Oil and Gas Royalties: Education versus Patronage? / by Mark Langevin

President Dilma partially vetoed the new oil and gas royalty law approved last month by the Brazilian Congress.  President Dilma’s veto preserves the division of royalties between the federal, state, and municipal governments for those concessions already granted, but attempts to condition the new law’s generous distribution to non-producing states. Dilma’s government proposes a new provision that distributes future royalties from future concessions and production sharing agreements toward educational investments at all levels of government.  President Dilma is expected to issue a special presidential decree that attempts to place this new provision into law.  In addition, the government announced its intention to direct 50% of the Social Fund’s investments toward education.  According to the Minister of Education, Aloizio Mercadante, this proposal seeks to establish a strong legacy of educational investments for future generations.

Accordingly,

“Only education will make Brazil a developed nation.  Education is the key to development, and the pre-sal oil and gas resources serve as the passport to our future. There is no future without investing in the education of our sons and daughters, our grandchildren, and all of the Brazilian people.”

Below is a breakdown of the division of oil and gas royalties given the approved legislation and President Dilma’s partial veto.  Overall, non-producing states and municipalities will increase their shares dramatically.  For non-producing states, royalty portions increase from 8.75% in 2012 to 21% by 2020; and non-producing municipalities will increase their cut from 1.75% to 27% by 2020. Although overall royalty and special windfall payments will continue to climb, they will be spread more thinly over Brazil’s state and local governments while the federal government’s share will fall from 30 to 20% by 2020.

President Dilma’s expected decree will place greater conditionality upon this new distribution of royalties and special payments, compelling state and local governments to increase educational investments rather than spending the oil and gas bonanza on patronage based political projects.

Although there is a movement underway in the Brazilian Congress to over-ride President Dilma’s veto, her efforts to harness the new found oil and gas wealth toward improving educational institutions and outcomes will likely undermine congressional efforts to sidestep her authority. For now, it looks like a showdown between politics is local and the federal government’s efforts to redress the fundamental challenge for Brazilian development; improving education for all Brazilians.

 

Government Jurisdiction 2012  2013* 2013** 2020
Federal Government 30% 30% 20% 20%
Producing States 26,25% 26,25% 20% 20%
Producing Municipalities 26,25% 26,25% 15% 4%
Impacted Municipalities 8,75% 8,75% 3% 2%
Non-Producing States 7% 7% 21% 27%
Non-Producing Municipalities 1,75% 1,75% 21% 27%
*Existing Concessions; ** Future Auctioned Blocks 
Special Participation Payments (Windfall)
  2012 2013* 2013** 2020
Federal Government 50% 50% 43% 46%
Producing State 40% 40% 32% 20%
Producing Municipalities 10% 10% 15% 4%
Non-Producing States 0 0 10% 15%
Non-Producing Municipalities 0 0 10% 15%

 

 

 

 

 

 

 

 

 

 

Source: http://www12.senado.gov.br/noticias/materias/2012/12/03/veto-a-royalties-e-publicado-congresso-aguarda-mp-com-recursos-para-a-educacao