Latin America Advisor

A Daily Publication of The Dialogue

How Should Colombia Handle Oil & Mining Royalties?

TIC Colombia / CC BY 2.0

Q: Colombian President Juan Manuel Santos in mid-June announced that he will propose to Congress changes to a 2011 law that centralized oil and mining revenues. What was behind Santos' decision to propose changes, and why are some Colombians opposed the 2011 law? Will the changes likely win approval? What are the challenges and best policies for managing Colombia's oil and mining revenues?

A: Lisa Viscidi, director of the Energy, Climate Change and Extractive Industries Program at the Inter-American Dialogue: "Oil and mining have been booming in Colombia, and taxes and royalties for the sector spiked from $5.2 billion in 2009 to $17.7 billion in 2012. The Santos administration in 2011 won congressional approval for a constitutional amendment to redistribute oil and mining revenues more equitably among producing and non-producing municipalities and to give more control over revenues to the central government in an effort to tackle rampant corruption at the local level. But as a result of the reform, producing municipalities suddenly lost an important source of income for key projects in health and education, with their share of national royalties dropping from 74 percent to 9.5 percent in 2015. In addition, municipal governments complained that a new requirement to obtain approval for investments from the Órganos Colegiados de Administración y Decisión (OCAD)—bodies made up of representatives from central, provincial and municipal governments and indigenous and afro-Colombian communities—has created a bottleneck preventing funds from being dispersed. Meanwhile, local governments in non-producing areas received much-needed resources but were often unprepared to efficiently spend them. In response to the complaints, Santos recently announced that local governments from producing regions will no longer need approval from OCAD to invest royalties revenues. However, this reversal generates further uncertainty and does not address the problem of local corruption. The administration needs to define a clear strategy for oversight of oil and mining revenues to avoid corruption. In addition, while redistributing a portion of revenues to non-producing municipalities is a valuable policy to bring needed resources to poorer areas for education, health and infrastructure projects, local governments need to be better prepared to manage the revenues. Municipal governments should develop multi-year investment plans with central government oversight and enact measures to smooth out expenditures through boom and bust cycles, such as stabilization funds."

A: Juan Mauricio Ramírez, deputy director of Fedesarrollo in Bogotá: "The royalty reform did not centralize oil and mining revenues in the central government. The greatest achievement of the reform was to change the distribution of royalties among subnational entities. Before the reform, 20 percent of them, the most important oil and mining producers, received almost 80 percent of royalties. With the reform, after a transition, they will receive 20 percent of royalties and the rest of the country will receive 80 percent. The big winners of the reform were the non-producing departments. The losers were the producing departments and municipalities. They have called for a counter-reform, and the ministry of mines has backed their position. However, it is very difficult for such an initiative to be successful in Congress, since it would affect the income of the majority of subnational governments that before the reform were receiving nothing or very few resources. On the other hand, the royalties reform empowered departments that traditionally had been weak and without resources more than it helped the municipalities. The reason for this is the 'philosophy' of the reform, which favors the implementation of regional projects above local ones. However, there is an aspect that has been considered 'centralizing,' and that is the presence of the central government in the decision-making process for approving projects financed with royalties. Subnational governments are calling for more autonomy, and they ask not to have the central government involved in, and even vetoing some of, these decisions. A proposed reform to this decision-making process for project approval has a greater chance in Congress. However, it requires a constitutional reform, which is always complicated and uncertain. The main challenge for Colombia to take advantage of the resources coming from royalties lies in the identification and structuring of investment projects. At this time, at least, the main challenge is not the lack of resources but the lack of well-structured projects."

A: Andrés Mejía Vergnaud, consultant at NSG and Desmarginalizar in Colombia: "A simple collective action problem will be behind the imminent counter-reformation to the 2011 oil and mining royalties reform: those affected by the reform have strong incentives to organize and mobilize. The 2011 reform aimed at distributing more broadly the benefits from oil and mining throughout the country. And while it's true that some non-producing regions have benefited, for most producing regions the 2011 reform has meant a sharp and drastic reduction in their income. The relative weight of such loss is greater than the relative gains non-producers have experienced. Candidates to Congress from such regions campaigned on a strong anti-royalties law platform. Producing regions will organize and will put pressure on the government to get some of their rights (and funds) back. How will they put such pressure? Quite simply: regionals authorities will stop supporting oil and mining industries in the regions and will even turn their backs on them (they have actually begun to do so). Oil and mining industries are subject to frequent social and environmental conflicts in Colombia. Before the 2011 reform, regional authorities had a clear incentive to mediate constructively in solving these conflicts: their own revenue was at stake. After the reform, authorities have no incentive to help; the frequency and gravity of conflicts has been growing. In some regions (e.g. Casanare), towns seek to challenge (through popular vote) the right of companies to operate. And, just when fiscal projections show a worrying trend of stagnating oil production, the pressure will simply be too high."

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