The biggest bet

If president Juan Manuel Santos manages to take forward the reform of the country’s royalties system, he not only will have scored a big hit, but will also have a place in history. The project will revolutionize the way these funds are distributed in the country and will allow important economic and social progress.

In two articles, the reform raises profound changes that are based on the principles of saving, regional competitiveness and social, inter-generational and regional equity. It creates the General System of Royalties (GSR), made up with all these resources that have been collected by the State from the exploitation of nonrenewable natural resources. And it also gives a guideline for their distribution.

A slice will remain in the FONPET (territorial pension contributions). Another one will address the Savings, Stabilization and Regional Competitiveness funds which will be created by the law. A third slice will go to the current beneficiaries of resource royalties and compensations. And finally, a last portion (10 percent) will be used for investment in science, technology and innovation in the regions.

Given the sensitivities that the reform will hit and the political pressures that lie ahead, many have doubts on this project’s success. But the government is prepared to give a battle: this is one of Santos’ major promises during his presidential campaign.

The government believes that there are enough reasons that justify this constitutional change. The country is still owing a royalties distribution and compensation system that benefits the greater population and that make it more equitable to all regions. Especially the ones that are most left behind. After all, it is a resource that belongs to all Colombian people. Besides, corruption, bad waste and inefficiency around resources that are produced by mining and oil are well known.

The procedure won’t be easy, because it affects a lot of money. During the 1994-2009 period royalties of close to 21.1 billion US dollars were generated, at constant 2009 prices. Of this amount, 16.6 billion US dollars have been for producers and 4.5 billion US dollars for non-producers. In total, 17 of the 32 Colombian departments receive 95 percent of these resources.

One of the arguments that the government has used to defend the project is the current high concentration occurring in the distribution of royalties: 80 percent of them is aimed at local authorities that represent only 17 percent of the population. Numbers are compelling. Casanare department, with less than 1 percent of the Colombian population, receives 24 percent of the royalties. Meta, with 2 percent of the population, 12 percent. And Arauca, with 0.5 percent of the population , 10.8 percent.

For the Energy and Mining Minister, Carlos Rodado, although it is reasonable that local authorities where extractive activities are performed receive royalties according with those activities’ effects, the assignment of that money isn’t coherent with the population distribution.

He points out that, in contrast, departments with proven requirements, such as Chocó and Nariño, receive feeble amounts, which historically has led to a poverty trap or to a strict dependence on sole central government resources.

On the other hand, one would expect that the regions that receive more resources present a greater comfort among its inhabitants, which is not true. According to 2005 Census, of the eight major royalty-receiving departments, after ten years of receiving them, only Meta and Santander show an Unsatisfied Basic Needs Index (INBI) below the national average (27.7 percent). Guajira department draws attention: despite having received about 1.5 billion pesos between 1994 and 2005, this department failed to reduce poverty.

Senator Jorge Ballesteros Bernier believes that regions have been stigmatized around the royalties issue, since not all of these resources are inefficiently managed. He points out that no management evaluations or results actually show that the central government manages the royalties better than regional mayors and governors. Carlos Alberto Contreras, mayor of Barrancabermeja and president of the association of producer municipalities, says that the royalty misuse isn’t generalized. He also believes that the proposed distribution model will negatively impact his government, because their incomes decline.

The Finance Minister, Juan Carlos Echeverry, recognizes that there will be cuts. However, he says that the producing regions will keep receiving higher royalty incomes per capita than the rest of the country.

On the other hand, if the predictions about higher oil revenues are true, this would compensate the decline experienced in some municipalities. It’s to be noted that, in the case of royalties, 70 percent of them comes from oil.

Now, we can expect a bonanza? The Energy and Mining Minister is realistic and says that oil forecasts are always a lottery. He prefers not to over celebrate his numbers.

The government has two possible oil production scenarios in the medium term, given current information. In the first one, the highest level of oil production would reach 1.25 million barrels per day in 2015. In a second scenario, production of 1,450,000 barrels per day in 2018 is expected, as a result of Ecopetrol's investment in heavy oil development and exploratory activities’ success, among other reasons. As for forecasts of the export price of Colombian oil, this one could grow gradually over the next ten years, and pass from 77 dollars a barrel in 2010 to 90 in 2020. In the next years it is also expected a significant expansion of the production of minerals such as coal, nickel and gold.

In short, optimistic forecasts or not, this draft legislation, just as the law to be developed, is expected to face a tough way through Congress. This whole issue is about the distribution of a fragment of the national resources, something we all feel as ours.