”Analyse av den aktuelle politiske og sosio-økonomiske situasjonen i Latin Amerika”

4. Natural resources: Some cross-cutting issues and regional aspects

There are a number of issues regarding the exploitation and management of natural resources which are applicable for most South American countries. In this section we discuss some of these issues in more detail, in addition to providing some regional aspects that may influence the natural resources policy of individual countries.

Decentralisation and formula based distribution of tax income

Decentralisation has become a panacea for economic development in the previously highly centralised countries of Latin America. Regional, departments and local districts control an increasing share of the public funds, e.g. in Bolivia 29% of the total budget is controlled at local level according to World Bank (2005). The general feature of financial system of decentralised expenditures is to use fixed distribution keys to a given tax income source, e.g. oil taxation, rather than regarding the collection of national tax income and its expenditure as two separate issues. The use of fixed keys for how resource rents shall be distributed by region and district without passing through the state budget is probably the result of comprehensive mistrust in the state/central government as a redistributing agency. If underground resources are considered to be more the wealth of the region where it is discovered rather than belonging to the national population as a whole, then “formula” based fiscal decentralisation may threaten the stability and unity of the state. This argument could be illustrated in the Norwegian context by giving a higher share of the “Oilfund” to Rogaland and Hordaland, on top of the positive effect through increased employment and extended effect of the business itself. The regions may even consider possible breaking away from Norway as they become stronger than the rest of the country. This is what is actually happening in Bolivia today. The department of Santa Cruz receives a large portion of the gas tax revenue, and has started to act like an independent region. The oil union strikes in Ecuador were directed towards raising the share of the resource revenue for the producing districts, illustrating the challenge of linking production and benefit of a natural resource to district autonomy, rather than national sovereignty. According to the World Bank (2005) districts in Ecuador only receive two % of resource revenues compared to 40 % in Peru, 48 % in Bolivia and as high as 62 % in Colombia (Table 8).

Preference for gross production taxes

The preferred form of resource taxation is to impose gross production taxation rates, i.e. the state gets a fixed share of produced volumes of gross income rather than a share of the net profits. The main risks with this system relate to private companies. Since private firms do not get entire profits (even in cases when they do cover complete costs), they may leave marginal deposits in the ground; furthermore, search activity may be less that what is optimal for a given country. The advantages of gross production taxes for national governments are many. Public agencies may not possess the necessary knowledge to control and audit production accounts, or may have little confidence in private companies. Another advantage is that the state will be able to cash in at the moment the resources are extracted, while the subtraction from income of depreciated investment capital normally implies waiting several years before money starts coming into the state coffers. Its relative simplicity to enforce is what makes the system of gross production more attractive to national governments.

Integrated gas market

Natural gas might end up being the main source of energy in South America if the countries are able to overcome major coordination problems in infrastructure investments. Bolivia and Venezuela can potentially export large amounts. The proposed 8000 km pipeline system from Venezuela to the Southern Cone with an estimated cost of USD 20 bill. has been ridiculed as Chávez’ private “white elephant” in the press, arguing that beyond 3000 km will it be cheaper to convert gas into LNG and ship it.¹⁶ However, if one changes the perspective from marginal projects to calculate the profitability of an integrated pipeline system for the whole region, the viability might look differently. Such pipeline could supply the energy short regions of North-Eastern Brazil on the way south, and an integrated pipeline system is flexible in transferring volumes according to shifting demands. However, such transport systems and markets are difficult to construct in a piecemeal manner, and the trans-border trust and ability to commit to long term contracts needed to initiate large scale investments are not present in the current situation. Road, water pipelines and other infrastructure can be developed at the same time, and the positive effect of these externalities can represent the factor which tips the project in one direction of the other.

A functioning market could make the gas price competitive with other energy sources, and open for large scale consumption of gas as the “staple” energy source of South America. With abundant resources and no price cartel (OPEC is just oil), the “shadow value” of unused reserves is actually close to zero. This also implies that the resource rent (at least theoretically) should be zero, since any marginal project that covers costs will be realized in a free market economy, and the realised profits will be due to lower transport or extraction costs than the marginal field. The localized consumption of gas is also reflected in large discrepancy between local prices of gas in the world market.¹⁷
Monopolies choke supply

The demand side of the energy market in the region is still in its infancy and the utility companies delivering products to both private consumers and the industry often abuse their position of monopoly to set artificially high prices, thus attracting only the high priced consumer segment. Fagunes (2005) estimates that the price for residential consumers is 6 times higher than the city gate price and the industrial price twice as high. Petrobras nearly dominates all parts of the gas sector in the region, and other companies are reluctant to engage into real competition with this dominant player. Many state companies enjoy similar monopoly positions in the other Latin American countries, this way preventing a functioning market.

Inefficient state companies and foul play

The intention of the deregulation of the energy markets during the structural adjustment period was to increase competition. Free markets with equilibrium prices would imply more investments, higher consumption and economic growth. However, in many cases the state monopoly became a private company monopoly and cartel, leading to inefficient markets and production (as Petrobras above). The “backlash” against free markets has made the reintroduction of state-owned companies with monopoly power more popular. Historically it is well documented that the absence of competition often leads to inefficient solutions. One example is the transformation of PDVSA from a private like company to a loyal state owned company, a process that has affected its production capacity (still below 3000 mill. barrels a day in production).

Furthermore, it seems like both Venezuela and Bolivia understand they need the technological know-how of the multinational companies. This can be observed in their invitation to take part in joint ventures, although keeping control over more than 50 % of the shares. However, state companies risk ending up as a “silent partner”, not contributing in the production, but taking their cut of profits. Such arrangements are hence in reality only a form of taxation, and may be highly inefficient. Another alternative is to let private companies operate on service contracts, i.e. getting paid for specific functions and operations.
Regional trade agreements

Extractable natural resources may not have an immediate effect on regional trade agreements. Commodity prices on oil, minerals, coal etc. are set on the world market and not protected by mayor restrictions. However, natural gas is only flexible if converted to LNG, and it is therefore considered to be a rather fixed point resource, i.e. needed to be consumed close to the source. This implies that trade agreements could play an important role in enhancing contract security in cross-border contracts by setting common institutional standards. However, the US-initiated Free Trades Agreement of the Americas (FTAA) approach seems to be on stand-by, and cooperation under the regional own initiative Mercosur is not very dynamic. Furthermore, the trade initiative by President Chávez for a Bolivarian Alternative for Latin America and the Caribbean (ALBA) has until now only been joined by Bolivia and Cuba. The urgency meeting between presidents Lula, Kirchner, Chávez and Morales in May this year to solve internal issues regarding the Bolivian nationalisation of natural gas confirms the willingness of regional leaders to join forces and cooperate as needed.

Increased world competition for natural resources

Prices on raw materials set new records every day. The price on the mayor raw materials has on average doubled in the two last years.¹⁸ This reflects a harder competition for inputs to industrial production as the world economy grows fast, fuelled by the full scale entry of China and India in the modern market economy. The natural resource based economic boom in Latin America might continue in the future as world growth is expected to continue. Harder competition for products does not only increase market prices, but it also seems to imply a harder competition between multi-national corporations. The entry of companies based in the South disrupts cartel tendencies among Western companies, pressing prices in auctions and open contract bidding. This may have a positive effect and for resource owning countries. A South Korean company is for example part owner of the Camisea project in Peru, while the Chinese state oil company CNOOC has shown considerable interest in the region.

The Chinese government has initiated discussions on more long term bilateral trading contracts with Latin America. China is interested in using Chinese capital stemming from their large trading surplus, into mayor investments in the region in exchange for secured deliveries of raw materials in the future.¹⁹ Such bilateral agreements have not yet materialized, probably due to the political risk in long term contracts but also to unrealistic expectations from both sides, i.e. Latin America regard the Chinese as a source for cheap loans, while the Chinese do not want processed products to be part of the deal. The latter discrepancy is possible to overcome in the future, while the former seem to be a returning problem in South America as illustrated by the nationalisation of the petroleum sector in Bolivia and Venezuela.