Bolivia’s Gas Nationalization: Opportunity and Challenges (2)

On November 27, the Bolivian legislature approved the Renta Dignidad, a monthly pension for Bolivians over age sixty, and the redistribution of the IDH to pay for it.  This move significantly reduced departmental revenues, angering opposition governors.  They interpret the measure as Morales’ attempt by President Morales to stem growing departmental power more than as a way to help the elderly.   Administration officials counter that departments receive a disproportionate share of oil and gas revenues and do not invest them responsibly.

This second memo in AIN’s four part series on Bolivian gas policy and nationalization seeks to explain the revenue distribution process and the regional conflicts it exacerbates.

Types of Revenue[5]

The three main types of oil and gas revenue that benefit the Bolivian public sector are each distributed differently among levels of government and geographic areas. 

Revenue destined to the state oil company, YPFB

During the contract renegotiation period, 32 percent of revenues from the largest gas fields went directly to YPFB.  Based on the new contracts, YPFB now receives about four percent of the remaining revenues after reimbursing the private companies for their expenses. 

Royalties

As established by the 2005 law, the 18 percent royalty is comprised of an 11 percent royalty to the producing department, a one percent royalty to the least developed departments of Beni and Pando,[6] and a six percent royalty to the nation’s general treasury.[7]  This distribution of royalties stems from the thirty year-old movement for producing departments to receive the benefits from the natural resources in their territory.  It also follows the precedent of the distribution established under the 1996 privatization.

Direct Hydrocarbons Tax (IDH)

The distribution of the IDH is more complicated.  The 2005 hydrocarbons law, which established the IDH, provides only minimal guidance on its distribution, leaving it to the executive branch to determine the distribution of the rest of the income by supreme decree.[8]

 IDH cuts for pension plan stoke regional animosity

Under the 1996 privatization initiative, a portion of oil and gas company profits went to a special pension fund, called the BonoSol, (Solidarity Bonus), to Bolivians over age sixty-five.  With gas nationalization, dividends received from the private companies for this fund dropped to $20 million, well below the $110 million needed, placing the BonoSol in peril.[9]   In October 2007, the Morales administration proposed cutting the Direct Hydrocarbons Tax (IDH) received by departments, municipalities, and universities in order to pay the BonoSol.  The plan met with resistance from departmental and municipal governments and university students.

The Morales administration then proposed replacing the BonoSol with a Renta Dignidad (Dignity Pension) that would expand eligibility to citizens beginning at age sixty[10] and would increase the amount of the benefit from about $225 to $300 per year (divided in twelve monthly payments), raising the total needed to $215 million per year.  The president proposed financing the pension with a 30 percent cut in IDH funds from the departments, municipalities, universities, and the national treasury and submitted the Renta Dignidad bill to the national congress for approval in mid October.  However, Morales threatened to implement the pension by supreme decree, if the Senate, in which MAS does not have a majority, failed to ratify it.

While politically popular among the elderly and MAS supporters, the initiative encountered strong resistance, marches, and protests in seven of nine departments of the country.[11]  Protestors were careful to state that they are not opposed to the pension plan, but that it should be funded from other sources.  The elderly, supported by social sectors, marched in support of the Renta Dignidad.  Influential unions also came out in favor of the plan.[12]  The sheer number and size of protests, as well as confrontations with police, arrests, injuries, and strong rhetoric, indicate the high regional passion surrounding the issue.

Upping the ante further, the Morales administration passed Supreme Decree 29322 on October 24, increasing the portion of IDH funds to municipalities from 34.5 percent to 67 percent, while decreasing the departmental share from 56.9 percent to 24.4 percent.  Combined with the 30 percent cut to fund the Renta Dignidad, this amounts to more than a 60 percent cut in IDH resources available to the departmental governments.[13]  The 30 percent Renta Dignidad cut to municipal budgets would in effect be offset by the increase in the municipal share of IDH funds, leaving the municipalities no worse off by the pension plan.  Also, Morales dropped the proposal of cutting IDH funds from the universities, leaving the departmental governments with the only reduction in funding.  The Morales administration justified the change in distribution as in line with the decentralization policy that brings decision-making closer to the population.

On November 27, MAS legislators, and a handful of other members of congress, passed laws in the absence of opposition representatives, to approve the Renta Dignidad[14] and the corresponding IDH cuts to the departments, as well as other controversial measures.

Pressured negotiations created illogical IDH distribution
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The fight over the pension plan and IDH cuts is the most recent conflict created by an oil and gas revenue distribution that suffers from inequities and lacks a clear logic.  The interim Rodriguez administration instated the majority of the distribution guidelines at during of political turmoil.  Rodriguez came to power after protests led to President Mesa’s 2005 resignation.  The decisions were made under intense pressure with multiple competing demands. 

An editorial in the Bolivian newspaper, La Prensa, explained: “In the middle of the crisis and a lack of State authority, all of the sectors able to mobilize segments of the population demanded a piece of the pie, which set off a greedy scramble between the departments, municipalities, police, armed forces, and universities.  The result was the consolidation of a totally irrational and inequitable revenue distribution system that amplifies asymmetries and inequalities in the country.”[15]

President Rodriguez promulgated three supreme decrees between June and October 2005, creating a complex and illogical system for distributing the IDH.[16]  The decrees allocate 12.5 percent of the tax to be divvied up among producing departments based on their production and 6.25 percent to each non-producing department.  Under the first decree three of the four oil and gas producing departments received fewer funds than the non-producing departments.  A second decree corrected this situation, granting all departments, except Tarija, equal shares of the revenues.[17]  Tarija receives more revenue because it is the largest producer with 68% of the total dollar value of oil and gas production in Bolivia in 2006.  In terms of production, Tarija is followed by Santa Cruz, at 16%, Cochabamba, at 13%, and Chuquisaca, at 3%.[18]{mosimage}

Municipalities received 34.38 percent of departmental funds, based on population, and 8.62 percent went to public universities.[19]  The decree also destines five percent of departmental taxes to set up a compensation fund in the most populous departments, La Paz, Santa Cruz, and Cochabamba.  This extra income goes to the municipalities within these departments.  Finally, the decree sets aside five percent for an indigenous fund, five percent for an internal national development fund and an amount to be determined annually through the budget process for the armed forces and police.  The remainder flows to the national treasury.[20]

See Appendix I for a chart showing funding to each entity and Appendix II for a map showing the departments and key political data.

Uneven distribution creates disparities

The IDH distribution is not equitable when judged on the basis of departmental production nor on the basis of population size.

As explained above, three of the four producing departments receive the same amount as the non-producing departments.  Each department receives the same amount of IDH funds for its departmental government, regardless of population, with the exception of Tarija, the largest gas producer.  Each department also receives the same amount of IDH funds for all of its municipalities, with the exception of the three most populous departments, which receive slightly more from the compensation fund, and again Tarija.  Municipalities within each department obtain funding based on population.  Thus, municipalities in departments with smaller populations receive more per capita than those in departments with larger populations.

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Therefore, on a per capita basis, revenues vary greatly across the country, as shown in the graph above.  The department of Pando, with a tiny population and no gas production, receives over $1000 per capita in IDH and royalties while Santa Cruz, a populous gas producing department, receives $58 per capita.  Tarija receives nearly 20 times more per capita than does La Paz.  Ironically, the citizens of La Paz department were the most active in protests demanding gas nationalization, but benefit least from the revenues.

More equitable distribution systems have been applied in Bolivia.  For example, population determines how much general tax revenue municipal governments receive. The World Bank’s Highly Indebted Poor Countries (HIPC) program uses a formula to destine additional monies to municipalities with higher numbers of poor people.[21]

In addition to the horizontal disequilibrium between departments, there are also vertical inequalities.  The majority of the IDH goes to the departments and municipalities, while the Bolivian national government retains 29 percent.  The national government continues to run a deficit of $390 million.  Meanwhile the departments and municipalities have not been able to spend all of the oil and gas revenues allocated to them and are have a surplus of $650 million.[22]

This disparity has created impediments for the national government, which bears the bulk of responsibility for public expenditures, including for areas slated to benefit from the IDH, such as education, health, and roads.  For instance, the central government pays teacher and health worker salaries.  There is a great need to increase these extremely low salaries to recruit and retain qualified individuals.[23]

The distribution logically benefits the producing departments for resources extracted from their territory, but it does not assure preferential treatment to the localities where exploitation takes place.  The greatest negative environmental impacts of exploitation occur at the local, rather than departmental, level.

Finally, YPFB receives insufficient funds to develop the company and make future investments.  Under the 1996 law, YPFB received one third of the 18 percent royalty, yet the 2005 law does not dedicate any revenues to YPFB.  The congress that approved the 2005, elected at the same time as Gonzalo Sanchez de Lozada, showed little interest in investing in the state company.[24]  YPFB does receive an estimated four percent of revenue based on contract terms.[25]  However, the percent of oil and gas revenues dedicated to rebuilding YPFB does not match the high expectations for the state company.

The Morales administration faces the political challenge of reforming the illogical and inequitable distribution system it inherited.  Unfortunately, the IDH redistribution instituted by the Morales administration to fund the Renta Dignidad further complicated revenue distribution without addressing fundamental inequities.  In order to stem resistance and clarify IDH distribution, the administration must educate the population about the problems with the current distribution.  A strong, equitable proposal that interlocks with a clear development plan could help the nation realize its vision of gas revenues spurring development.  Finally, the distribution of IDH should be defined under law and approved by congress in order to avoid conflict and ensure more budget certainty for departmental and municipal governments.[26]

 

* AIN researcher Emily Becker contributed to this report.

Appendix I:  Distribution of Oil and Gas Revenue in Bolivia[27]

Comparison of Oil and Gas Income Before and After Nationalization

(In Millions of US Dollars)

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Ley = Law
D.S. = Supreme Decree
PART YPFB = Revenue to State oil and gas company YPFB
IDH = Direct Hydrocarbons Tax
REG Y PART TGN = Royalties and other revenue to the national general treasury

 

 

 

 

 

 

 

 

 

Distribution of Royalties and IDH by Department, 2004 to 2007

(In Millions of US Dollars)

{mosimage}

Regalía y Participaciones TGN = Royalties and other income to the national general treasury
IDH: TGN y Fondo Indígena = Direct Hydrocabons Tax: National General Treasury and Indigenous Fund
YPFB Por DS Nacionalización = Income to YPFB because of Nationalization Supreme Decree

Distribution of Royalties and IDH by Department, 2004 to 2007

(In Millions of US Dollars)

{mosimage}{mosimage}{mosimage}

Regalía Departmental = Departmental Royalty
IDH = Direct Hydrocarbons Tax
Prefectura = Departmental Government
Univ = University
Municipio = Muncipality
Depto = Department

 

Appendix II:  Map of Bolivia and Comparison of Departments

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Map is courtesy of the University of Texas Libraries, The University of Texas at Austin.

Department

Party of Prefect

Passed Autonomy Referendum

% of total population, 2001  [28]

% of oil & gas production, 2006 [29]

% of IDH and Royalties, 2007

Chuquisaca

MAS

No

6%

3%

7%

La Paz

Opposition

No

28%

0%

9%

Cochabamba

Opposition

No

18%

13%

11%

Oruro

MAS

No

5%

0%

6%

Potosi

MAS

No

9%

0%

6%

Tarija

Opposition

Yes

5%

68%

30%

Santa Cruz

Opposition

Yes

25%

16%

15%

Beni

Opposition

Yes

4%

0%

8%

Pando

Opposition

Yes

1%

0%

7%


1. República de Bolivia, Ministerio de Hidrocarburos y Energía, Nacionalización en el siglo XXI, May 2007, p188.
2. Ibid, p249.  Unofficial translation.
3. Author interview with Marcelo Martínez Céspedes, Expert in International Commerce and International Relations, Ministry of Planning and Development, October 25, 2007.
4. Law 3058, Article 57.
5. In addition to the three main types discussed here, consumer taxes such as the value added tax and the Impuesto Especial Directo a los Hidrocarburos (IEDH) also apply.  This report does not focus on the consumer taxes as they did not change with the nationalization.
6. This one percent is split between the departments of Beni (two-thirds) and Pando (one-third).
7. Law 3058, Article 52.
8. Law 3058, Article 57.  The law states that at a minimum, 4 percent of the tax must go to each producing department (Tarija, Santa Cruz, Cochabamba, and Chuquisaca) and 2 percent to each non producing department.  It then provides that the executive branch will determine the distribution of the remainder.
9. La Prensa, October 25, 2007.
10. During the privatization process, the minimum retirement age went up from 55 to 65 at a time when the average life expectancy at birth was around 59.81.  According to the current CIA World Factbook, the average life expectancy in Bolivia is currently 66.19 years. November 15, 2007.
11. La Prensa.  “Las movilizaciones por el IDH se extienden por 7 regiones.”  October 26, 2007.
La  Prensa.  “Marcha Cruceña por IDH acaba con líos, hay mas presiones.”  October 25, 2007
12. La Razón.  “Sindicalistas apoyan el recorte a las 9 prefecturas.” October 31, 2007.
13. ABI. “Renta Dignidad se pagará desde fines de enero de 2008 y se garantiza por 50 años.”November 28, 2007.
14. Ley 3791
15. Gregorio Lanza, “El pecado original del IDH,” La Prensa, October 16, 2007.  Unofficial translation.
16. Supreme Decree 28223 of June 2005, Supreme Decree 28333 of September 2005, and Supreme Decree 28421 of October 2005.  Other legal documents governing the distribution of the direct hydrocarbons tax include Law 3058, Law 3322, Supreme Decree 28701, and Supreme Decree 29322.
17. The first decree stipulates that the largest producer, Tarija, received most of the 12.5 percent destined to producing departments.  Production determined the distribution of the remainder (12.5 percent) to the Santa Cruz, Cochabamba and Chuquisaca. They received far less than the 6.25 percent allocated to each non-producing department.
18. Figures for 2006.  Computed from royalty figures found in:
República de Bolivia Ministerio de Hidrocarburos y Energía, Nueva Política Hidrocarburífera del País: Distribución de I.D.H., Regalías, y Participaciones, La Paz, Bolivia, March 2007, p4-6.
19. Decreto Supreme 28421. The 2007 changes to IDH distribution did not affect the universities’ share.
20. Ibid.
21. Author interview with Diego Cuadros Anaya, Coordinator of Planning, Oversight, and Evaluation, Vice Ministry of Decentralization, Ministry of the Presidency, October 26, 2007.
22. Autor interview with René Martínez, Fundación Jubileo, October 25, 2007.
23. Ibid.
24. Autor interview with Roberto Fernández, Centro de Estudios Superiores Universitarios, Universidad Mayor de San Simon (CESU-UMSS), October 12, 2007.
25. YPFB also received 32 percent of revenues from the largest gas fields while the contracts were under negotiation.
26. Author interview with Jose Padilla, Santa Cruz Departmental government, October 18, 2007.  Author interview with Elizabeth López, Red Umavida, October 25, 2007.
27. República de Bolivia, Ministerio de Hidrocarburos y Energía. Nueva Política Hidrocarburífera del País, Distribución de IDH, Regalías y Participaciones. La Paz, March 2007. Author’s translation.

28. Population data from Instituto Nacional de Estadistica, 2001 Census.
29. Oil and gas production and IDH and royalty figures are from the Ministerio de Hidrocarburos y Energía.