Veta, Dilma!
Once again, like child wandering into a particle physics lab, I’m going to walk into a Brazilian issue I don’t know too much about. Apologies in advance.
All over Rio huge signs have been appearing recently. I saw even noticed a huge banner on the Sugarloaf this weekend. Signs like this:
These huge signs are imploring President Dilma to use her presidential veto to block a controversial plan concerned with the distribution of royalties related to the discovery of pré-sal (in English, Pre-salt, a deep layer of salt that suggests huge reserves of high quality oil below).
When they say “huge reserves” of oil, they’re not messing about. Petrobras estimate that there are more 50 billion barrels of oil available – roughly four times Brazil’s current national reserves. That’s kind of a big deal.
So this is good news right? Big oil party for everyone in Brazil? Not quite…
The problem is deciding how the money will be distributed. The oil companies are eagerly waiting to get in and exploit all that delicious oil and will pay huge royalties for the honour of doing so. So the money should go to the government right? So that it can be used to benefit the people of Brazil? Hmmm, it’s not quite as simple as that.
The Brazilian constitution says that the ownership and exploitation of all oil reserves belongs to the federal government. That suggests that the money should go to central government to be distributed evenly among all of Brazil’s states and municipalities.
However, the pré-sal is concentrated along the coasts of the states of São Paulo, Rio de Janeiro and Espírito Santo. Representatives of these states feel that the lion’s share of the oil money should remain with these states. If there is a massive oil spill/leak then these are the states that will suffer. Furthermore, if the money is shared evenly among all Brazil’s states, where is the incentive for the individual states to promote further oil exploration and infrastructure.
You’ve got to get past a lot of ocean water and then drill through kilometres of rock and salt before you get to the black stuff.
Personally I can’t help feeling that if Brazil is a whole country, rather than a loose collection of states, then surely the money should go into a big pot that is shared evenly among the country. And it’s hard to ignore the fact that São Paulo and Rio de Janeiro are easily Brazil’s two richest states.
But then I think about how money is distributed and spent in some of the other states of Brazil. Would I, as a resident of Rio, be happy to think that the money gained from Rio oil is going to line the pockets of the corrupt politicians of Maranhão? It is estimated that if the ‘equal sharing’ plan goes ahead, Rio would lose $4.2 billion in 2013.
The debate is not just on who should receive the ‘pré-sal’ money, but also how it should be spent. The caption says “The petrol that moves the world also has to move education”.
All this wrangling reminds me of the arguments going on in Europe right now – Germans feel aggrieved to be bailing out Greece when the Greek government has been notoriously bad at enforcing basic financial housekeeping such as tax collection. These issues really raise questions of what it means to be a nation or union of states (be they nation states like the EU or federal states like Brazil).
As you can see from that banner, the protest is going on right now. Where do you stand on this issue? Do feel free to fill me in if I’ve neglected to mention something important.
I’m siding with the states on this one. Rio needs that money, especially before the games! And it is in these states where all the work and potential damage will happen…
OK, I’ve got a question: if and when the Belo Monte dam is constructed, where will the royalties go? I doubt that the state of Pará will be the sole or even the primary recipient. I agree that if Rio needs money for the games, that should be a priority, but the money should first go to the Federal government, then be distributed as fairly as possible based on need. After all, there’s no guarantee that Rio’s politicians are any less corrupt than those in other parts of the country.
The comparison with Germany bailing out Greece is a good one, because while the short-term costs of a bailout are annoying, it’s in Germany’s long-term interests for the EU to continue to be viable. This isn’t just about economics, either: the social and political instability that result from economic problems in one region or country are a threat to its neighbors.
I think this money should be divided up equally. Rio is already benefiting greatly from the influx of oil industry workers and their high salaries dropping cash all over town so to ask for a greater percentage just because the oil resides off the coast of the state? What a joke! Have you been to the wasteland known as the nordeste? I got sick in Salvador last year and had to hit up the posto saude…Yeah, it could use a few bucks to spruce the place up a bit. And if there is some sort of oil spill then federal money should pay for it, not Rio.
You can be sure that if a shit ton of oil was discovered in Goias, Rio would be singing a different tune trying to get their hands on it. I can only imagine the bribery that is going on now behind closed doors…
This is a baby that can be split, and make everybody unhappy (which is actually often a sign of good government). Divide the oil royalties, 25% going to fund basic education throughout Brasil, 25% distributed to non oil producing States by the Federal Government (based on population, and with actual rules and oversight on how it is spent) , and the remaining 50% going to ES, RJ and SP to do as they please with. I have never heard anyone from Rio asking for a share of the farming, timber or mining revenues from other States, nor would they ever give them up. But, the oil is a little different, there is enough to share and if directed to such needs as education it can help all Brasilians. Unfortunately, RJ, SP and ES are out numbered in Congress, Dilma has to veto the legislation which has already been passed. She does have line item veto powers, and she wasn’t afraid to use those powers in the recent forestry legislation. It will be interesting.
Tom,
Even though I read your blog periodically, this is the first time I comment. According to the Brazilian constitution, all VAT (ICMS) tax should go to the State where the product was produced or exctracted. The only exception of that rule is oil and Energy. So this was already a big loss to Rio, since Royalty revenue is just a fraction of what the state would receive in ICMS. A Royalty compensation was created to offset the environmental damages for the states and cities where Oil and Energy is produced or exctracted. Now, non-producers States are trying to benefit twice, while all damages from the industry are located only in Rio (google the population growth – mostly poor non-educated new residents – in Macae for the last 15 years for instance, and you would understand better one of those damages I am talking). Just remember that non producers already gain on taxation for all oil consumed within their boundaries – unlike any other product that Rio consummes. In true Federative countries, a discussion like that would never happen. If such thing passes it would damage a lot the Federative character of Brazil republic.
Hi Alexandre,
Normally I try to answer everyone individually, but I don’t feel like I know enough about this subject to really comment on everyone else’s points individually. Today I was just thinking aloud about this issue and I appreciate you giving your input. I’m still not 100% sure how I feel about this. Certainly Mrs Eat Rio (a carioca herself) appears to agree with your point of view and she knows far more about these issues than me!
I guess I’m not really used to this idea of a federal system. For me, the lowest divisible unit is the country (in the UK we have counties, but they’re so small that they’re not really all that important). With a country the size of Brazil, I guess this idea of ‘one nation’ probably doesn’t work so well – every state is so big that it is like a mini-country itself!
“Do feel free to fill me in if I’ve neglected to mention something important.”
I tried out a new Chilli con Carne recipe last night. It was pretty good.
Sorry Gritty, I must have missed that major news headline ;)
I think that it should be evenly distributed. This can make a hugggee difference in ALL Brazilians lives. It could definitely change education and it could definitely improve a lot of things.
I think Rio’s future is already really bright, so it can spread some of the wealth that is destined to come it’s way ;)
And no, I’m not a socialist.
It is a costly endeavor and the state will pay for it. How about a 70:30 split?
wait, it’s only the STATE that pays for the project??? If so, then most of it should go to Rio de Janeiro and whatever other states that are monetarily involved.
Im interested to hear that its not a federal project……Petrobras has it’s hands in this, right?
What a lot of interesting points of view! I started out by saying that I wasn’t very knowledgeable on this subject so it’s been great to hear what you guys think.
Interesting that most (not all) estrangeiros seems to think that the money should be shared. That is my instinctive feeling, but I come from a relatively small country. The furthest distance between two points in Britain isn’t much more than the distance between a couple of adjacent states in Brazil, so maybe I think more in terms of ‘one nation’ than the average Brazilian.
To be honest, I’m not 100% sure how this works in the UK. I know in the 70s we found a lot of gas in the North Sea and certain areas did very well out of it, but I think it mainly went into a central pot to be spread around.
I wrote this without consulting Mrs Eat Rio so I was interested to hear what she thought about this. After reading it she said “I think you’ve been misinformed” (she can be pretty harsh like that sometimes…). She went on to pretty much agree with what Alexandre said – Rio already gives away a huge amount of the oil revenue. What they are arguing against now is giving even more of it away.
I think it’s an interesting question which raises questions about how a nation fits together and how best to share (or not) the earnings from natural resources. I will watch with interest to see how Dilma handles it.
I was watching the news coverage of the protest on the Globo Jornal last night and thinking about the same questions. Here in Minas Gerais there’s far less infrastructure than in the larger cities. It’s like another world, and sometimes the struggle just to get basic items is a huge deterrant to business and growth. As we watched the coverage, we couldn’t help but think that sharing that money with the whole country would do a lot of good. It’s also a very good point that if there is a disaster of some sort the cities/states affected should have extra resources at hand to deal with it. Phil’s point re: Belo Monte is a very good one. If this decision goes in the states’ favor, does Para get a huge windfall? Somehow I suspect that the debate will be different then. I agree that some sort of split is in order with most of the money going to the federal, but a lump staying with the states. One final thought: how many of us actually believe that if the money stays with the states that it will actually go towards environmental protection and/or building infrastructure to abate the effects of a potential disaster?
Hi Malvina (can I persuade you to change your name to Falkland? Ho ho…) – cool blog! I was reading through your 100 Brazilian Dishes this morning. It inspired me to have number 32 (Pão de Mel come doce de leite) for my lunchtime sobremesa today – yum! :)
Belo Monte is an interesting case isn’t it? If I understood Alexandre’s comment correctly, I think the money from Belo Monte would also get shared among the states as it would count as Energy and therefore exempt. But once again, I wonder if that’s really fair, considering all the damage that would be done in Pará.
Some form of split seems like a good idea, but I guess the problem is agreeing how to cut the cake.
If a disaster occurs then a federal emergency may be called and enacted thus enabling the government to direct federal funds to that situation. This already happens so I don’t see how this line of argumentation forwards claims by the “oil states”. The thing here is that Petrobras is still mostly state owned, so all Brazilians must pay for said company to extract oil from those fields. I have a proposal: not a penny of federal money may be allocated to Petrobras and all state owned shares will be offered to the Goverments of Rio, SP, and Espirito Santo at a MARKET PRICE. If they can’t afford to buy those shares and then develop those fields on their own then a divide, by way of each state’s individual transfers to the federal governemnt will be the guideline: if after taxes a state contributes 20% of federal revenue then said state get’s 20% of the oil royalties. I think this is very reasonable. I would add that the federal goverment not keep a penny of oil revenue, and in exchange transfer all responsibilities to each individual state ( Health, all Infrastructure including Roads and Airports, Education, and so forth). Only defense and a national emergency fund would remain in federal hands.
LOL at the Malvina/Falkland observation.
I think that will be more a political decision than technical, because we have lots of problems and distortions.
The royalties serve as a compensation for potential environmental and social damages and to ensure correct urbanization and infrastructure investiments to accommodate the new population and companies. But the
brazilian reality (before pré-sal) is that there is an unbalance between the cities that earn royalties and the ones that actually suffer the real impacts from the exploration. So there are many cities that receive free money just because they are the closest to the exploration sites.
With pré-sal, the exploration sites are very far from the continent (around 300 kilometers), so it’s difficult to have an eventual directly in an state or city.
The current share rules generate a big concentration of money in a few cities. Campos de Goytacazes receive almost 25% of all money owed to cities. In fact, what is seen in Brazil is that the Royalties attract more people to the city and not the opposite. Usually, the small and medium cities that receive royalties in Brazil have low HDI.
The lack of ICMS (IVA) at the origin should be taken in account to calculate the royalties correctly, but I’m afraid the royalties are not just a fraction of the non collected ICMS.
It’s a shame all the discussion is about who will earn and how many but there is no discussion about what should be made with the money.
Some interesting reading for those who read in Portuguese: http://www.ipea.gov.br/desafios/index.php?option=com_content&view=article&id=1215:reportagens-materias&Itemid=39
Hi Carlos,
Great comment, thanks – you have given me even more to think about! Like you say, it’s sad that the focus has been on the fairly negative fight over who gets the money. In an ideal world this would be a cause for celebration – lots of new money to help combat Brazil’s many problems.
Hey Tom, I think Alexandre and Carlos said it all. Well almost. It wasn’t said, that what they’re gonna vote for, discusses also the redistribution of royalties on previously signed contracts! That new law is unconstitutional, to say the least.
If the other states want the Royalties, fine! But let us charge ICMS on the source, then we won’t mind.
Great blog you have!
Thanks Mauricio! I think this has been very informative. Educational even! :) Now what will Dilma do?
Hey Tom,
I think she will most probably NOT give a veto. It would be costly, politically speaking. She won’t go against 23 states in defense of RJ/SP/ES. She will leave the decision up to the STF, that hopefully will judge it unconstitutional.
Cheers! :)
I would think the fact it affects RJ, SP and ES, is exactly why she would veto if it is a purely political decision. SP and RJ are where all the vote are, right? And Brasil does not have that abomination of US democracy called the Electoral College, so it is a pure popular vote, right?
Hello PTRio,
The three states’ population altogether, account to less than 1/3 of the Brazilians. Also, we have to consider that Rio de Janeiro, by far, would be the most financially damaged in case of the law’s approval, as it accounts for the biggest areas of the Pre-Sal. I may be wrong but I haven’t seen that much complaining from other producer states. So Rio looks like the only state that’s really complaining (as the other states would be a lot less affected).
Please guys, correct me if I’m wrong, but that law was already approved in the chamber of deputies and by the senators, so now either comes the veto or the law gets approved. Thus, in the case of an approval, the only chance for the producer states would be to file a claim of unconstitutionality against it in the STF (Supremo tribunal federal).
Cheers
Tom,
I am from Sao Paulo, I would love to see my state benefiting from all the money, God knows we need it.
Rio also really needs the money, Rio has been really neglected for the past 20 or so years, and that didn’t help considering Rio lost all the revenue it once had when it was the capital of Brazil.
I am siding with President Dilma on this one, she is saying the money should go to neither Sao Paulo and Rio or the rest of the states, Dilma just signed a decree saying 100% of all royalties from the new OIL discoveries should go for EDUCATION in Brazil, all of Brazil, not only Rio or Sao Paulo, I posted the article at the end of my comment.
See, in my opinion, this is a matter of choosing the less of two evils, either you give ALL that money to Rio and Sao Paulo and only the politicians from these two states get to go to town with all that cash, or we distribute the money ALL around to all the states, and let politicians from all over Brazil go to town with that money, so I am going with the third option, neither the states of Rio and Sao Paulo get the money and neither all the rest of states in Brazil get’s the money.
(go town=steal part of it with kickbacks and back room deals)
I say, let’s give it all to the DEPARTMENT of EDUCATION, God knows Brazil needs to invest in education, it will be easier for all of us to control and monitor where the money is going, it’s only ONE DEPARTMENT getting all that money to be used to education initiatives all over Brazil.
The OIL wells will dry up one day. I say let’s transform the profits from these OIL reserves in human capital, skills, in which future Brazilians will be able to create wealth for future generations and start a healthy cycle of wealth.
Dilma is hard line and serious about investing the money in Education and I trust that she truly wants the best for the country.
This is what I just read and made me very happy, like I mentioned at the beginning of the comment, Dilma signed a decree that 100% of the royalties are going to go to EDUCATION, period.
I love Dilma!! She is my new hero!! :)
Abracos
Ray
Here is the article:
http://noticias.uol.com.br/politica/ultimas-noticias/2012/11/30/100-dos-royalties-das-novas-concessoes-do-petroleo-vao-para-a-educacao-diz-mercadante.htm
Ha ha! I must say, Dilma seems to have done a great job with a tricky situation. The smart move was to shift the focus from who would get the money and instead make headlines with how the money is spent. And it’s just great to see her prioritising education like this. As time goes by I have been more and more impressed with the way she has handled her presidency.
It’s not perfect (I see new figures on the economy show that things have seriously slowed down here), but you can’t fix everything at once right?