Asia-Pacific: Feeling the Pinch from Lower Commodity Prices
Alpa Shah and Peter Mullins
Realizing the revenue potential from natural resources has become even more challenging with the recent decline in commodity prices, participants said at a conference for the Asia-Pacific region.
The conference on ‘Natural Resource Taxation in the Asia-Pacific Region’ was held from August 11-13 in Jakarta. The conference—co-hosted by the Ministry of Finance of the Republic of Indonesia and the IMF’s Fiscal Affairs Department and supported by the IMF’s Managing Natural Resource Wealth Topical Trust Fund—brought together 90 senior government officials from resource-rich countries in the region, international experts, and IMF staff.
Getting the most from extractive industries
The conference addressed a central question: how to structure and administer a fiscal regime for extractive industries (EI) that, taking account of a country’s particular circumstances, allows governments to retain a reasonable share of revenues, while at the same time remaining attractive to private investors?
The prospect of substantial profits makes EI especially attractive to governments as a potential source of revenue. However, before this revenue potential can be realized, resource-rich countries need to ensure the fiscal regime is attractive enough to private investors or state-owned companies to encourage them to explore, develop, and produce, given the large upfront capital investments needed and the inherent uncertainty over future commodity prices and project costs. In addition, an efficient fiscal regime—including clear rules, well-allocated responsibilities, adequate institutional capacity, and transparency of the resource revenue management process—is vital.
Extractive industries’ big role
For many countries in the region, EI activity is well established and represents an important share of total exports and government revenue (see Figure). For example, Indonesia has historically played an important role in the development of the petroleum industry, and was the pioneer in the use of production-sharing contracts dating back to the 1960s. The EI sector today contributes significantly to Indonesia’s budget, with combined revenues from the oil, gas, mining, and coal sectors reaching $28 billion in 2014, or 24 percent of total government revenue.
Currently embarking on reforms in the petroleum sector, Indonesian officials candidly shared their experiences, lessons learned, and future hopes for the EI sector. Finance Vice Minister Mardiasmo reflected, “In the area of energy extractives, like in many emerging countries, Indonesia faces a historic opportunity to enhance the country’s management of its oil and mining industries; these enhancements could include more sustainable economic outcomes to benefit for all, reduction of risks of corruption, and an increase in public trust.”
Weathering the shortfall
Country participants recognized the shortfalls in government revenues due to the current environment of declining commodity prices. “We fully acknowledge that the oil and gas sector, which has long been a major contributor to the state revenue, is currently under pressure from the sharp decline in crude oil prices in the world market,” said Indonesia’s Mardiasmo.
During the conference, discussion ensued about how to weather the revenue shortfall, and how countries can best position themselves for a future upswing in commodity prices. An important focus of the conference was on enhancing tax administration capacity and tackling international taxation issues, including transfer mispricing – that is, manipulating prices for transactions between related parties to shift the tax base away from high tax countries. Conference participants acknowledged the importance of cooperation between finance ministries and line agencies involved in the EI sector, but also recognized the challenges in achieving such cooperation.
The three days of discussion produced active sharing of experiences and exchange between countries in the region. Countries such as Indonesia, Malaysia, Thailand, and Papua New Guinea shared the experiences of their long-established mining and petroleum sectors, including the role of national resource companies, while Mongolia shared its experience in the area of fiscal transparency as an Extractive Industries Transparency Initiative (EITI) compliant country.
In closing the conference, Assistant Minister of Finance Astera Primanto Bhakti called for “continued dialogue between us, producers and consumers on the short-, medium- and long-term outlook to improve our understanding, not only in supply and demand trends, but also in extractive-sector management.”