The fiscal politics of resource revenue: federalism, oil ownership and territorial conflict in Brazil and Canada

ABSTRACT

This paper explores the fiscal politics of oil revenue in Brazil and Canada, two oil-rich federal countries that have different constitutional arrangements for revenue allocation and where constituent unit governments have different powers in the energy sector. More specifically, it offers a comparative analysis of the intergovernmental relations around oil revenue distribution in both countries over the last 30 years. The argument is that constitutional provisions on natural resources in federations (federal ownership or constituent unit ownership) produce distinct federal dynamics as it pertains to intergovernmental relations. Federal government ownership of natural resources produces conflicts between constituent units as they vie for their share of the proceeds. In contrast, provincial ownership eliminates the direct competition between constituent units for natural resource revenues. Nevertheless, intergovernmental tensions over natural resources can still appear as constituent units pressure the federal government to adopt horizontal fiscal equalization formulas friendly to their oil-producing, or non-oil-producing economies.

KEYWORDS:

• federalism
• fiscal federalism
• oil
• natural resources
• Brazil
• Canada

ACKNOWLEDGEMENTS

The authors thank Rachel Hatcher, Angela Kempf, and the anonymous reviewers for their comments and suggestions.

DISCLOSURE STATEMENT

No potential conflict of interest was reported by the authors.

Notes

1 The distinction between direct and indirect distribution is not absolute and we only use it in an ideal-typical manner.

2 There are different arrangements for on- and offshore production, as offshore is often centralized, even in more decentralized models. This is particularly important in cases where offshore production is more relevant for the countries’ economies than onshore, such as in Australia.

3 According to Law no. 7,990/1989, 5% of the value of oil and natural gas is transferred to producing states (70%), producing municipalities (20%) and municipalities where there are off- and onshore gas shipment facilities (10%) (Brasil, 1989). In 1997, Law 9,478 determined that, in the cases of offshore production (the most common cases in Brazil), oil revenue is transferred to producing states (22.5–30%), producing municipalities (22.5–30%), municipalities where there are offshore gas shipment facilities (7.5–10%), the Minister of Navy (15–20%), a special fund that transfers revenues to all states and municipalities (7.5–10%), and, in some cases, 25% to the Minister of Science and Technology. In cases of high volume of production, 40% is transferred to the Minister of Science and Technology, 10% to the Ministry of Environment, Hydropower resources and Legal Amazon, 40% to producing states, and 10% to producing municipalities (Brasil, 1997).

4 Both funds transfer money to states (Fundo de Participação dos Estados – FPE) and municipalities (Fundo de Participação dos Municípios – FPM) according to a combination of per capita income and population size. Revenues from other taxes related to the production and commercialization of oil and gas also fund these federal entities (Gobetti, 2011).

5 In the profit-sharing model, the state owns the oil and a company is responsible for initial production costs. If the production is successful and profitable, the government pays for these costs, the government and the company share the profit from the production, and the government receives royalties (15%) and taxes. This is different from the previous model of concession that was based on a contract between the government and a company where the company owns the oil and pays royalties (10%) and taxes to the government (Trojbicz, 2018b).

6 The spending of oil revenues was also a subject of debate and reform. Legislation approved in 2010 and 2012 determined that the revenue allocated to the fund should be spent on education, heritage, sports, healthcare, science and technology, environment, and climate change (Brasil, 2010, 2012). At the same time, thousands of Brazilians mobilized to protest increases in public transportation fees. Complaints related to corruption and poor education outcomes and health policies were soon added. Responding in 2013, Congress approved new legislation establishing that 50% of resources from the social fund should be allocated to education and that 75% of revenues transferred to subnational governments should be spent on education and 25% on health (Brasil, 2013).

7 Alberta’s United Conservative Party leader Jason Kenney even said he would hold a referendum on equalization if his party forms the government in the 2019 provincial elections.

8 Ironically, the federal equalization programme is implicitly tasked with reducing interprovincial fiscal inequalities exacerbated by provincial oil ownership.

9 Currently, 50% of these revenues are considered. This decision by the federal government represents a compromise position between the preferences of oil-producing and non-oil-producing provinces.

10 Oil-producing provinces nevertheless attempt to argue that some of their resource revenues go to non-oil-producing provinces in the federation through equalization.

11 The company leading the project, Kinder Morgan, stated that opposition by the government of British Columbia was generating investor uncertainty as it announced its decision to suspend the project (McDonald & Vessy, 2018).

12 Québec Premier François Legault said he did not want ‘Alberta’s dirty oil’ in his province (Crête, 2019).

Additional information

Funding

Daniel Béland acknowledges support from the Canada Research Chairs Program. Catarina Ianni Segatto acknowledges support from the Houston Family Fellowship and the Johnson Shoyama Graduate School of Public Policy.