Fixed Assets: When Politicians Have the Upper Hand

Historically, many Latin American gov's have taken most of public revenues from fixed assets like petroleum, gas, minerals or other natural resources. Venezuela is the archetypical case, with about three fourth of public revenues coming from Petróleos de Venezuela. The answer is easy: stones don't vote.

After the crisis that overthrowed Sanchez de Lozada from the Bolivian presidency, the new cabinet is enlisting a law to frame the explotation of their inmense gas resources -second biggest in the continent- by some foreing companies. A recent analysis in Financial Times (March 3) depicts well the case:

But production has been frozen since then while companies waited to see the results of Congress's deliberations. Whatever the details on taxes and royalties, the bill likely to be approved is unlikely to persuade foreign gas producers to invest more in the country.

The most modest proposal in the lower house is for the maintenance of royalties at 18 per cent and introduction of a new tax of 32 per cent. The most radical aims to increase royalties to 50 per cent on top of existing taxes.

Big investors are saying they will not comment until they see the final bill, but they are privately concerned about the proposal. Analysts say small fields could be closed and investment frozen in larger fields, although none of the bigger companies is likely to pull out.

Taxing natural resources has become an extremely popular source of revenue everywhere, as well as a big source of fiscal irresponsibleness and revenue insecurity for the Ministros de Hacienda or de Fazenda in all those countries.

Because stones don't vote.