CC BY
35
Секция 15.Экономика и управление
Section 15. Economics and management Секция 15.Экономика и управление
Alhanaqtah Omar Jraid Mustafa, Tafilah Technical University, assistant professor, Financial and Administrative Department E-mail: [email protected]
Efficiency analyses of mechanisms of withdrawal and distribution of an oil rent in the world’s practice
Abstract: The problem of effective usage of the income from oil is actual for many oil-producing countries. Therefore the research of experience of different oil-producing countries on withdrawal and usage of an oil rent is almost important task containing considerable elements of scientific novelty.
Key words: oil rent, withdrawal, distribution, bonuses, rental, royalty, taxes.
Mechanisms of withdrawal and mechanisms of distribution of an investment income are key elements in a solution of the problem of a rent. Firstly, I analyse world experience from the position of mechanisms of distribution of an investment income:
1) Transformation of a non-renewable resource into the renewable. It is a question of redistribution of incomes from the oil business into the other sectors of the economy. For example, Norway became the fish power number one in many respects thanks to real return from the invested petrodollars. In the late seventies the state subsidized the fish branch of 0,2 bln. dollars a year (construction of laboratories on artificial insemination of caviar and farms for whitebaits, free transfer fish thresh to farmers for finishing it to the commodity sizes). In the head of the 1990th when the total volume of production of fish exceeded 150 thousand tons, the state released branch in “free swimming”, and by 2002 Norway exported already 421 thousand tons of a salmon for the sum of 1,3 bln. dollars.
2) Use of investment incomes from oil production for investment of the social sphere. This mechanism is actively applied in the countries of the Middle East. So in Kuwait at the birth of the child on his bank account 3 thousand dollars are enlisted; each inhabitant of this country has the right for the interest-free loan for housing construction for the sum about 220 thousand dollars; on each minor child grants
187
Section 15. Economics and management
on 170 dollars are monthly paid; 300 dollars all unemployed wives receive; in the country there is free medical care and if operation abroad is necessary to the patient works, the state assumes all expenses; study abroad is paid also. Thus, the natural rent is used for a covering of the current needs, providing a high standard of living to citizens of these countries. All “oil" benefits extend only on them. For example, in Kuwait average earnings of the Kuwaiti civil servant — 3,5 thousand dollars per month, and average earnings of the foreign Filipino worker or the Indian — 150 dollars per month.
In Yemen the oil income of the state completely compensates a rent for all citizens of this country; the public transport is free; from the state treasury treatment and training of Yemenites abroad is paid.
The authorities of Saudi Arabia adhere to similar policy: the health insurance, free treatment and training abroad, interest-free loans for construction of the house and car purchase (but it is less, than in Kuwait).
However there are also negative tendencies of use of such a mechanism of distribution of investment revenue: unreasonable inflating of social programs which not only eat all the budget, but also exhaust the country in debts. The companies of the countries of the Middle East, except of Bahrain which has turned into financial center of the Gulf, don’t stimulate diversification of the economy and don’t decrease in its dependence on hydrocarbons. As a result the last 40 years annual reduction in 1,3 % of gross domestic product per capita in the OPEC countries is observed. This example shows that state orientation only on a natural rent is unpromising from the point of view of public welfare and economic growth of the country [1, 121].
Thus, key ideas of redistribution of an investment income in the international practice can be formulated as follows:
• development of new forms and technologies of more effective usage of factors of production (for example, investments into innovative technologies);
• compensation of negative consequences from underestimation of production factors which are showing during production (for example, social policy as compensation of underestimation of a factor of labour at its operation).
In the international practice there are basic mechanisms of withdrawal of an investment income: bonuses, rental, royalty and taxes.
Bonuses are single payments which can be dated for various stages of implementation of the project. Payment of bonuses can be fixed in a legislative order, but most often it is a subj ect of negotiations (the state can start withdrawing money from the producer not only until receiving profit by it, but also until the beginning of its investment activity).
Rental (rent) is a source of systematic governmental income from the moment of signing the agreement, not depending on existence of production or profitability of
188
Секция 15.Экономика и управление
the producer. The government can establish progressive rates of a rent for stimulation of the producer to the fastest development of the contracted territory.
Royalty is a compensation to the resource owner (government) for the right of development of stocks; pays off as percent of gross revenue of the producer. The size of a royalty fluctuates from 0 % to 40 %, but in the majority of the countries is equal 12,5-20 % of the cost of the oil extraction [2].
There is a practice when the royalty pays off on a sliding scale 1 that serves the purpose to withdraw from the producer the part of a windfall profit rent. Besides, by changing of a royalty rate the government creates for companies financial incentives to work in the necessary direction (dependence of a rate on water depth over sea fields induces the companies to develop deep-water deposits, dependence of a rate on density of oil stimulates development deposits of heavy oil, etc.).
In the taxation of production of hydrocarbons both usual profit tax and special types of taxes are applied. Rates of a profit tax of corporations fluctuate from 0 % to 70 %, rates of a profit tax of the oil companies (in the majority of the countries of OPEC) make, as a rule, 50-85 %. More high taxes on profit actually serve in the oil sector as the instrument of withdrawal of excess profit received here.
Contracts on oil production with the section of made production were widely adopted. The made expenses in such contracts are compensated to the companies by part of the extracted oil (compensation oil). Now in the majority of the countries the maximum share of compensation oil in production fluctuates from 20 % to 50 %. Thus production rest (distributed oil) is subject to the section between the government and the company contractor. In the majority of the countries practicing closing of such bargains, section proportions with growth of production change in favor of the government. The share of distributed oil belonging to the company contractor is object of the taxation.
Creation half a century ago of the OPEC organization which put the ultimatum in front of the multinational companies became a sign event in the history of a rent formation: concession by concession, but not less than a quarter of extracted oil has to belong to the states-owners of oil deposits [1, 126].
There are data on shares of the government in the income from oil production in various countries: Albania — 75-80 %; Angola — 82-88 %; Great Britain — 33 2 -70 %; Vietnam — 70 %; Gabon — 75-80 %; Indonesia — 87-89 %; Spain — 40 %; Ireland — 75 %; Cameron — 84-86 %; China — 59-62 %; Columbia — 63-70 %; Malaysia — 81-86 %; Nigeria — 82-90 %; Norway — 85-90 %; UAE — 88-91 %;
1 0 % - if the depth of oil extraction is less than 1000 m, 4 % - from 800 to 1000 m, 8 % - from 500 to 800 m, 12 % - from 200 to 500 m, 16,67 % - less than 200 m.
2 For deposits with production up to 1 million tons per year. Otherwise the special tax on the oil income raised from net income from a rate of 75% works.
189
Section 15. Economics and management
Russia — 40-60 %; Syria — 72-82 %; USA — 47-65 %; France — 50 % [3; 4]. This indicator 1 characterizes the general level of tax burden in the oil sector of economy of these countries.
According to the table it is possible to draw a conclusion that in the countries where there is a development not only extracting, but also other branches (the USA, China), the share of the government in the income from oil production is significantly lower. It occurs as a result of existence of effective mechanisms of investment in the economy so that the regulating function of the government for the purpose of withdrawal of the windfall profit rents of the companies considerably falls.
In 1988 Alan Gelb executed for the World bank important research “Oil fountains: blessing or curse?” in which he drew a conclusion that “the positive causal relationship between high level of a rent and development of economy isn’t inevitable” [5]. The analysis showed that excessive withdrawal of a rent can constrain processes of accumulation and modernization of factors of production, and in long-term prospect the lack of resources and attention from the authorities can nullify economic growth 2. Summarizing results of research of Gelb, it is possible to formulate two main circumstances on which the choice of a country policy of optimum use of the investment income which is, in particular, brought in by oil production, depends on:
• “life expectancy” of the decisions made by the government (at the unstable government, in the conditions of frequent change of management this time is rather insignificant);
• extent of centralization of decision-making upon the conditions when there are serious contradictory forces (work at considerable influence of autonomous local authorities probability of adoption of inconsistent decisions increases that reduces public efficiency of the income from oil production).
It is possible to allocate also following key factors of policy of “absorption” of the income from development of oil deposits:
1) norm of production (if the country has the opportunity to grant the loans and to borrow abroad necessary assets, expected excess of growth rates of oil production cost over the growth rates of interest rates has to become a signal to stop oil extraction from the deposit);
2) ratio between the income from the oil, used in the country and abroad;
1 Calculation of this indicator is made as follows: the relation of all receipts of the government to the income from primary activity which in turn is defined as the cumulative gross income minus cumulative gross expenses for the entire period of implementation of the project.
2 Many economies working with the sphere of production of mineral resources and oil, faced problems of falling of efficiency of the internal capital, tendencies of concentration ofwealth in hands of minority and uneven distribution of the income in the country. In many countries investment incomes led to ignorance of need of development of traditional, not resource, sectors of economy; falling of an education level, health care, etc. [6].
190
Секция 15.Экономика и управление
3) the directions of internal use of the oil income (they can be directed on investment of a public sector or support of non-government sector by means of subsidies, reduction of taxes, etc., on development of the oil production or other branches of economy, on financing of competitive productions and production infrastructure, financing of housing construction, education, health care, etc.);
4) way of transfer of an oil rent to final recipients (to firms, households), for example, by means of direct transfers or credit subsidizing;
5) industrial or agrarian priority in the economic policy.
The important problem which all oil-producing countries face, is a need of optimization of a ratio between oil and other sectors of economy for protection of the last against an adverse effect of the first, delaying resources on itself. The most complex challenge in the solution of this problem is establishment of an optimum rent mode which at the same time would remain incentive to production and would maximize the income paid to the government 1. Competence of an oil fiscal system of the state can be estimated by two basic criteria:
1) level of profitability of an oil and gas branch;
2) existence or lack of stimulating influence of system of the resource taxation on investment process in the country.
In view of these criteria, the progressive system of the resource taxation (according to which the share of profit of corporations given to the government grows with increase in the profit), is represented as more preferable in comparison with regressive (according to which rates of the government tax collecting raise at profit reduction, and vice versa). In economic science it is considered to be that regressive tax modes increase investment risk, especially for goods with often changing prices, such as oil. Such modes bring also to disproportionally sharp falling of government profits during periods of relatively high oil prices.
The analysis of the international experience allows drawing the following conclusions:
• The government role as regards to oil sector is dual. On the one hand, the government is the highest tax authority and has to seek for obtaining the maximum income. On the other hand, as the owner of a resource it has to offer adequate incentives for the potential investors providing economic efficiency of oil projects.
• The main goal of a tax system is that the government receive adequate payments for the natural resources and distribute the income from their operation so that to promote sustainable economic growth. At the same time, according to the experts [7], any tax system can’t dominate over all the others, i. e. to be most preferable than the others to all investors and the states possessing natural resources.
1 Current trends of legislative regulation of oil production are that there is almost always more income is in the hands of corporations, than, from the point of view of society, it is necessary or it is desirable. Popular belief that oil companies plunder society for many years, thus underpaying taxes, a royalty and a rent to the government.
191
Section 15. Economics and management
• In the countries where there is a development not only extracting, but also other branches, the share of the state in the income from oil production is significantly lower. This results from the fact that at existence of effective mechanisms of investment into the economy the need of regulating function of the government for the purpose of withdrawal of windfall profit rents of companies considerably falls.
• Need of usage of special tax instruments is caused by limitation and nonrenew-ableness of natural resources. In that degree, in which the resource is limited and irreplaceable, its price can include some sum over minimum price at which this resource will be made [6]. This minimum price includes production expenses and a profit level which is sufficient for attraction of investments. Resource cost over this minimum price defines as an economic rent. Withdrawal of this part of the income happens without restriction of investments and provides to society its share of the profit got from the development of natural resources belonging to it.
References:
1. Kuzyk B. N., Ageev A. I., Volkonskiy V A., Kuzovkin A. I., Mudretsov A. F. The natural rent in the economy of Russia. - Moscow, 2014.
2. Improvement of the taxation of environmental management and environmental problems in the Russian economy: Reports and performances of participants of “a round table”. - Moscow, 2010, 2013.
3. OPEC Annual Statistical Bulletin. - 2012.
4. Kukovinets A. A. Mechanisms of withdrawal of rent incomes at the example of some oil extracting countries. - Moscow, 2006.
5. Gelb A. Oil windfalls: blessing or curse. The World Bank Research Publication. -New York, 1988.
6. Steyner R. Taxation of oil production and use of an oil rent//Russian Economic Journal. - 2004. - № 1.
7. Conrad R., Shalizi Z., Syme J. Risk and rankings of alternative contract instruments. - New York, 1991.
192
