to them (b) Awarding contracts to private mineral firms 2. Carrying out extractive operations, regulation of the sector, and state-owned downstream processing 3. Collection of taxes, royalties, and SOE profits 4. Distribution of revenues, within the public sector or to private agents 5. Utilization of resources in public projects and programs

4. 1. Public and Private Mineral Firms • Chile: CODELCO plus private firms, growing since early 1990s and now over two-thirds of output. CODELCO has focused function. • T&T: Petrotrin (state-owned enterprise) as fiscal agents for extraction stage and partners in downstream operations. • Altho’ private foreign firms dominate, there is large state involvement in oil v. gas production. • Mexico: PEMEX has monopoly in all HC. • multiple functions— • oil exploration and production • Importer of oil derivatives and natural gas, gasoline retailer • Social service and local infrastructure • Political pawn and power center. Union as veto player.

5. 2. Public and Private Mineral Firms, cont’d • Ecuador: Petroecuador initially fiscal agent and downstream monopolist. • Taking over operations since 1990s, but lacks technical capacity and since 2003 lacks financing. Output falling. • Private foreign firms did most of the expansion, but are being squeezed out gradually since 1990s. • Bolivia: State firm (YPFB) initially fiscal agent and downstream monopolist. • Private foreign firms did the exploration and expansion, during a neo-liberal phase, but have been squeezed out since 2005. • YPFB lacks technical capacity and financing. Output falling rapidly as wells go out of operation.

6. 2. Sector regulation • Chile: stable regulation, with private participation allowed since the 1970s. Policy stability since democratic transition in 1990 gives investors confidence. private firms have grown. • T&T: stable regulation and contracts, with generous contracts for private firms during the 1990s price slump., which continued into boom times. • Mexico: complex regulation of PEMEX. Politicized management and multiple functions. Politically active mgt. and union. • Ecuador and Bolivia: Regulatory regime has swung widely, in time with the wide swings of government orientation— between quasi-market neo-liberalism and quasi-socialist populism.

7. Taxation, royalties, revenue management -- issues of definition • Multiple functions of SOEs— • What is taxation? What is government expenditure? • Operations as a mineral exploitation firm • State fiscal agent collecting revenues from private firms • Importer of gas and fuel, often sold at a loss • Retail and wholesale marketing –gas stations, etc. • Making profits or losses • Is domestic HC valued at the domestic price or at world price (opportunity cost)? • Provider of social services and local infrastructure • Multiple taxes • Is the VAT or other tax on fuel a tax on the mineral extraction sector, or on consumption?

8. Taxation, royalties, revenue management –actual practices • Chile: Profit taxes on state and private firms – perhaps too low rates. • Structural surplus law designed to keep fiscal policy acyclical over copper and GDP cycles. Law in place governing the use of saved resources. • T&T: low taxation of extraction. Aggregate royalties high, nonetheless. Stabilization fund(s) established during latest boom, with shifting rules. • Mexico: Complex and high effective taxation of PEMEX • PEMEX depends on unsustainable borrowing to finance investment, • Inadequate resources at PEMEX for growth. • No stabilization fund, but fiscal rule uses surpluses to retire debt. • Ecuador: Fiscal position of Petroecuador unclear. • Revenues used off-budget to subsidize gasoline imports. • Unstable, increasingly confiscatory tax regime for private firms. • Series of stabilization funds 2000-08. Now abolished. • Bolivia: Export royalties remain in place. Fiscal position of YPFB as operator is unclear. No stabilization fund.

9. Mineral fiscal revenue as % of GDP

10. 4-5. Distribution of mineral revenues and Use in the public sector • Chile: Steady improvement in multi-year budgeting. • Destination for Saving copper fiscal revenues: • (i) Pension reserve fund (directed toward funding future minimum pensions ) • (ii) Social and Economic Stabilization fund to maintain spending in bad times • (iii) Central Bank recapitalization. • Expansion of social sector programs (health, education, conditional cash transfer scheme for the structurally poor). • T&T: Revenues come into the budget. • Large public investment program to fund infrastructure expansion, education and social programs. • Patronage politics important for personnel and procurement. • Heavy subsidies for domestic fuel consumption. • Transfers and subsidies increased from 9 to 14 percent of GDP from 2002/03 to 2007/08.

11. 4-5. Distribution of mineral revenues and Use in the public sector, cont’d • Mexico: MoF efforts to improve budgeting. • Party politics and strong legislative position of states builds pressure to spend resource revenues • Ecuador: Lack of political consensus on spending rules and party populism fuel pressure to spend, • fuel subsidies, wages and investment all grew during boom • Less growth of investment to support non-oil tradables • Bolivia: mineral revenue boom came to public sector with low capacity • Fiscal rules disburse a large share of mineral revenues to subnational government. Wide inequalities per capita. • New agendas and laws for social development led by community entities– creating expectations without clear rules or institutional capacity, and without amending revenue inequalities.

12. Lessons from LAC • Democracy and Transparency are not enough to assure good outcomes • There is no ONE right mix of public and private firms • Public firms, like PEMEX, can become an independent political force. Private firms may take too much, as in T&T. • Both public and private firms can produce efficiently and send revenue to the state, as in Chile. • Instability of the rules and structure gives the worst outcomes • Mineral firms, public or private, need to have adequate incentive, capacity and resources to invest and manage efficiently. • Over-taxation leads to decapitalizationand underinvestment, “killing the goose”. • Rule-based adjustment of the tax and royalty regime can get the public sector an adequate share of boom revenue. • Multiple veto points in the political system help to assure time-consistency of policy and contracts.