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1
Fiscal Federalism in Iraq: OIL and GAS
The oil situation: a snapshot
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OIL in the WORLD: a snapshot
Oil and DemocracyOil and Economic GrowthOil and Conflict
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OIL AS A LIMITED COMMODITY…
(The “Hubbert Peak”)
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…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
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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?)
The complexities of oil
OIL PRODUCTION AND INSTITUTIONAL DESIGN
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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
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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
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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)
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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
The OIL situation in Iraq
Management of resources and fiscal instruments
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More than 95% public revenues in Iraq derive
from oil
So who is the owner?
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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…)
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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?
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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)
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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?
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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…
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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…)
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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…)
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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
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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
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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
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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?