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From issue: Education (Fall 2010)

Policy Updates

A snapshot of policy trends and successes in the region.

In this issue:

Energy: Brazil's Oil Royalty Battle

Jeb Blount

Brazil’s government, seeking to extend its control over rapidly expanding offshore oil reserves, has walked into a political and constitutional quagmire.

A law that was close to receiving presidential approval as we went to press will mandate that oil royalties and taxes on windfall profit, previously directed to producing states, be divided among all of Brazil’s 27 states and 5,500 municipalities. It means big money for a country expected to produce about seven million barrels of oil per day by 2020—more than triple today’s production. Under the proposed law, which has already received approval by the Brazilian Congress and Senate, once the cost of producing a barrel of oil is taken out, 71 percent of what’s left goes to the government in the form of royalties and taxes, and only 29 percent goes to the company that produced it.

If the law is enacted, many cities and states will be in line to get tens of millions of dollars a year in new revenue. The funds will be divided equally among recipients based on current federal transfer arrangements. But the State of Rio de Janeiro and dozens of its municipalities—which are home to 85 percent of Brazil’s oil and gas output—will lose more than 95 percent of the 8.71 billion reais ($5 billion) a year it receives directly from two types of oil royalty.

Without a way to make up for the shortfall, Rio de Janeiro’s plans to host the 2016 Summer Olympics and 2014 World Cup are in jeopardy, according to Governor Sérgio Cabral. State finance officials have warned that the immediate loss of more than 15 percent of state revenue may cause Rio to default on its debts with the federal government and, according to Cabral and former State Treasury Secretary Joaquim Levy, plans to cut crime and poverty may be shelved.

Rio de Janeiro further argues that the country’s 10 percent basic royalty on oil is compensation for the disruptions caused by development and insurance against environmental risks.

Brazil’s 1988 Constitution appears to back the state’s claim with a clause prohibiting legislation that would revoke “acquired rights.” As a result, many lawyers say the new royalty rules will be overturned on constitutional grounds in cases of payments on existing oil concessions. Royalties on new fields are another matter.

Meanwhile, the rest of Brazil is anticipating the potential boost in revenue if the royalty law stands.

In 2009, basic oil royalty payments in Brazil reached 7.98 billion reais ($4.56 billion), the second highest on record. In 2008, when oil hit a record high of almost $150 a barrel, royalty payments reached 10.9 billion reais.

That amount does not include a windfall profits tax, known in Brazil as “special participations,’’ which is really a kind of extra royalty. Brazil’s oil regulator, the Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP), keeps a running total of monthly oil production and assesses basic royalties of 10 percent per barrel produced based on either a basket of world oil prices or a minimum monthly price set by the ANP, whichever is higher. If a field has “substantial” volumes, an additional payment is due every three months.

When these windfall profits payments are included, the 2009 total doubles to 16.4 billion reais ($9.4 billion), more than half of which went to Rio de Janeiro State and its municipalities.

If oil prices remain at about $82 a barrel, this year’s royalty and windfall profits payments may beat the record year of 2008.

As of late May, the latest month for which 2010 figures are available from the ANP, royalties of $5.84 billion were paid to producing states and municipalities, as well as Brazil’s navy, finance ministry and science and technology ministry. The addition of windfall profits would more than double that.

Of the royalties paid so far this year, 67 percent or 2.56 billion reais went to the State of Rio de Janeiro and 62 municipalities in the state, not including extra windfall royalties. Overall 30 percent of each real paid in royalties goes to the state governments, 34 percent to municipalities, 16 percent to the navy, 8 percent to the finance ministry’s special fund and 12 percent to the science and technology ministry.

Still, in a country where the phrase “The Oil Is Ours” rings in national mythology, the idea of one state getting more from a resource owned by all Brazilians rankles many. Politicians also like access to these funds because royalty money comes without strings attached.

Under the new oil bill—to which the royalty amendments were added—the overall government share per barrel will probably rise. This means more money for states and municipalities. Right now the government auctions concessions to the highest bidder, with the concession owner getting the right to sell the oil in exchange for tax and royalty payments.

Under the new rules, all new rights will be sold to the company or companies willing to give the Brazilian government the biggest share of oil produced after recouping costs, in addition to taxes and royalties.

Rio’s state government has said it might be willing to give up its fight to keep oil royalties if a tax rule exception made two decades ago is resolved in the state’s favor. According to Brazil’s Constitution, the country’s ICMS tax—similar to a value-added levy—is collected at the state level on all products and services produced in the state.

There is one exception: petroleum. In the case of oil and gas, the ICMS is collected and spent in the state where it is consumed, an exception made to spread the country’s oil wealth.

Rio, the main petroleum producer, loses about 8 billion reais a year because of the rule, according to Rio de Janeiro’s state finance secretariat. At the same time São Paulo, the biggest consumer of petroleum products, collects 55 percent of the ICMS taxes related to petroleum.

Rio de Janeiro has not lost yet. The bill containing the royalty changes still requires a lower-house vote to reconcile differences with the Senate-passed version.

In November, when it is taken up during the lame-duck session before the new president and Congress take office on January 1, the bitter battle over royalties will likely get worse. This means the next administration may have a short honeymoon before dealing with this contentious issue over distribution of powers and profit.


Public Debt Markets: Sin and Redemption

César Arias

Latin America has made significant strides in shoring up its public debt. Previously constrained by what financial experts consider the “original sin”—relying on foreign currency borrowing to finance domestic projects, which inevitably leads to a currency mismatch—the region is now heading toward a more balanced currency composition of government debt. This reached a milestone in August 2010 when the average ratio of local currency-denominated debt to total public debt reached a historic high of 65 percent in the region’s seven largest economies.

The new composition of public debt has allowed governments to smooth the effects of capital flight and currency devaluations on debt sustainability, which exacerbated the last two financial crises in Asia and Latin America.

Similarly, the deepening of domestic bond markets has offered crucial funding alternatives during the global credit crunch. Asian governments and corporations have reaped the greatest benefits. At the end of 2009, Asia accounted for 65 percent of local-currency-denominated bonds in emerging markets, three times the 22 percent share of Latin America.

This year in Latin America, the largest shares of local currency debt were registered in Chile (92 percent), Brazil (89 percent), Colombia (77 percent), and Mexico (75 percent). Five years of strong growth, balanced budgets, reduced public debt, stable inflation, and increased foreign exchange reserves helped these economies weather the global financial crisis. The progress achieved through this policy mix also boosted investor confidence and left these governments well-positioned to transform their public debt portfolios. Not surprisingly, Chile, Mexico, Brazil, and Colombia are also among the highest-rated sovereigns in the region and the pioneers in attracting a broader pool of institutional investors from their domestic pension, insurance and mutual fund industries.

In July 2010, Colombia effectively overcame the original sin by raising $1.3 billion in peso-denominated global bonds. The transactions met robust demand from international investors, allowing the government to offer a low-price concession for instruments with a relatively long, 10-year maturity. Chile soon followed suit, successfully tapping international capital markets for $520 million worth of peso-denominated bonds. Both transactions took place soon after Moody’s upgraded Chile’s sovereign debt to Aa3 and S&P brought Colombia’s ratings closer to investment-grade status.

But the impressive growth of local bond markets and their positive spillovers are neither risk-free nor shielded from policy reversals. Investors have a low tolerance for macroeconomic slippage and will closely watch policy continuity.

The challenge is to maintain a deep and diversified investor base. In the long term, market incentives will triumph over regulatory tricks or moral suasion. In Asia, for instance, the combination of high savings and market infrastructure reforms helped bond markets thrive during the 2008 financial crisis. In contrast, attempts to link pension reform and domestic capital market development in some Latin American countries—particularly by requiring banks and pension funds to maintain a minimum allocation of government bonds in their portfolios—have actually crowded out private creditors and resulted in disappointing returns.

A broad investor base can reduce vulnerability to the increasing volatility of global financial markets. Brazil has led the region in attracting institutional investors looking to assume more stable positions. By the end of 2009, 39 percent of Brazil’s government debt was held by banks, 33 percent by investment funds, 16 percent by pension funds, and 8 percent by foreign investors. This diversity has allowed short-term investors to enter and exit bond markets without exacerbating volatility or sparking herding behavior. In Colombia and Peru, private pension funds played a critical stabilizing role during the crisis. They absorbed the excess supply of long-term government bonds and helped contain sell-off pressures from foreign investors.

From a cost perspective, the shift to local currency debt mitigates foreign exchange vulnerabilities but increases interest rates. Latin American governments still pay a high credibility premium for past mistakes and the lack of liquidity in their local markets. The result has been an increased exposure to floating rates and short maturities in most public debt portfolios. This combination makes government debt sensitive to changes in interest rates and liquidity conditions in a region with with a history of price volatility and financial stress. Countries are increasingly seizing opportunities to conduct successful buybacks, bond exchanges and prefinancing operations, but there is a long way to go.

Debt management might be a highly technical profession, but it is not isolated from the political process. Latin America has resisted temptations of fiscal profligacy and public mismanagement. Hopefully this time the change is irreversible.


Gender: Violence Against Women

Nadine Gasman and Gabriela Alvarez

Violence against women, a result of gender inequality and unequal power relations between men and women, is a pervasive phenomenon.  It occurs in all social classes and in all countries, from the most developed to the least developed. Despite progress in policies and legislation, it remains one of the top human rights issues in the Americas today. 

Although little research exists, available data suggest the situation is bleak across the region. The Economic Commission for Latin America and the Caribbean (ECLAC) estimates that up to 40 percent of women in the region have been victims of violence at some point during their lives.1 And, according to figures from the 2004 Demographic and Health Surveys Project, 44 percent of women in Colombia have suffered from spousal violence. In Peru, physical violence affects 47 percent of women.

Femicide—the killing of women—has reached alarming levels in Latin America.  The most recent region-wide statistics available, from 2003, show that seven Latin American countries score among the worst 10 nations when measuring the rate of femicide per one million women in 40 countries. In 2003, Guatemala had the world’s highest rate with 123 femicides per one million women. Colombia (70), El Salvador (66), Bolivia (43), Dominican Republic (37), Mexico (24), and the United States (22) followed.2 More recent figures from Guatemala showed that in 2006 two women, on average, were murdered each day.

Violence against women and girls not only costs lives, but stunts social and economic opportunities. Globally, up to 50 percent of sexual assaults are committed against girls under 16. A report by the U.S. Centers for Disease Control and Prevention estimated that in 2003 the costs of domestic violence in the United States exceeded $5.8 billion per year, with $4.1 billion going to direct medical and health care services and $1.8 billion the result of absenteeism.3

There have been encouraging legislative responses around the world.  A 2006 study by the United Nations Secretary General on all forms of violence against women reported that 89 countries have passed some legislation on domestic violence, and a growing number of countries have launched national plans of action. However, in 102 countries there are no specific legal provisions against domestic violence, and in at least 53 nations marital rape is not a prosecutable offense.4

Over the last 30 years, most Latin American governments have implemented policies and passed legislation to address the issue. Many of these changes are guided by a regional legislative instrument, the Inter-American Convention of Belem do Para (1994), which recommends that states amend their penal codes to impose penalties for violence against women and adopt measures that prevent perpetrators from harassing, intimidating or threatening victims.

The convention also urges states to establish effective legal procedures for victims, including access to restitution and reparations. More recently, since 2005, six Latin American countries have focused on second-generation legislation, which has broadened the focus to address violence against women in the areas of migration, trafficking and conflict and crisis situations.

In Chile, Brazil, Costa Rica, Mexico, Argentina, and Venezuela these second-generation laws have applied lessons learned from previous legislation. The underlying concept of the new legislation is that violence is a multidimensional problem, with multiple manifestations at the domestic level and in the public sphere.  It has shifted the traditional concept of intra-family violence toward a broader understanding that women are victims of violence in the workplace, in the streets, in conflict situations, and in public transportation. Nevertheless, the incremental advances have been mainly linked to the judiciary, the provision of services to victims of violence, capacity building of police, and improvement of services in the health sector.5

Much more needs to be done. One of the main challenges is the failure of states to create a climate of justice—a problem that leads to alarming levels of impunity. For example, in Guatemala, of the 2,920 homicides of women registered in the last five years, there have been only 184 detentions, leaving 94 percent of cases unsolved.

One key reason for the failure of many countries in Latin America and the Caribbean (and particularly in Central America) to tackle the problem in an integrated way is the lack of coherence between the legislative initiatives and the culture and practices of the legal and judicial system. When the concept and laws for gender equality and the protection of the rights of women have not been incorporated into the daily practice of judicial personnel, legitimate cases of violence can often be dismissed by judges.

Although mounting international and national efforts to eradicate violence against women testify to the progress in raising awareness among policymakers and communities, an important next step is to address the issue at its cultural roots and across institutions and sectors.  This requires a coherent response that includes legislation, service provision and prevention. A long-term response involves addressing the larger challenges of gender inequality and women’s empowerment through education.

Gradual recognition of this larger context has increased. In 2008, UN Secretary-General Ban Ki-moon launched the global multi-year UNiTE Campaign to End Violence against Women, which identifies violence against women as one of the most prevalent violations of human rights and an obstacle to the achievement of the Millennium Development Goals. The strategy calls for raising public awareness, political will and investment. Part of that effort will require persuading governments to make it a higher priority.

 

Footnotes

1.  ¡Ni una más! Del dicho al hecho: ¿Cuánto falta por recorrer ? Únete para poner fin a la violencia contra las mujeres” CEPAL 2009

2.  Sanmartín, José; Second International Report Statistics and Legislation Partner Violence against Women; Queen Sofía Center for the Study of Violence; 2006

3.  http://www.unifem.org/gender_issues/violence_against_women/

4.  Ending violence against women: From words to action, Study of the Secretary-General United Nations, 2006



 
 

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