Brazil: Congress to vote on redistribution of oil royalties

• A version of this post ran on the author's blog, Riogringa. The views expressed are the author's own.

On Tuesday, Brazil's Congress is due to vote on a bill that could redistribute the country's oil royalties, reducing the share of oil-producing areas and expanding the share in other states. Officials in Rio de Janeiro and Espírito Santo, two of the states that benefit from the current royalties system, bitterly oppose the bill. But evidence shows that in coastal towns and cities that earn oil royalties in these states have growing cases of corruption and mismanagement, as well as high levels of inequality and little progress in human development.

A few recent examples are illustrative of the corruption and mismanagement problem in cities with large oil royalty funds.

In March, the government of Campos dos Goytacazes in Rio proudly announced the inauguration of a new Sambadrome, large enough to hold 40,000 (10 percent of the city's population). The stadium – funded entirely by oil royalties – cost 80 million reais ($39 million), going 10 million reais ($4.9 million) over budget. Campos is the city that earns the most oil royalties of any city in Brazil, receiving 9.7 billion reais ($4.8 billion) from 2000 to 2010. But over the same period, the city dropped from 17th to 42nd in Rio state's development index. Seventeen percent of the city's schools and preschools operate in rented homes. Primary education in Campos received the worst grade in the state.

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In April, a Federal Police case dubbed Operation Lee Oswald led to the arrest of 28 people including the mayor of the city of Presidente Kennedy, Espirito Santo. The city government was accused of fraud in awarding government contracts, overbilling, and embezzlement, with the mayor as the ringleader. Those arrested were charged with corruption, criminal conspiracy, and money laundering, among other crimes. Presidente Kennedy earns the most money in oil royalties in the whole state; the city gets 20 percent of the total amount of royalties earned in Espirito Santo. From 2000 to 2010, the city earned 398 million reais ($195 million) in royalties. Despite a high GDP per capita, the city has the fourth-worst human development index statewide.

In September, a Rio judge decreed that the secretary of security of Mangaratiba, a Rio coastal town, would lose his job and demanded to freeze his assets. The secretary, also a policeman, was accused of earning a fortune far beyond his means, and the judge demanded he pay a fine for illegally accumulating wealth dating back to 1992. Mangaratiba earned 170 million reais ($84 million) in oil royalties from 2000 to 2010.

Uneven development in royalty-earning cities is also an issue.

A study by Macroplan as explained in an excellent EXAME article looked at 25 cities that earned the largest amount of oil royalties from 2000 to 2010. It found that despite a huge rise in GDP, cities accomplished little in terms of human development. These coastal cities in Rio, São Paulo, and Espirito Santo earned 27 billion reais ($13.2 billion) over that period. Of the 25 cities, 16 had a higher unemployment rate than the national average in 2010. Seventeen had a lower average wage than the national average of 1,200 reais ($590) per month. Twenty had higher illiteracy rates than the state average. Many cities imported workers to fill skilled jobs since the locals are unqualified. In total, 10 percent of the inhabitants in all 25 cities earn a quarter of the minimum wage. In Macaé, which earned the second most in royalties ... over a decade, nearly 10 percent of the population lives in extreme poverty. By comparison, in Rio state as a whole, around 3.7 percent live below the poverty line.

Violence is also an issue. In 13 of the cities, the homicide rate is above the state average. These include Linhares (Espirito Santo), Búzios, Cabo Frio, and Paraty (idyllic beach towns in Rio state) which are among the 100 most violent cities in Brazil.

Other coastal cities in Brazil earn royalties, too – with similar results. Guamaré, a town of 12,000 in Rio Grande do Norte, earned 202 million reais ($99 million) over the past decade and had eight mayors during the same period. One was arrested for embezzlement; another is under investigation for paying over half a million reais to bands to play at Carnival last year. The current mayor spent 2 million reais ($984 thousand) on Carnival this year and 2.2 million reais ($1million) to celebrate the city's birthday with high-profile singers. Despite having the 20th highest GDP per capita in the country, as well as being home to biodiesel plants, a Petrobras refinery, and wind farms, 10 percent of the population lives in extreme poverty and a fifth of the poulation is illiterate.

So what will this mean for royalty distribution and how these funds are used? "Oil exploration has 20- to 40-year cycles, which come to an end. Brazil's cycle is just at the beginning and we need to decide how to best use these resources so that in the end, we have thriving cities, not huge favelas," Macroplan director Alexandre Mattos told EXAME.

– Rachel Glickhouse is the author of the blog Riogringa.com