Alarming situation for Rio de Janeiro

Alarming situation for Rio de Janeiro

The rules for the distribution of royalties from the Petroleum have been the subject of heated controversies and discussions since the discovery of oil reserves in the pre-salt layer. The euphoric atmosphere of the discovery created a debate that was more ideological than technical, which resulted in the establishment of the legal model of sharing. This was the kick-off of the controversial discussion around the division of royalties, which continues today.

The dispute goes back to 2012, when a new rule for the distribution of oil royalties was approved in the Congress through Law No. 12,734. The law reduces the royalties distribution percentages intended for Unity, Producing states and municipalities and increases the share that will be divided among all states and municipalities through the Special Fund. In short, the demographic criterion used by these funds would penalize producing states, such as the Rio de Janeiro, which would receive less than populous states with low or no oil and natural gas production, such as, for example, Bahia, Minas Gerais e Paraná.

Significant reduction in royalty revenue will represent social and economic chaos for Rio.

© Wilton Junior / Estadão
Significant reduction in royalty revenue will represent social and economic chaos for Rio.

The referred law had its effects suspended in 2013 by the Minister of Federal Supreme Court (STF) Cármen Lúcia, in compliance with Direct Action of Unconstitutionality (Adin) 4,917, filed by the then governor of the State of Rio de Janeiro. According to Adin, the legislation would be interfering with compromised revenues, signed contracts, in addition to fiscal responsibility. Immediate losses of more than R $ 27 billion by 2020 were also pointed out, and for Rio’s municipalities the loss would reach R $ 2.5 billion.

Therefore, the preliminary injunction of the STF, in its provisional nature, determined that the royalty installments would continue to be distributed based on articles 48 and 49 of the Petroleum Law (Law 9.478 / 97). Since then, the definition of this situation has been pending judgment, which after several postponements is scheduled for December 3, 2020. The decision for the trial still in 2020 surprised, as everyone believed that it would not be resumed during the pandemic of covid-19, let alone in the last weeks of the Supreme and Congress’s operation this year.

The imminent trial led the State of Rio de Janeiro to join the State of Espírito Santo in an attempt to negotiate an agreement on the division of royalties. Espírito Santo’s proposal for an agreement was presented in April, but it was only at the beginning of September that the Rio government formally manifested itself in the STF in favor of the terms suggested by the Espírito Santo State. If the proposal is accepted, the forecast is that Rio de Janeiro and its municipalities will stop receiving approximately R $ 7.7 billion by 2025. Otherwise, the impact on the State’s accounts will be much greater: from R $ 67, 9 billion, according to estimates by the Rio de Janeiro State Finance Department. This is because, if the law is deemed constitutional by the STF, the amounts received since 2012 by the producing states and municipalities would have to be returned retroactively.

Even if the decision is applied only to fields that were contracted and signed after the law was enacted, without retroactive payment, the State of Rio will lose revenue. The possibility of rejection, by the STF ministers, of the allegations contained in Adin 4,917 would seriously damage the State of Rio de Janeiro. In view of the dependence on oil income, Rio de Janeiro already accepts and moves so that the loss of revenue is as small as possible, through the acceptance of Espírito Santo’s proposal.

The big problem is that Brazilian states are going through a financial and tax collection crisis that has been going on since 2014. Therefore, royalty revenues have become an even more important component for the fiscal balance of states. For Rio de Janeiro the situation is alarming. It remains to hope that there is a reconciliation between the federal entities around this proposal of the Holy Spirit. Otherwise, in addition to the political tragedy that Rio has been facing, the possibility of a significant reduction in royalty revenue will represent social and economic chaos for the State. To check.



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