Category Archives: Gas

Bolivian Political and Social Landscape: Primer for Pending Presidential Elections

As the presidential campaigns gain momentum, AIN outlines the political and social landscape in Bolivia to provide background to understand upcoming electoral debates.

President Evo Morales is running for a third term in the October 12, 2014 elections.  Critics argue he is not eligible to run for another consecutive term, but the Plurinational Constitutional Tribunal ruled in his favor, and the opposition across the political spectrum lacks a strong, unifying candidate.  Four candidates have formally registered to run against Morales.

Bolivian Government Achievements

  • Macroeconomic success:
    • From 2009 to 2013, Bolivia’s economy experienced steady growth.

1 GDP growth

The population living in extreme poverty fell from 38% in 2005 to 24% in 2011.

2 poverty

  • Bolivia has accrued a significant “rainy day fund.”  According to the New York Times,  “Bolivia has the highest ratio in the world of international reserves to the size of its economy, having recently surpassed China.”
  • Employment rates and wages have both steadily increased under Morales. The minimum wage increased in 2013 from about $145 USD (1,000Bs) to about $174 USD (1,200Bs) a month.
  • Double holiday bonus: In November 2013, President Evo Morales decreed that all employers must pay a double holiday bonus to all employees.  Previously, the bonus was one month’s salary paid in December.  The double holiday bonushad a mixed reception, celebrated by workers, but criticized by many employers and small business owners.
  • Social programs: The Morales administration started several popular cash transfer programs, including benefits to school children and pregnant mothers, which have promoted significant decreases in maternal and infant mortality as well as increases in school attendance and high school graduation.
  • Gas income: The Bolivian government has strengthened the economy by increasing state hydrocarbons revenues as a result of the 2004 hydocarbons law, the 2006 Nationalization Decree, and high gas prices.  This income has permitted significant investment in infrastructure and social programs.

Coca Leaf and Drug Control

  • In 2013, Bolivia successfully petitioned the United Nations to recognize legal coca cultivation and uses within its borders.
  • The Morales administration has achieved sustained reductions in the cultivation of illicit coca leaf using a system of community coca control. (26% reduction from 2010-2013).
  • Unlike previous military forced eradication, this innovative model relies on coca grower participation.  This model guarantees subsistence and enables coca growers to diversify their income, leading to greatly reduced human rights violations.  For more information see this WOLA-AIN memo.

3 eradication
Source: Bolivian Vice-Ministry of Social Defense

  • Bolivia currently has less than half as much coca as Colombia and Peru.  Yet inexpensive and abundant Peruvian cocaine paste base floods through Bolivia to Brazil and other consumer countries, offsetting national control efforts.
  • The Morales’ administration has diligently pursued drug interdiction after the 2009 expulsion of the US Drug Enforcement Agency, reporting significantly increased seizures. However, the great bulk of cocaine sales and profits trafficking occur outside Bolivia’s border, limiting the impact of these initiatives.
  • In spite of tensions, US-Bolivian on-the-ground collaboration on coca reduction continued productively until September 2013, including a trilateral agreement, including Brazil, to improve monitoring technology.

Challenges facing the Morales Administration 

  • TIPNIS issue: In spite of much rhetoric about protecting the rights of Mother Earth, the Morales administration has gone ahead with plans to build a highway through the Amazon, including the TIPNIS, a national park and indigenous territory.
    • This is an enduring point of contention in the country, most notably among lowland indigenous peoples who led two marches to La Paz to protest the lack of prior consultation of TIPNIS resident about the project, which is guaranteed by the 2009 Bolivian constitution.  Both marches, in 2011 and 2012, were met with police repression from the government. The segment of the construction project within the territory is on hold, but may be resumed.  Critics highlighted contradictions with the administration’s pro-indigenous and environmental discourse and its handling of the incident.
  • The lowland indigenous umbrella organization, CIDOB, and its highland counterpart CONAMAQ are both split between factions that support the MAS ruling party and its vocal opponents.
  • Policies of extraction vs. environment: One of the most significant challenges for the MAS administration has been balancing multi-sector demands for basic services financed primarily by extractive industries with its rhetoric of protecting and living in harmony with nature.
    • Bolivia’s economy has always been heavily reliant on extractive industries such as mining and hydrocarbons that have a substantial environmental impact.  Conflicts often arise in mining communities over the benefits of mining income versus the damage to the environment.  In addition, continuing contamination, such as the recent bursting of a damn holding toxic mining tailings in the Chuquisaca department, exacerbates the Morales administration’s inherited legacy of environmental degradations from centuries of mineral exploitation.
  • Violence Against Women: Violence against women and children has always been startlingly prevalent in Bolivia.  In March 2013, the Bolivian Congress passed a comprehensive a law to address these issues, which contained progressive ideas and preventative measures.  However, the government lacks the resources and political will to fully implement the law.  See this AIN update for more information.

4 violence stat

  • Unsafe abortions: This is another concern for women in Bolivia.  Abortions are illegal except in the case of incest, rape, or if the mother’s life is in danger. Pro-choice advocates had a partial victory in a February 2014 constitutional tribunal ruling that upheld the illegality of abortion, but threw out the rule that requires women to get a judge’s consent in the three permitted exceptions.  (See Emily Achtenberg’s article in NACLA for more information on this ruling.)  Lack of access to and information about sexual and reproductive health combined with cultural taboos and widespread sexual violence put women’s health at risk and severely limit their choices.  Although they are illegal, an estimated 60,000 abortions are performed in Bolivia each year, and only 46% of them are performed without complication.  See this AIN update for more information.

5 abortions
Source: La Razón

  • Judicial delay and prison overcrowding: The Bolivian justice system suffers from tremendous judicial delay, resulting in lengthy pretrial detention, as well as severe prison overcrowding.  Only 17% of prisoners in Bolivia are actually serving their sentence, while the other 83% are merely awaiting trial, which could take years.  After prison riot and fire that killed 35 people, Morales a pardon and amnesty decree in September 2013.  However, to date the pardon has benefitted only about 800 people. More comprehensive reforms, including the reduction of disproportionately high drug sentences (drug war prisoners make up almost half of all inmates) need to be enacted.

6 prisoners
Source: La Opinión

  • Legacy of dictatorships: Unlike neighboring Chile and Argentina, which initiated some legal action against those involved, impunity for authors of human rights violations continues in Bolivia.   A group of survivors of the dictatorship have maintained a vigil for more than two years outside the Ministry of Justice, demanding acknowledgment for the crimes of the dictatorship and the declassification of military files from the dictatorship era.  In 2004, the Bolivian government passed a law guaranteeing compensation to victims, but modifications have reduced the initial promised aid to 20%, and only 1,714 of the 8,000 who applied were approved to receive benefits.  See this AIN update for more information, as well as this Amnesty International report and BBC article.

 

7 dictatorship march
Photo: Gonzalo Ordoñez for AIN

Bolivian-US Bilateral Relations

  • A mutual lack of trust is the single largest impediment to improved bilateral relations.  This lack of confidence should be addressed as a prerequisite for reinstatement of ambassadors. In spite of a lack of ambassadors, bilateral relations have varied, depending on the skill of the Chargés and other officials from both nations.
  • A lack of transparency on the part of USAID and credible allegations that the agency was inappropriately aiding lowland opposition led Morales to expel Ambassador Goldberg in 2008.  USAID in Bolivia did not follow international agreements on development. See AIN background.
  • The Morales administration responds positively to genuine diplomatic gestures.  For example, November 2008 meetings with US congressional leaders permitted the sort of frank exchanges that can create rapport and lay the basis for more regular dialogue and better mutual understanding. See WOLA and AIN analysis on bilateral relations.
  • US decisions to “decertify” Bolivian drug control efforts since 2008 are increasingly disconnected from reality. Governments in the region continue to see the US determinations as offensive and politically motivated. More information here.
  • US funding steadily decreased since 2008.  Although the Narcotics Affairs Section, the Drug Enforcement Agency, and USAID are now gone, Bolivia has compensated with funds from its own treasury and increased support from the European Union.
  • Request for extradition of ex-President Gonzalo Sánchez de Lozada: Widespread resentment continues for the US refusal to extradite the ex-president for the death of 69 protestors in October 2003. Although US officials claim the charges are politically motivated, two-thirds of the Bolivian congress, where Sánchez de Lozada’s own coalition had a majority, voted to indict him. The Bolivian government submitted a new extradition request on July 10th, 2014 and the US has promised to respond within sixty days. The US is expected to reject this initiative.
  • US citizen Jacob Ostreicher accused of money laundering:  Although US representatives and Sean Penn have argued for Ostreicher’s innocence, charges against Ostreicher appear credible. He was subject to protracted pre-trial detention in violation of his due process rights, as is every Bolivian arrested on drug charges under drug legislation imposed by the US in 1988.  There was also a great deal of corruption around his case on the part of some Bolivian government officials.  He escaped from Bolivia at the end of 2013 and is considered a fugitive by Interpol.

Conclusion

Recurring protests and strikes from diverse sectors, including transportation workers, university students, and milk and meat producers have characterized the political and social landscape in the past few months.  However, this does not necessarily equate to discontent with the Morales administration.  Rather, many sectors are strategically taking advantage of election momentum to leverage to get demands met.  As one indigenous protester explained, “We’re not the opposition.  We just want the respect of our people and our rights and a solution.”

Although the administration’s performance has been mixed, Morales still enjoys widespread support and his party will most likely retain a majority in both houses of congress.  Furthermore, the opposition on both the left and the right lack a strong, representative, unifying candidate.  It is likely that Bolivian voters will opt for continuing the status quo.

Wright on Bolivian Lithium: Interesting, but Not Quite Right

It’s not the first time a respected, established journalist has presented a selective view of events in Bolivia.  In general, Lawrence Wright’s New Yorker article “Lithium Dreams” covers a great deal of territory, but lacks objectivity and thorough research in some areas.

Some errors are simple and avoidable, such as misspelling Pablo Solón, Bolivian ambassador to the U.N.’s name, or confusing the timeline of key incidents.  Wright claims, “After President George W. Bush placed Bolivia and Venezuela on a blacklist, saying that neither country was doing enough to combat drug trafficking, Morales and Chavez expelled their respective ambassadors.”  Morales actually expelled Ambassador Goldberg and Chávez followed suit on September 11 four days before the U.S. “decertification” of Bolivia’s antinarcotics initiatives.  Both assertions could have been easily verified by fact-checkers.

Other inaccuracies stem from partial truths or unnecessary hyperbole, and tend to gloss over the complex dynamics at play in Bolivia.  For instance, Wright laments that Bolivia did not take advantage of silver production in the sixteenth and seventeenth century – without recognizing the inherent workings of the Spanish colonial system of extraction and exploitation.

The Uyuni town square in the sunshine in December, 2005. Features children playing by a small monument and a beautiful colonial-style building in the background.
Uyuni town square over four years ago. (Jialiang Gao. December 2005.)

Wright’s statement that “before Bolivia can hope to exploit a twenty-first century fuel, it must develop the rudiments of a twentieth-century economy” narrowly evaluates progress from the perspective of the most-developed nations, placing much of the world in this backward category.  He exaggerates to sustain his hypothesis by inaccurately demoting the largest town near the Salar, Uyuni, to “a mud-brick town perched on the perimeter of the salt flat.”  Although Uyuni is no metropolis, the majority of its buildings are not made from adobe.  Furthermore, although road infrastructure and other transit routes need improvement in many areas of Bolivia, there are several roads leading to Uyuni, not just the single-lane dirt road that Wright describes.

Misreading Morales’ “Obsession” and Bolivian Government Initiatives

It is true that the Morales administration has made little progress on lithium extraction and international contracts to exploit it, and it appears unlikely that this will change in the near future.  It remains unclear how this will impact the currently stable Bolivian economy in the long run.  Yet Wright oddly concludes that unless the Morales administration immediately cuts a deal with multinationals or rushes to extract and sell the lithium themselves, all hope is lost:

“[Morales’s] obsession with preventing the Salar from becoming another Cerro Rico may also keep it from ever becoming a source of Bolivian wealth. Until his regime can come to an agreement with a multinational corporation—or figure out on its own how the mine the treasure in the Salar de Uyuni at a competitive global price—its lithium will remain forever stuck in the brine, as will Morales’s dreams of Bolivian batteries and electric cars.”

Although a high level of international interest currently exists, Wright makes it seem like now is the only time to sell the metal.  He also implies President Morales will likely extend his tenure beyond his elected five-year term, describing his presidency as a “regime,” although Morales repeatedly asserts he will not seek reelection after his second term, in accordance with the Bolivian constitution.  Moreover, suggesting that the Salar is Morales’s “obsession” reveals that the author doesn’t understand how overambitious and overextended Morales and the MAS government are, in fact leaving little time for any single-minded focus.

Wright even refutes his own hypotheses.  He argues that Bolivia is a victim of the “resource curse,” stating that “Bolivia has its own chaotic political history, and a long tradition of failing to use its wealth to develop its infrastructure to provide decent training and education for its citizens.” Yet, several paragraphs later he adds that “the average teacher’s salary has risen by forty percent,” and “some of the money from gas revenues has gone to subsidize school lunches, to create a form of social security for the elderly, and to provide incentives for mothers to keep their children in school.” All of these government programs, initiated during Morales’ tenure, reflect an effort to invest resource income to benefit Bolivians.

Missing the Mark on Hydrocarbons

Wright provides a narrow, incomplete assessment of Bolivia’s natural gas industry and the “nationalization” of hydrocarbons:

“The [nationalization] approach, though popular with Morales’s base, is seen by many economists as shortsighted:  the foreign gas companies that developed the Bolivian natural-gas fields, after their discovery in 2000, have experienced dramatic declines in their profit margins, leaving in doubt their future investments in the country.”

There are many problems with this statement.  First, Wright suggests that the Morales administration’s nationalization initiative cut foreign investors profits.  In fact, the majority lost the bulk of their profits as a result of the Hydrocarbons Law implemented in 2005 during the administration of Carlos Mesa, a source quoted repeatedly in the article.  The “nationalization” process primarily consisted of the purchase of a majority of shares from Chaco and Transredes international consortiums and one refinery from Petrobras.  This was an incredibly costly process for Bolivia, but did not affect all international investment.

Of the remaining foreign investors in the Bolivian gas industry, only one, CHLB, reacted negatively to policy changes and is seeking international arbitration.  All others, including BG, Pluspetrol, Petrobras and Total, continue investing in Bolivia with no apparent plans to pull out.[i] Furthermore, although exploration revealed huge additional natural gas deposits in 2000, existing reserves were already being exploited, contrary to Wright’s assertion of their “discovery in 2000.”

Wright presents further half-truths.  He continues, “Bolivia’s neighbors, meanwhile, have turned to more reliable sources of natural gas.”  It is true that Brazil has begun to actively explore offshore options and has reduced the amount of gas purchased from Bolivia, yet in November 2009 the Brazilian ambassador to Bolivia confirmed that his country would continue to purchase 30 million cubic meters a day until 2019, as previously agreed, and stated that it was probable that the contract could be extended.[ii] Although Argentina discovered its own natural gas reserves, the nation plans to renew its existing contract to purchase Bolivian natural gas on March 26.  The new contract stipulates sales to Argentina of 5 million cubic cm per day for the next three years, gradually increasing to 27 cubic cm per day by 2017.[iii] Furthermore, Bolivia recently signed an agreement with Uruguay to buy natural gas, and Paraguay has also expressed interest.  Regional negotiations are about to begin to identify how to best transport gas throughout the region.

Admittedly, along with lower prices, natural gas production has failed to increase.  This delay, paired with flourishing contraband of subsidized gas canisters to neighboring Peru, has led to frequent internal shortages.  A lack of reinvestment in the industry has also dampened production potential.  Yet, Carlos Mesa’s statement cited in the article is inaccurate: “[T]he former Bolivian President, says that gas production has fallen to the point that the country is now importing it.”  In truth, Bolivia imports diesel and sometimes gasoline, but does not import natural gas.  Mesa continues, “’We produce less and less,’ he said, calling the situation a ‘disaster.’” Although restricted production provoked internal shortages, it did not cause significant economic problems.  In fact, according to Reuters in late 2009, “State revenue from the key natural gas sector boomed to $2.65 billion last year, from just over $1 billion in 2005, and revenue from the mining sector increased fourfold in the same period to $128.1 million.”

In spite of difficulties in the hydrocarbons sector, increased revenue and advantageous economic moves in other areas have put Bolivia on comparatively strong overall economic footing.  In January the IMF noted:

“Increased export volumes of gas and mining and the concurrent boom in commodities prices led to a 230 percent increase in export receipts between 2005 and 2008. […] The external and fiscal positions strengthened sharply during the boom years.

Larger export receipts, coupled with higher taxation of the hydrocarbon sector and moderate rates of increase in government spending, led to substantial external current account and fiscal surpluses. […] These surpluses contributed to the build-up of a comfortable reserves buffer, which—added to the debt relief obtained under Multilateral Debt Relief Initiative (MDRI)—turned Bolivia into a net external creditor in 2008.”

However, if we accept Mesa’s claims of “disaster,” it is important to factor in recurring multiple problems related to the Morales administration’s resource management and extraction efforts. These issues include widespread corruption allegations, as well as problems with output and technical capacity in the national hydrocarbons company and the Mutún iron foundry.  In light of these very real challenges, an extremely slow, measured approach by the Bolivian government – whether by design or default – and not the rapid “now or never” action recommended by Wright appears to be the most prudent course.

Mystifying Morales

The middle section of the article, based on conversations with several Bolivian ex-advisors, breaks with the analytical focus of the rest of the piece, and Wright largely bases his assessment on a few sources who are not experts on resource management.  For example, he frequently cites Fernando Molina, claiming the journalist is “one of Bolivia’s best-known intellectuals,” when in fact he does not enjoy that reputation.  Molina presents some questionable analysis, such as oversimplifying and minimized the Aymara world view: “The Aymara see the world as a fight between the forces of good and the forces of evil, like in ‘Star Wars.’”

Wright also attempts to shed light on President Morales’ moral character, describing the leader after accompanying him on an official presidential trip.  Although the author often quotes Morales directly, the rest of his portrayal seems to imply that Morales is alternately quirky and paranoid.  He writes, “Morales, who is fifty, is a creature of his biography.”  Characterizations of an indigenous president merit extra diplomacy, and the following description of Morales’ formation as a leader can be interpreted as objectifying the president as an exotic rarity.

Furthermore, Wright asserts that Morales possesses a “mystical attachment to coca.”  Despite the traditional and spiritual significance of coca, Morales’ primary connection, like that of tens of thousands of Bolivian families, is a pragmatic reliance on the leaf as a source of economic subsistence.  Wright later criticizes Morales’ statement that “social control” to limit coca farming is “vague.” Perhaps this term was unfamiliar to the author, but it is specifically defined and implemented in the Chapare region, where Morales still leads coca growers’ unions.[iv]

Wright seems to use an unfair yardstick to criticize Morales in his presidential persona.  He describes how Morales imposes exaggerated security measures such as sending his luggage on separate flights, and would rather call his own doctor during international travel or use a common Bolivian home remedy for an earache – implying Morales does not trust U.S. doctors.   Comparatively, Barack Obama’s security is a great deal more elaborate, and it is not at all rare for presidents to consult their own physicians while out of the country.

He also claims that Morales “fired” ex-Justice Minister and indigenous union leader Casimira Rodriguez because “She didn’t seem to be learning anything.”  Although Wright is quoting Morales’ former campaign advisor in this instance, he offers no further information to put this comment into perspective.  Rodriguez’s removal from the post did not reflect a lack of ability on her part; she left office at the same time that about a third of the cabinet turned over.  The author does not seem to understand that MAS views these ministerial posts as rotating appointments to be shared by different key constituencies.  Whether or not you agree with this political strategy, the reality fails to support Wright’s hypothesis that Morales’ “nontraditional appointments” demonstrate poor judgment.

Conclusions

If Wright had accurately assessed the numerous impediments Bolivia faces in its attempt to extract lithium and negotiate international contracts, his article could have made a significant impact.  There are no guarantees that lithium exploitation in Bolivia will be successful, but the author oversteps his bounds and overshadows his more salient points by dramatizing the issue and creating a false sense of economic crisis and urgency for lithium exploitation.

Wright’s historical segments on the demand for lithium seem even-toned and balanced. In contrast, the information about Bolivia is dramatic, incomplete and misleading.  Wright’s tone reflects a common problem with outside reporting on Bolivia: journalists often lack the information and input they need to contextualize their hypotheses and affirmations.  In the absence of a solid frame of reference, they tend to exaggerate existing ironies or trivialize the nation’s political dynamics.  Furthermore, Wright, like others before him, relies too heavily on a handful of interviews or “experts,” and as a result, perhaps unintentionally, reflects their biases.


[i] For examples of recent  foreign investment in the hydrocarbons industry: http://www.reuters.com/article/idUSN2638135520091126?feedType=RSS&feedName=everything&virtualBrandChannel=11563, http://www.eldiario.net/noticias/2010/2010_02/nt100210/3_01ecn.php

[ii] http://spanish.peopledaily.com.cn/31617/6800343.html

[iii] http://www.laprensa.com.bo/noticias/230210/noticias.php?nota=23_02_10_nego1.php

[iv] The latest UNODC Coca Cultivation Report points out that, although the social control method faces challenges in some areas of Bolivia, in the Chapare region the cato restriction for coca production is largely observed. For further information on social control in the Chapare, please refer to AIN’s report: “Obama’s Bolivia ATPDEA Decision: Blast from the Past or Wave of the Future?” at http://ain-bolivia.org/2009/08/obama%E2%80%99s-bolivia-atpdea-decision-blast-from-the-pa/#hide.

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.

 

Bolivia’s Gas Nationalization: Opportunity and Challenges

The four memos in this series on Bolivian oil and gas policy and the challenges facing the nation is part of an ongoing project of the Andean Information Network and Erika Weinthal from the Nicholas School of the Environment and Earth Sciences at Duke University examining Bolivia’s efforts to confront the “resource curse.”

Part I: Background on Bolivian Oil and Gas Policy, Current Conflicts, and Challenges
Part II: Political Conflict over Gas and Oil Tax Distribution
Part III.  Increased Gas and Oil Revenues from Nationalization Benefit Various Projects
Part IV.  Accountability and Sustainability

Popular protests in Bolivia demanding greater benefits for the population from the country’s vast natural gas reserves contributed to the resignation of two presidents, the election of President Evo Morales, and the nationalization of the country’s oil and gas industry.  Rather than expropriation, the nationalization consisted of higher taxes on petroleum companies and renegotiated contracts.  As a result of the new policy and high gas prices, the Bolivian government’s income from the country’s oil and gas industry has increased dramatically, nine fold  between 2002 and 2007.

The new funds present an opportunity to Bolivia, the poorest country in South America, to use this income for social and economic development to benefit the population.  But the revenues also present numerous challenges: developing a shared vision for the use of the revenues, determining an equitable distribution of resources, engaging the population and civil society in decision-making, investing resources wisely, and ensuring transparency and accountability – challenges which other resource rich countries have faced and failed.

 

Bolivia’s Gas Nationalization: Opportunity and Challenges (3)

National Level

At the national level, the government spends oil and gas revenues on a program called the Juancito Pinto Stipend that gives about $25 a year to the families of each child enrolled in primary school.  The program aims to encourage school enrollment and defray school supply costs.  In addition, as mentioned earlier in this series, the Bolivian legislature approved a Morales administration proposal on November 27 to spend 30 percent of the direct hydrocarbons tax (IDH) on a Renta Dignidad payment to Bolivian senior citizens.3   Ongoing negotiations between the Morales administration and departmental prefects may modify this measure.

Beyond these two programs, which have been publicized as the fruits of increased oil and gas revenues, it is not clear which other initiatives benefit from these revenues.  The oil and gas revenues go into the general treasury, making it impossible to match programs with funding sources.4

However, one can calculate the share of Bolivian government spending that comes from oil and gas income.  Oil and gas revenues accounted for a sizeable 19 percent of the national budget, according to calculations from the Bolivian government’s 2007 national budget.

The Ministry of Public Works’ new Viviendas Solidarias (Solidarity Housing) program may benefit in part from increased oil and gas funds.  The $600 million program, primarily financed by pre-existing housing fund, provides home construction loans to families who would have difficulty getting loans from a commercial bank.

An analysis by Fundación Jubileo of the 2007 national budget found that 65 percent of the national government’s share of the direct hydrocarbons tax and royalties goes to fund government administration and recurring expenses while only 35 percent goes to investment projects.7   Fundación Jubileo argues that gas revenues should be used for investment in the economy rather than recurring expenses because these resources are non-renewable.  The organization also points out that since gas prices fluctuate and may drop, they are not reliable to cover recurring expenses.

Indigenous Development Fund

A 2005 supreme decree reserves five percent of the IDH for an indigenous development fund.8   To implement this fund, the Bolivian government established a board of directors comprised of three representatives of indigenous organizations from the highlands and three from the lowlands.  Unfortunately, the groups have not been able to reach agreement on the distribution of funds.  The highland indigenous groups, which represent a much larger indigenous population than the lowlands, want the distribution to be based on population size while the lowland indigenous groups suggested the distribution between the highlands and the lowlands be split evenly.9

Departments

The advent of the IDH in 2005 meant that departments that had not previously received any income from the oil and gas sector began to receive large infusions of funds.  Those who had already been receiving funds through royalties saw large increases.  As shown in the graph below, the departments as a whole saw their budgets almost triple in the space of three years.  The second graph shows that oil and gas revenues make up a huge portion of the departmental budgets, 78 percent in fact.10   The departmental governments are highly financially dependent on the national government.  Transfers from the national treasury, including revenues from oil, gas, mining, and forestry, make up 98 percent of the departments’ budgets.11{mosimage} {mosimage}

A Fundación Jubileo report found that the departmental governments are spending 60 percent of oil and gas revenue on recurring expenses and only 40 percent on investment projects.12  Investment projects include constructing roads, assisting small business, and building power plants while recurring expenses are ongoing operating expenses such as salaries.  Fundación Jubileo reports that departmental governments have increased investments in response to its report.13

Given that such a large portion of the departmental budgets come from oil and gas revenues, looking at the overall budgets gives a good sense of how the departments are using these revenues.  The pie chart below shows the spending of all nine departments by category of project.  Road building is the largest expenditure, comprising 45 percent of departmental spending.  Unfortunately, the road construction industry in Bolivia is known to suffer from corruption and contracts sometimes go to those with close ties to the government.14 {mosimage}
While not representative of Bolivian departments as a whole, Santa Cruz provides an example of departmental spending from gas and oil revenues.  The chart below shows the Department of Santa Cruz’s allocation of its receipts from the IDH.

 

Santa Cruz Department Allocation of 2007 Income from the IDH15

 

Bs.

$US

%

Highway Construction

164,661,092

21,219,213

60.8%

Health

29,577,506

3,811,534

10.9%

Investment Projects*

27,185,378

3,503,270

10.0%

Agricultural Research Center (CIAT)

16,791,511

2,163,855

6.2%

Other Health

11,966,391

1,542,061

4.4%

Police

8,492,638

1,094,412

3.1%

Vaccinations

6,743,630

869,024

2.5%

Jails

3,500,000

451,031

1.3%

Departmental Road Construction

1,383,344

178,266

0.5%

Cleaning and Improving Rivers

576,434

74,283

0.2%

Total

270,877,924

34,906,949

100.0%

Assigned Budget

211,267,901

27,225,245

 

Experts note that departmental governments generally lack the administrative capacity to use the massive new infusion of funds to effectively carry out projects.  The Ministry of Finance reports that some $700 million, the equivalent of a year’s worth of the main oil and gas tax, are sitting in departmental, municipal, and university bank accounts.16   In the face of citizen protests that the department was sitting on funds received from oil and gas, the department of Tarija decided to give about $320 to each family, a politically popular move.17   According to the Minister of Planning and Development, the two departments with the largest oil and gas revenues, Tarija and Santa Cruz, have spent the lowest percentage of their 2007 budgets.18  Between January and August, Tarija executed 34.9 percent of its budget while Santa Cruz spent 35.4 percent of its budget.   Tarija and Santa Cruz are the two departments that are the most stridently opposed to the Morales national government and the IDH cuts.  The Morales administration has used the figures of large dollars left unspent by departments as an argument for shifting funding away from the departments and towards municipalities.  While the low percents indicate a lack of administrative capacity, it is dangerous to measure departmental government effectiveness solely by how quickly budgets are spent.

Municipalities

It is much harder to characterize the Bolivia’s municipalities’ spending due to the sheer number of them and a lack of existing analyses.  However, anecdotes can illuminate the type of spending from oil and gas revenues seen at the local level.

For example, the municipality of Caraparí, in Tarija department, sits on top of the largest known gas reserve in Bolivia.  The municipality’s budget for 2007 is a hefty $29 million.  With a population of 12,000, that amounts to $2,400 per capita.19   For comparison purposes, the annual salary of a Bolivian teacher with ten years of service is $3,000.20   Civil society groups, such as the civic committee (similar to a chamber of commerce), the small farmers’ union, ranchers, the women’s center, and others, organized to propose projects to meet the population’s needs.  They succeeded in persuading the local authorities to put in place 80 projects in the 43 communities that make up the municipality.21   Projects include building new bridges and paving roads and opening a health center to combat Chagas disease, a tropical parasitic disease common in the area.  Perhaps the largest project is using gas revenues to install three electricity generating turbines.  Nevertheless, unemployment is a major problem in the municipality, meaning many families continue to live in poverty.

In Santa Cruz municipality, which includes the city of Santa Cruz, oil and gas revenues are being spent on building schools, urban roads and arterials, and water infrastructure projects.  Santa Cruz, like other Bolivian municipalities, uses a participative planning process in which neighborhood level groups propose projects for their neighborhood and the municipal government compiles the requests.  Interestingly, the sum of all of the neighborhood requests is less than the total amount of funds available.  A government official explained that this is because the neighborhood groups are focused on only their immediate context, while it is the larger projects, above the neighborhood scale, that are more expensive.22

In Oruro, the government is using oil and gas revenues to build streets, improve public plazas, assist miners, and plant vegetation to prevent erosion.23   Civil society groups have proposed that the government fund a system to monitor air and water quality – important issues due to the environmental impacts of mining in the area.24

Conclusion

According to the Ministry of Planning and Development, the Bolivian people expect that the increased revenue from oil and gas will be distributed in a way that will benefit the people, generate employment, and change the conditions of inequality and exclusion.25   It is too early to judge whether or not the revenues will be able to meet these lofty goals.  The revenues are currently funding stipends for primary school students and senior citizens as well as road construction and other projects.  It is difficult though, to discern a cohesive plan that could guide the use of revenues to ensure that they are used to best meet the government’s articulated national development goals.  While Bolivia has a National Development Plan, the national government does not have a specific plan for the use of the increased oil and gas revenue, according to government official and nonprofit experts.  Bolivia would benefit from a national debate over how best to use the revenues.  Unfortunately, the debate so far has focused on political wrangling between the national and departmental governments over revenue distribution rather than on how best to use the resources to benefit all Bolivians.

 


1  Republica 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, p2.
2  For an explanation of how these revenues are distributed between the different levels of government, see Andean Information Network, Part II: Political Conflict over Gas and Oil Tax Revenue Distribution, December 4, 2007.3 See Andean Information Network, Part II: Political Conflict over Gas and Oil Tax Revenue Distribution, December 4, 2007.
3  Author interview with Marcelo Martínez Céspedes, Expert in International Commerce and International Relations, Ministry of Planning and Development, October 25, 2007.
4  Budget figures from: Honorable Cámara de Diputados Comisión de Hacienda y Fundación Jubileo, Presupuesto General de la Nación e Inversión Pública, 2007, p15-16.  The direct hydrocarbons tax (IDH) brought in 5,941 million Bs. and the special tax on hydrocarbons (IEDH) brought in 1,489 million Bs.  Royalties from all sources, including mining and forestry as well as oil and gas brought in 3,713 million Bs. of which, according to calculations from Ministry of Hydrocarbons publications, 3,509 million Bs. was from oil and gas.  Oil and gas revenues from the IDH, IEDH, and royalties brought in 19 percent of the national budget.
5  Author interview with Marcelo Martínez Céspedes, Expert in International Commerce and International Relations, Ministry of Planning and Development, October 25, 2007.
6  Fundación Jubileo, Jubileo, January/February 2007, pp6-8, http://www.jubileobolivia.org/pdfs/Revista%20Jubileo%206.pdf
7  Decreto Supremo 28421.
8  Autor interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007.
9  Interview with Elizabeth Lopez, Red Umavida, October 25, 2007.
10  Calculated from base data in graph of departmental budgets by income source.  Graph from Ministerio de la Presidencia, Viceministerio de Descentralización, Propuesta de Regionalización, PowerPoint Presentation, September 2007.  The figure does not include capital income, financing sources such as loans, or transfers from the national government for health, education, and social projects.
11 Ibid.
12 Fundación Jubileo, Jubileo, January/February 2007, pp. 6-8, http://www.jubileobolivia.org/pdfs/Revista%20Jubileo%206.pdf
13 Author interview with René Martínez, Fundación Jubileo, October 25, 2007.
14 Autor interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007.
15 Figures provided during author interview with José Padilla, Asesor de Minería, Hidrocarburos, y Energía, Prefectura de Santa Cruz, October 18, 2007.
16 La Prensa.  “Las movilizaciones por el IDH se extienden por 7 regiones.”  October 26, 2007.
17 Author interview with Jubenal Quispe, Maryknoll, October 23, 2007.
18 Agencia Boliviana de Información.  “Prefecturas de Santa Cruz y Tarija son las que menos ejecutan recursos de inversión pública.”  October 30, 2007.
19 El Deber. “Caraparí Despierta de su eterno letargo.”  November 20, 2006.
20 USA Today.  “Bolivian President Slashes Salary for Public Schools.”  January 28, 2006.
21 El Deber. “Caraparí Despierta de su eterno letargo.”  November 20, 2006.
22 Autor interview with Anibal Jerez Lezana, Director Adjunto, Oficialía Mayor de Administración y Finanzas, Gobierno Municipal Autónomo de Santa Cruz de La Sierra, October 18, 2007.
23 Author interview with Ely Lopez, Red Umavida, October 25, 2007.
24 Ibid.
25 Author interview with Marcelo Martínez Céspedes, Expert in International Commerce and International Relations, Ministry of Planning and Development, October 25, 2007.

 

Fuelling Bolivia’s crisis?

"Sometimes you get to the front of the queue and the diesel has already run out," says Agapito Serviche from his pick-up truck.

"The diesel does not last long enough for a day's work, so I have to stop working and come back to the queue just to put food on the table."

Blame game

Santa Cruz, which is home to large scale commercial agriculture, has been worst hit by Bolivia's chronic diesel shortages, which coincide with the start of the planting season.

In rural Santa Cruz, tensions are worse.

Uncle and nephew, Pascual and Vidal Arellano grow soy and have more than 200 hectares of land near the village of Chane Independencia.

But these days, they spend more time at petrol stations than in the fields.

"Sometimes the whole family has to go out for diesel. One person has to be in one station queuing and another elsewhere," Pascual Arellano says. "I expect to lose 40% of my crop this year."

Those lining up hold President Evo Morales responsible, blaming his policy of nationalising Bolivia's natural gas reserves in 2006 and refineries this year.

Under President Morales, state energy company Yaciemientos Petroliferos Fiscales Bolivianos (YPFB) took over hydrocarbons operations. Private companies were asked to sign new contracts and pay higher taxes and royalties to the state.

"When the multinationals were here, we didn't go without diesel," says Apagato Serviche. "Now they have drawn up new contracts and we are in crisis. Whose fault can it be but the government's?"

Future shortages?

But diesel shortages were on the horizon long before Mr Morales came to power in 2005.

Bolivia has the second largest natural gas reserves in Latin America, but its diesel refining capacity has not met domestic needs for almost two decades.

Consecutive governments have spent more than $100m (£50m) a year on fuel subsidies, making Bolivia's diesel the cheapest in South America.

The subsidy helps people in this country, which is South America's poorest.

But it also gives rise to contraband smuggling, which President Morales blames for the shortages.

Nationalisation may not have caused the diesel crisis, but avoiding future shortages will depend on its success.

Not enough

In the short term, Bolivia is importing diesel from neighbouring countries and Venezuela, and has militarised border petrol stations to stop diesel leaking out through smuggling.

In the long term, Bolivia needs investment in its hydrocarbons sector as a whole, not just to avoid deficits in diesel, but also natural gas.

Growing domestic demand, as well as contracts signed with Argentina, commit Bolivia to doubling its natural gas output by 2011, from 37 million to 76.8 million cubic metres a day.

Critics say Bolivia is destined to fail and incur fines because it is not attracting the investment needed to develop capacity.

"Even though Bolivia has large, proven reserves of natural gas, it is facing an energy crisis," says Hugo del Granado, an industry specialist and former vice president of YPFB.

"It is not a question of transporting the gas," he says. "It is the fact that there is no way of producing the amount needed."

Mr Del Granado points to the decision by Brazil's state energy giant Petrobras to freeze about $2bn in planned investment in the wake of nationalisation, which he says deterred other investors.

Attractive

But while investors have dragged their feet, they have not walked out of Bolivia.

President Morales has given them until this month to produce investment plans or face expulsion.

His rhetoric is uncompromising, but behind the scenes, the hydrocarbons ministry has sought alliances with companies in the United States. Moreover, Petrobras and the Brazilian President, Luiz Inacio Lula da Silva, will visit Bolivia in the coming weeks to discuss supply and investment opportunities.

Patricia Vasquez, an analyst with the consultancy Energy Intelligence, believes investment is on the way.

"For international corporations like Exxon or Chevron, Bolivia is a small percentage of their overall global portfolio, but they are used to the ups and downs and have invested a lot here, so they are willing to take risks," she says.

"Bolivia is attractive because there is a lot of gas, and markets on the doorstep."

Populist outbursts

The objective of nationalisation is poverty reduction – and some argue it is not solely investment rates that should be the key indicator of success.

"In the late 1990s, after privatisation, investment rocketed, but the state made far less money, due to the generous terms offered to companies," says Claire McGuigan from the NGO Christian Aid.

"The government also failed to use revenues to improve the lives of Bolivian people in areas like health and education. On that front, President Morales is doing far better."

Showing that revenues are being put to good use, and that investors are now answerable to the state, form parts of Mr Morales' strategy, in a country where gas is a political football that led to the death of more than 60 gas protesters and the downfall of a president in 2003.

Earlier this month, Mr Morales accused pipeline company Transredes, which is largely owned by the British company Ashmore Energy International Ltd, of conspiring against his government.

His comments came during a ceremony to open a $24.6m pipeline built by Transredes to funnel gas to La Paz, Bolivia's capital. Transredes described the comments as "entirely false" and critics said Mr Morales was generating a hostile environment for investors.

But many see such outbursts as typical of the populist leader, whose goal is to show the Bolivian people that he is prepared to stand up to multinational giants.

If Mr Morales is to quell anxieties over diesel and natural gas in the long term, his challenge, according to Kathryn Ledebur from the Andean Information Network, is to "effectively implement spending plans to use the additional revenue, which has increased ninefold, to better the lives of the Bolivian people.

"If he can use investment to develop the industry, he could generate sustained economic stability in Bolivia for many years to come. "

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
{mosimage}
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.

{mosimage}

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)

{mosimage}

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

{mosimage}

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.
 

 

 

 

Bolivia’s Gas Nationalization: Opportunity and Challenges (1)

Bolivia has a long history of an economy largely driven by exports of primary materials, from silver to tin to oil and gas.  Though it has previously experienced various resource boons, the resulting revenues did not help alleviate poverty.  Bolivia has the second largest reserves of natural gas in South America after Venezuela and exports most of its natural gas to Brazil and Argentina.  A little less than 80 percent of the dollar value of Bolivia’s production from the oil and gas industry comes from natural gas, 20 percent from petroleum, and 1 percent from butane and propane.   Natural gas exportation requires long term contracts with purchasers and significant investment in pipeline infrastructure.

Privatization spurs protests and re-nationalization

State involvement in the petroleum industry has fluctuated drastically, including two previous nationalizations of the industry, in 1937 and again in 1969.  In 1996, President Gonzalo Sanchez de Lozada privatized the oil and gas industry in accordance with dominant neoliberal policies.  The privatization law set the Bolivian government’s share of revenues at 50 percent for existing wells and 18 percent for new wells.  Since new wells represented 94 percent of production,2  this meant that the Bolivian government’s share was much closer to 18 than 50 percent.3   This new structure brought a large amount of foreign investment in exploration, which identified vast additional natural gas reserves.

The discovery of new reserves led to an idea for a project to sell liquid natural gas (LNG) through a port in Chile, which could then be exported to international markets beyond Bolivia’s immediate neighbors.  This proposal to sell gas through Bolivia’s traditional enemy, which had taken Bolivia’s only coastline though war in the late 1800s, angered the population and resentment over a lack of transparency in oil and gas policy grew.  The perception that government policy benefited transnational companies over the Bolivian populace, as well as a myriad of other social and economic conflicts inspired large public protests in September and October 2003.  What is now referred to as the “Gas War” led to the deaths of 67 people and the resignation of President Sánchez de Lozada.  After he fled to the United States, Vice President Carlos Mesa assumed the presidency.

In a July 18, 2004 national referendum on the gas issue, the majority of citizens voted for greater state control in the industry and an increased share of revenues for the state.  Under popular pressure, the national congress passed Law 3058 in May 2005 imposing a new tax on petroleum companies and specifying a greater role for the Bolivian state oil and gas company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB).  However, Mesa hesitated to sign the bill and popular protests then led to his resignation as well.  Both heads of Congress signed the bill, putting the new gas law into effect.  During the term of Interim President Eduardo Rodriguez, supreme decrees established mechanisms to distribute the huge increase in gas revenues.  In the December 2005 presidential elections, Evo Morales, promising to nationalize the oil and gas industry, gained 54 percent of the vote.

On May 1, 2006, three months after his inauguration, President Morales announced the nationalization of the country’s oil and gas industry with Supreme Decree 28701.  The decree would not typically be considered a nationalization by international standards as it did not involve expropriation of assets.  Rather, it consisted of higher taxes, renegotiating contracts with private companies, and rebuilding the state oil and gas company.

The new law retains the 18 percent royalty and adds a 32 percent tax called the Direct Hydrocarbons Tax (Impuesto Directo a los Hidrocarburos, IDH).4   For the largest natural gas fields, those that produce over 100 million cubic feet of gas per day, the decree adds an additional 32 percent tax to benefit the state owned YPFB.  However, this additional 32 percent was only collected during the period while contracts were being negotiated.

The Bolivian government negotiated forty-four contracts with twelve different companies between May and November 2006.  The contracts were then reviewed by the Bolivian congress, approved in April 2007, and entered into effect in May 2007.  Under the new contracts, the remaining 50 percent of revenues, after the royalty and IDH, is then split between YPFB and the private company.  However, YPFB must cover the recoverable costs of the private companies, leaving YPFB with about four percent of revenue, according to experts.6   This means an overall government share of gas and oil income of about 54 percent.

The new law calls for YPFB participation in the entire chain of production and commercialization of oil and gas and the acquisition of majority control, or a 51 percent share, of the privatized petroleum company operations.  The Bolivian government already owned a 48 percent share of operations as part of a fund that was set up to pay a benefit to retired Bolivian senior citizens under the 1996 privatization.  In addition to the three percent share from each company, YPFB also bought back two refineries for $120 million.8

Increase in revenue changes political dynamics

As a result of the new oil and gas policy and high gas prices, the Bolivian government’s income from oil and gas increased from US$173 million in 2002 to an estimated US$1.57 billion in 2007.9   The Bolivian government has expressed a commitment to distribute these resources equitably and spur development to benefit the population.  However, there are multiple, complex factors that impact gas policy and revenue distribution, including the ongoing decentralization process, calls for departmental autonomy, and constitutional assembly deliberations.

The 2005 law governing the use of the main tax on petroleum companies requires that funds be used for education, health, roads, productive development, and projects that contribute to the generation of employment.  Though it does have a National Development Plan, the Bolivian national government has not yet developed a specific plan of how to use the new increased royalties and taxes from the oil and gas sector, according to a government official and non-governmental organization experts.  The national debate over the use of oil and gas revenues has focused on the distribution from the national government to the departmental and municipal governments, as well as to universities and indigenous groups, rather than how best to invest these resources.  The current system of distribution of revenues perpetuates inequities and lacks a clear logic because the distribution was negotiated at a time of political turmoil.10 

Departmental prefects (the equivalent of state governors) were popularly elected for the first time in the 2005 elections.  Previously, prefects were appointed by the central government and historically the departmental governments have merely been weak, implementing arms of the national government.  The country is currently in the process of rewriting its constitution, which will determine the structure of the national and sub-national governments.  A strong autonomy movement seeks to influence the constitution to increase the power and jurisdiction of the departmental governments.  The prefects of six of the nine departments are from parties in opposition to the President, complicating relations.

While the departmental and municipal governments benefit from the majority of the gas revenues, there is a lack of administrative capacity to use the massive new infusion of funds and carry out projects.   The Ministry of Finance reports that some US$700 million, the equivalent of a year’s worth of the main oil and gas tax, are sitting in departmental, municipal, and university bank accounts.  At the departmental and municipal levels, the largest expenditures in revenues from gas and oil are going to road construction.

At the national level, the government is spending oil and gas revenues on a program to provide money to the families of each child enrolled in primary school.  In order to fund a social security program for the elderly, the Morales administration proposed cutting the funds from the main oil and gas tax received by departments and municipalities by 30 percent.  This plan has been met with strong resistance, marches, and protests, but has received widespread support from the elderly.  Beyond these two programs, which have been specifically promoted as benefiting from oil and gas revenues, it is  currently not possible to determine which central government programs are being funded from oil and gas revenues and which from other general treasury sources, according to government officials.

Public participation and the future gas policy

Bolivia’s highly mobilized population, strong unions, and civil society organizations can be an asset in ensuring that funds are spent to the benefit of the population.  Furthermore, the current administration has strong ties with many social movements and has recruited several civil society leaders into top government positions.  However, Bolivia’s weak legislature and a lack of information and analysis available to the public, impedes public participation.  While a participative planning process at the local level channels public input into budget decisions, Bolivia lacks similar participative mechanisms for addressing larger regional and national development issues.  Bolivia’s public participation and government oversight laws are helpful, but gaps remain to fully guarantee accountability and transparency.

Bolivia lost investment opportunities during the time that oil and gas policy was in flux, starting with the protests in 2003 and ending with the new contracts entering into effect in May 2007.  Investment in the sector is currently much lower now than it was prior to 2003.  Even so, large gas reserves and relative economic feasibility of extraction lend a large comparative advantage to the country.  The government should be able to maintain high levels of income from the sector into the near future but will need to act to increase investment in production and exploration so that production is able to meet both internal demand and external demand from signed contracts.  Governments on all levels need to strengthen existing and develop new mechanisms to invest new revenues responsibly in order to have the greatest positive impact on Bolivia’s economy and people.
* AIN researcher Emily Becker contributed to this report.


1. The author wrote this memo as an independent consultant and accepts all responsibility for any errors contained within.
2. Raul Escalera and Roberto Fernández. PowerPoint Presentation on Hydrocarbons Revenue, Centro de Estudios Superiores Universitarios, Universidad Mayor de San Simón (CESU-UMSS). PowerPoint provided during author interview. October 12, 2007.
3. Nations worldwide typically receive closer to 50 percent of revenues.
4. Law 3058, Article 52.
5. República de Bolivia, Ministerio de Hidrocarburos y Energía, Nacionalización en el siglo XXI, May 2007, p189.
6. Autor interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007 and autor interview with Roberto Fernández Terán, Centro de Estudios Superiores Universitarios, Universidad Mayor de San Simón (CESU-UMSS), October 12, 2007.  Recoverable costs may include everything from investment, administration, and production costs to salaries and benefits.
7. In addition, 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.
8. Autor interview with Carlos Arze, Centro de Estudios para el Desarrollo Laboral y Agrario (CEDLA), October 24, 2007.
9. 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, p 2.
10. The main legal document determining the distribution of the funds, Supreme Decree 28421, was developed under an interim president in October 2005, after massive social protests had brought down two presidents.