Bolivia’s Gas Nationalization: Opportunities and Challenges (4)

Public Participation, Transparency, and Accountability

Under Bolivia’s 1994 Popular Participation Law, Bolivian citizens are able to participate in decision-making regarding public funds, including oil and gas revenues, at the municipal level.  Under this law, the municipalities use a bottom-up participative planning process to determine the use of public funds.  This is part of Bolivia’s decentralization initiative and efforts to move government decisions closer to the people.  Population groups are divided into Organizaciones Teritoriales de Base (OTBs) at basically a neighborhood level.  The groups then propose projects for spending public funds allotted to their area.  These projects are then grouped into an Annual Operating Plan for each municipality.1

The OTBs for each municipality elect a Comité de Vigilancia (Oversight Committee) that is responsible for approving the plans and overseeing the accounts.  If the Oversight Committee detects wrongdoing, it can request that the Ministry of Finance freeze the account.  This has occurred several times.  Oversight Committees work well in some municipalities.  Unfortunately, some mayors have been able to co-opt the committee by funding a pet project of each member.2  There are also elected municipal councils that provide oversight.3  However, the existing entities do not have prior experience dealing with the larger sums of money now available from oil and gas revenues.  In addition, the process would benefit from broadening its scope to involve traditional civil society groups.4  In sum, the local participative planning, budgeting, and oversight process developed under the Law of Popular Participation has increased citizen participation in decision-making and oversight of local spending, including spending from oil and gas revenues.  Nevertheless, problems persist.

At the departmental level, there is not a mandatory participative planning process, though different departments involve the public in various ways.  For example the Santa Cruz Department’s fifteen provinces each encompass about five municipalities. Each has a provincial council that leads the planning process at that level.  The prefecture then compiles the provincial proposals and develops the plan for the department.

At the national level, the annual budget must be passed by law through congress each year.  However, Bolivia’s legislature is weak and does not provide a strong forum for negotiating between competing political interests.  In addition, during the Mesa administration, the government created a system of directories in each of department and one for the national government to serve as oversight bodies.  However, these directories have not been very functional.5

In terms of transparency, the Bolivian government has provided key information to the public.  The government publishes the funding levels received by each departmental government, municipal government, university, and the national government.  It also publishes the laws and decrees governing the use of funds.  The Vice Ministry of Decentralization has developed an impressive website called the Bolivian Democratic Observatory with detailed budget, spending, and statistical data on each municipality.  The Vice Ministry is also planning to add information on the departments and is working with the Ministry of Planning and Development to build a database related to the National Development Plan.6  The 2005 hydrocarbons law requires government officials to guarantee access to information to individuals and groups that demonstrate an interest.7  However, institutional norms, such as requiring a high level official to approve the sharing of documentation, sometimes impede access to information.8

Bolivia’s 1990 government administration, oversight, and control law (SAFCO) provides improved controls on government spending in order to avoid corruption.  The legislation requires the government to publicly seek and consider at least three bids based on price and quality and prohibits officials from making decisions when there is a conflict of interest.  According to one analyst, the law has decreased corruption in Bolivia.9  Even so, Transparency International ranks Bolivia as 105th out of 179, with a ranking of 1 being the country with the lowest perception of corruption.  Bolivia’s score is 2.9 on a scale of one to ten with ten signifying the highest confidence in low corruption.10  SAFCO has been criticized for making administrative processes extremely bureaucratic, and the government has proposed reforming the law.11

The Role of Civil Society

In addition to the formal processes, Bolivia benefits from a strong and engaged civil society.  Bolivia’s strong civil society has the capacity to mobilize large sectors of society to make demands known and hold the government accountable.  Several prominent civil society leaders have been tapped by the Morales administration for government posts.  This brings fresh ideas and expertise in the government but can diminish the ability of civil society organizations to maintain a critical stance.

Nonetheless, several civil society organizations have recommendations for oil and gas revenue policy.  Multiple organizations advocate the need for long term strategies at all levels of government for the use of the revenues, especially for diversifying the productive sector and making it more dynamic.  Several experts point out that the national and departmental governments should invest more heavily in the productive capacity and small businesses.  Recommendations include spending funds on activating the productive sector and investing in industries such as mining, forestry, natural gas, agriculture, and fishing.  The National Development Plan calls for such productive investment, but is lacking in execution, according to the groups.  Non-profit organizations claim that since the revenues are from non-renewable resources, they should be used for investment rather than operating expenses.  In addition, long term planning is particularly important for those communities most impacted by environmental and resource degradation effects of oil and gas extraction.

One example of social control over government expenditures comes from Cochabamba.  The media and civil society groups heavily criticized the departmental government of Cochabamba for recently purchasing sixty luxurious automobiles for transporting government employees – an expenditure that while falling short of corrupt, may not be the best use of public funds in a country where many citizens live in poverty.  The strong negative reaction will make the department think twice before making future purchases, and led the departmental government to return some of the vehicles.

Sustainability of Revenues

A sustained revenue flow is a prerequisite to Bolivia to productively invest its resources for development.  This requires managing oil and gas policy to ensure continued production and exploration, working closely with private companies to encourage investment, and strengthening YPFB.

In terms of working with the private sector, it is positive that none of the private companies left the country after the nationalization decree.  All chose to stay and renegotiate their contracts to be in line with the new policy, indicating that their profit level is sufficient to keep them operating.  Unfortunately, though, exploration of gas reserves in Bolivia plummeted in 2003 when petroleum companies became nervous about the political climate.12   While the $75 million dollars invested in exploration in 2006 is slightly above the 2005 figure of $46 million, it is well below the $370 million invested in 1998.13  As another indicator of activity in Bolivia, the number of wells perforated in Bolivia decreased from 65 in 1999 to 9 in 2006, comparing negatively with neighbors Brazil (230 wells in 2006) and Venezuela (945 wells in 2006).

Exploration is a high-risk, long-term undertaking that takes about eleven years to begin producing gas.14  At the moment, there are not firm, wide-scale plans for exploration.15  Of the 44 contracts signed between the government and private companies, only seven were for exploration and many of those are in retention.16  In addition, a last minute change to exploration contracts resulted in a disincentive for companies to pursue exploration.  The Bolivian congress added a clause to the contracts stating that once the exploration is conducted, the contract is subject to change.  This makes it difficult for companies to calculate the risk and payback.17  The Bolivian government has sought investment partnerships with other state owned companies such as those of Venezuela, China, and Argentina, but they have not yet been consolidated.  YPFB plans to sign an agreement with Venezuela’s state oil company to conduct exploration in an area north of La Paz.18  Petrobras, Brazil’s oil company and the largest producer of oil and gas in Bolivia, suspended investment after the nationalization announcement but is now considering new investments.19

The Bolivian Minister of Finance predicted in October 2007 that income from royalties and the IDH would decrease 6.16 percent in 2008 due to a slight decrease in production and exportation volumes.20  Bolivia has already had to reduce the amount of gas exported to Argentina and suspend exports to the Brazilian city of Cuiabá because of insufficient production.

Unless it ensures investment in production facilities and exploration, Bolivia may continue to face difficulties in honoring its contracts with Brazil and Argentina as well as satisfying internal demand.  The contract with Argentina comes with a monetary penalty for failure to deliver.  YPFB reports that the investments that petroleum companies have committed to will enable the industry to resolve scarcity problems in 2009.21

According to Bolivia’s association of oil and gas companies, Bolivia lost a large opportunity during the period its gas policy was in flux.  The association claims that Bolivia could have been a large international exporter of liquid natural gas, but instead, is the supplier of last resort to neighboring countries, who are seeking to be less dependent on Bolivia.  The association points out that exporting liquid natural gas through Chile would have allowed Bolivia to reach large and profitable markets in the United States, Mexico, Japan, South Korea, and China.  Instead, Bolivia continues to be dependent on natural gas exports to Brazil and Argentina.22  Others argue that under the existing oil and gas policy, Bolivia would not have benefited significantly from the project to export through Chile compared to other parties.

Nonetheless, Bolivia remains a country with large natural gas reserves that are relatively economical to exploit, positioned in the middle of the large and growing South American market, in an era of high gas prices.  In an announcement in mid September 2007, petroleum companies operating in Bolivia declared that they planned to invest some $568 million in exploration, plant construction, and other activities.23  In addition, Bolivia’s association of oil and gas companies envisions its members investing US$3 billion in the next five years.24  In October 2007 the Minister of Hydrocarbons traveled to the United States. During his visit, he emphasized that international investment is secure in Bolivia and foresees doubling its natural gas production by 2012.25

Challenges

Continuing to rebuilding Bolivia’s state company, YPFB, so that it can successfully assume its new responsibilities will also be a major challenge.  Ten years ago YPFB had 3400 staff members.  By 1999, after privatization, that number had shrunk to 276 staff.26  A Morales administration policy that caps all public salaries at US$ 1,875 per month27 makes it more difficult to recruit top industry professionals on the international market.  The association of oil and gas companies notes that YPFB, not surprisingly, was not ready to assume the new responsibilities created by nationalization and still has a ways to go.  The association also notes that companies need YPFB to approve projects quickly and with minimal bureaucracy to move forward.28

Unfortunately, Bolivia also faces shortages of oil and gas in the domestic market.  Bolivia produces very little diesel and is a net importer.  Agro-business in the eastern lowlands and the transportation sector use diesel extensively.  Bolivia also experiences propane and butane shortages, which families purchase for cooking and heating.  Propane and butane make up only about 7 percent of Bolivia’s natural gas.  Households use the inexpensive, easily transportable propane and butane canisters because most households are not hooked up to a natural gas pipeline.

Propane and butane canisters and diesel are highly subsidized.  According to the government, Bolivia will spend an estimated $180 million on diesel and propane and butane subsidies in 2007.29  The association of oil and gas companies points out that the shortage of canisters is not surprising given that the internal price is fixed at about a quarter of what its neighbors Brazil, Chile, and Peru pay.  This leads to a lack of investment by companies as well as contraband across borders.30  The shortage of propane and butane canisters could be partially addressed by installing natural gas pipelines to reach more Bolivian households.

Assistance to overcome difficulties

The internal market for natural gas is growing.  Approximately 60 percent of Bolivia’s electric production uses natural gas as the fuel.  Bolivia uses hydroelectric power in the rainy season but has been experiencing more droughts and less rain in the past several years, leading to greater reliance on natural gas.  Bolivia may benefit from the experiences of other countries.  Norway, for instance, also has strong state control in its oil and gas industry and extracts significant income from the industry.  Norway’s diplomatic section in Bolivia is working with the Bolivian Ministry of Hydrocarbons to initiate a cooperation and technical assistance program on oil and gas policy through Norway’s “Petroleum for Development” program.31  In Norway, the government uses a portion of petroleum revenues for general spending in the national budget and saves a portion of the revenues for investing abroad.  This allows the government to even out ups and downs in revenues as well as earn interest income.  Norway seeks to keep inflation under control, but has had trouble with government spending leading to inflation in some instances.32

As large increases in government expenditures can lead to inflation, Bolivia will need to use caution to ensure that it’s increased spending from oil and gas revenue does not allow inflation to grow out of control.  Inflation from October 2006 to October 2007 was 11.34 percent over the year.33  This is over three times the rate forecast for 2007 and the highest level of inflation in the past 12 years.34  A report by the Bolivian Central Bank states that the factors responsible for the inflation include an increase in the amount of money circulating, the increase in international net reserves, the depreciation of the dollar, and El Niño weather impacts.35  Consumer products that saw their prices rise more than others include beef, potatoes, rice, and tomatoes36 – important staple foods – putting pressure on Bolivian households.  The price of cement, a key component in housing construction, has risen significantly.

The future is highly unpredictable.  While for the very near future Bolivia is likely to benefit from high gas income, countries may shift away from fossil fuels in the future in response to global climate change and prices may fall, leading to the end of Bolivia’s gas boom.  In any case, Bolivia’s gas resources are finite and non-renewable.  The question then is, in this time of a gas boom, will Bolivia be able to invest the new resources in a way that will position the country and its people in a better way to face the next economy.

Conclusion

The Bolivian government’s nationalization of the oil and gas industry succeeded in bringing the country a much larger share of the revenue generated by the industry.  The nationalization was not dramatic by international standards, involving higher taxes and renegotiation of contracts rather than any expropriation, and all of the oil and gas companies in the country continued operations.  This should be seen as a real achievement.  Now, the Bolivian government faces the formidable challenge of tackling long term planning and investment issues to ensure that the revenue boon benefits the Bolivian people.  Some factors in the country will help in this regard.  These factors include a government that has professed the goal of using the revenues for development, an active civil society, and existing public participation and accountability laws and mechanisms.  Other dynamics present further challenges.  These include reaching agreements with political opponents, navigating an ongoing decentralization process, reforming an inequitable distribution between levels of government and areas of the country, building administrative capacity to execute larger budgets, and confronting corruption.  Bolivia will be a fascinating test case to see if and how this resource rich country will succeed in its worthy goal of using its natural resources to spur development.

 


1 Author interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007
2 Author interview with Diego Cuadros Anaya, Coordinador of Planning, Oversight, and Evaluation, Viceministry of Decentralization, Ministry of the Presidency, October 26, 2007.
3 Ibid.
4 Author interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007
5 Author interview with Diego Cuadros Anaya, Coordinador of Planning, Oversight, and Evaluation, Viceministry of Decentralization, Ministry of the Presidency, October 26, 2007.
6 Ibid.
7 Law 3058, Article 10.
8 Autor interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007
9 Author interview with Jubenal Quispe, Maryknoll, October 23, 2007.
10 Transparency International. “Corruption Perceptions Index. 2007.”  http://www.transparency.org/policy_research/surveys_indices/cpi/2007
11 Agencia Boliviana de Información, “Ejecutivo afirma que es necesario modificar ley Safco por obsoleta,” November 11, 2007.
12 Author interview with Yussef Atli, Camara Boliviana de Hidrocarburos, October 19, 2007.
13 Camara Boliviana de Hidrocarburos.  Petróleo y Gas.  April/May/June 2007, p70.
14 Author interview with Jim Bibb III, Ballyco, October 19, 2007.
15 Author interview with Yussef Atli, Camara Boliviana de Hidrocarburos, October 19, 2007.
16 Ibid.
17 Ibid.
18 La Razón. “YPFB instalará gas natural en 41 mil viviendas de El Alto.”  October 16, 2007.
19 Los Tiempos.  “Petrobras estudia nuevos inversiones en Bolivia y compra de campo de Total.”  October 29, 2007.
20 La Razón, October 23, 2007, A8.
21 Ibid.
22 Cámara Boliviana de Hidrocarburos, Petróleo y Gas, July/August/September 2007, p43.
23 Author interview with Jim Bibb III, Ballyco, October 19, 2007.
24 Cámara Boliviana de Hidrocarburos.  Petróleo y Gas.  April/May/June 2007, p7.
25 Los Tiempos.  “El Ministro de Hidrocarburos se Encuentra en Washington.”  October 20, 2007.
26 Author interview with Jim Bibb III, Ballyco, October 19, 2007.
27 USA Today.  “Bolivian President Slashes Salary for Public Schools.”  January 28, 2006.
28 Author interview with Yussef Atli, Cámara Boliviana de Hidrocarburos, October 19, 2007.
29 La Prensa.  “La subvención al diesel sube US$20 millones.”  October 24, 2007.
30 Cámara Boliviana de Hidrocarburos.  Petróleo y Gas.  April/May/June 2007, p15.
31 Author interview with Hege Fisknes, Counselor and Chief of Mission, Diplomatic Section of Norway, October 26, 2007.
32 Ibid.
33 El Deber, “Santa Cruz es la más inflacionaria: Consumo. El BCB dice que este año la inflación seguirá aumentando y que se cerrará con casi un 10%,” November 2, 2007.
34 Los Tiempos, “La inflación rebasó las previsiones del Gobierno y alcanzó la tasa más alta de los últimos años. Ahora buscan captar la mayor cantidad de circulante de la economía nacional,” November 3, 2007.
35 Ibid.
36 El Deber, “Santa Cruz es la más inflacionaria: Consumo. El BCB dice que este año la inflación seguirá aumentando y que se cerrará con casi un 10%,” November 2, 2007.