DIVIDING UP THE SPOILS: GAS REVENUE DEBATE

UNCLAS LA PAZ 002945

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/AND
TREASURY FOR SGOOCH
ENERGY FOR CDAY AND SLADISLAW

E.O. 12958: N/A
TAGS: ECON EINV ENRG EPET PGOV BL
SUBJECT: DIVIDING UP THE SPOILS: GAS REVENUE DEBATE
INTENSIFIES

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Summary
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1. (SBU) With the signature of gas accords October 28, the
GOB estimates that hydrocarbons production will generate USD
2 billion next year, with USD 1.3 billion going to the
government as a result of new production contracts (septel),
and USD 4 billion within four years, with USD 2.4 billion
destined to the state. This increased revenue is certain to
generate conflict between universities, municipalities,
regional governments, and the central government, who will
each demand a piece of the pie. GOB promises to provide
universal, free healthcare and other benefits with the money
have raised public expectations. It remains to be seen if
they will be fulfilled. End summary.

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Gas Revenue on the Rise
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2. (SBU) According to YPFB (Bolivia's state-owned oil
company) President Juan Carlos Ortiz, hydrocarbons production
in the next year will generate USD 2 billion. Based on the
new hydrocarbons exploration and production contracts
(septel),USD 1.3 billion of this will go to the state in
taxes and royalties. Within four years, taking into account
increased production and export to Argentina, the sector is
estimated to generate USD 4 billion annually, with USD 2.4
billion going to the state (based upon current prices, which
could decrease if oil prices decline). The state revenue is
made up of general taxes of around 10 percent, royalties of
roughly 18 percent, a direct hydrocarbons tax (IDH) of around
32 percent, and a tax on the large fields of San Alberto, San
Antonio, Margarita, and Itau of 32 percent for use by YPFB.
Tax and royalty rates vary by company contract, but range
from 50 percent to 82 percent, according to various sources.

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Competing Demands for Resources
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3. (SBU) Bolivian law requires that all taxes be shared by
the national government with regional governments,
universities, and municipalities. Regional governments in
gas producing areas currently receive 12 percent of royalties
and part of the IDH payments. Due to the fact that regional
governments have money that they are not spending and the
national treasury has a deficit, the MAS administration is
proposing changes at the Constituent Assembly to the way the
IDH is divvied up to give the national government a larger
take. A move to decrease their revenue will surely anger
regional governments and further divide the eastern producing
regions and the central government. Eighty-nine percent of
Bolivia's natural gas is produced in Tarija and Santa Cruz,
home to the GOB's main opposition. These two regions will be
particularly disgruntled if they do not get "their fair
share" of the revenue, and it is instead spent to alleviate
poverty in the western highlands. The GOB intends for the
revenue from the additional 32 percent tax that has been
placed on the large fields to go directly to YPFB -- an
estimated USD 200 to 300 million dollars annually. The
regions, universities, and municipalities will likely protest
this assignment of resources and demand their share in
accordance with Bolivian tax law.

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Investing in Human Capital ...
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4. (SBU) Meanwhile, the government has already announced in

the press that hydrocarbons revenue will be used to provide
universal, free healthcare, bonus payments to schoolchildren,
housing, employment, and other benefits. The World Health
Organization has reportedly agreed to donate USD 2 million in
support of the universal healthcare program. The Armed
Forces will deliver USD 25 to parents of enrolled primary
school children in November to promote school attendance.
Vice Minister of Tourism Dr. Jose Cox told Emboff on October
30 there would be "plenty of money for tourism promotion now
that the GOB had signed the hydrocarbons contracts."

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Comment: And Reaping the Political Benefit?
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5. (SBU) The division of hydrocarbons revenue is certain to
generate heated conflict between the central and regional
governments. GOB pledges to provide various benefits with
the hydrocarbons revenue have raised public expectations.
Members of the government and the public are reacting as if
they have won the lottery and are already dreaming of one
million ways to spend the money. The resources give the GOB
an important opportunity to improve the lives of Bolivia's
majority poor, and reap significant political benefits as
well. The challenge, as always, is in implementation, and
additional demands are growing from every direction. There
is already major pressure from MAS insiders for the
government to create jobs for MAS loyalists in ministries.
The government's challenge will be to manage patronage
demands effectively while simultaneously providing basic
improvements in the living standards of the Bolivian people,
South America's poorest. End comment.
GOLDBERG