Local Governments and the Challenges to Decisions on the Use of Municipal Revenues: A Study about the Use of Post-Salt Royalties in Brazil

The aim of this study is analyze how local governments in Brazil have allocated the “royalties” from oil exploration in post-salt fields. In 1997, this type of mineral rent was changed based on arguments that the... [ view full abstract ]

The aim of this study is analyze how local governments in Brazil have allocated the “royalties” from oil exploration in post-salt fields. In 1997, this type of mineral rent was changed based on arguments that the extraction companies should have to pay economic compensation to the municipalities where they have been extracting oil and natural gas. In this sense, the revenue related to these “royalties” should have been used to support the policies for environment protection and economic diversification that should have been formulated and implemented by local governments of those municipalities.

The literature on oil royalties and other kinds of mineral rents has pointed out that the legitimacy of these revenues is based on the need for policies oriented towards public values related to sustainability. Thus, even after years of exploitation and the depletion of oil fields, the good preservation of the environment and the existence of other economic activities would ensure an acceptable quality of life in these municipalities.

This study combines the perspective of historical institutionalism and the complexity of managing public values to analyze issues related to the challenges that local governments face to design and implemente public policies. Considering the influence of large corporations on the collective decisions in Brazil and the inherent effects of increasing returns on political economy, it is hypothesized that these revenues have been used mainly to support policies that aim to increase the oil exploration and not to promote public values related to sustainability.

The municipality selected to analyze this hyphotesis is Macaé, which is known as the “petroleum capital” of Brazil. This city is located in the state of Rio de Janeiro and has undergone large changes in its economy and politics after the change of the post-salt royalties in 1997. Nowadays Macaé is in a huge economic and social crisis since 2014, when the international price of oil barrel decreased. The question that guides this study is: In what policies the local government of Macaé used the revenue from post-salt royalties?

The data used was collected from the Macaé Transparency Portal, created in 2012. This is the website of the local government of Macaé that makes available the information on municipal revenues and expenditures. This study is based on the analysis of records labeled "Royalties 5% of the 7990 Act”, which indicate the policies that have been suported by this mineral rent between.

The results indicate that the revenues from pos-salt royalties represented more than 1/5 of total revenues of Macaé between 2012 and 2015. In this period, the local government used more than 70% on current expenditure (i.e. less than 30% were used for investment). On the spent on current expenditure, were used mainly for the maintenance of structures and public services that have supported activities related to the oil exploration and for the administrative services of the City Hall and the departmants of local government.