Transcript Malaysia: Revenue Flow and NOC

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
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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
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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