Without Royalties Rio Faces Budget Cuts

By Maria Lopez Conde, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Last week, Supreme Court (STF) Justice Cármen Lúcia Antunes Rocha suspended the new royalties distribution law that imposes a more equitable division of oil-generated revenue between Brazil’s 26 states and Brasília. The injunction was granted just three days after the states of Rio de Janeiro, Espírito Santo and São Paulo filed lawsuits with the Supreme Court to prevent the implementation of the controversial law.

The three states, which are also the nation’s top oil producers, believe the bill breaches existing production contracts, and could cost their cities billions.

In her decision, Justice Rocha stressed the fact that the constitution guarantees compensation for oil-producing states and that a law cannot benefit some states to the detriment of others. Her ruling is preemptive and temporary, which means the legality of the bill will be up for discussion by the STF.

Municipalities that depend on revenue from petroleum royalties in the state of Rio de Janeiro welcomed the Justice’s decision, but many of them have begun anticipating revenue and budget losses as they wait for a final verdict on the fate of the law.

For Rio de Janeiro state, the bill could mean a R$3.1 billion loss this year alone and R$38.5 billion by 2020, according to Governor Sérgio Cabral. The law would also negatively impact the municipalities that depend heavily on petroleum royalties.

Vice-governor of Rio, Luiz Fernando Pezão, estimates that at least twenty municipalities in the state will lose between 60 to 70 percent of their revenues. Cities located in the Campos Basin, headquarters for Rio’s oil production, such as Macaé and Campos de Goytacazes, would be among the hardest hit by the law.

For the oil boomtown of Macaé, which received R$476.9 million from royalties last year, oil-generated revenues represent thirty percent of the budget. While the local government has not always used royalties to improve public services in the growing city, Macaé greeted the suspension of the law with optimism as it contends that a loss of royalties will force the city to make tough financial decisions.

“This is the first victory in the unjust war against oil-producing states and municipalities by self-interested political groups,” said the mayor of Macaé, Aluízio dos Santos, in a press release last week.

In the past, dos Santos warned that the bill puts the Brazilian economy at risk and could cause Macaé to lose R$193 million this year, forcing the city to take a second look at development priorities.

Campos, located in the Campos Basin, is the country’s largest oil producer. It depends on royalties to fund nearly sixty percent of its budget.

According to the mayor’s office, oil revenues facilitate cheap public transportation and social programs that relocate people who live in high-risk areas. With the bill, Campos could stand to lose R$585 million in 2013, more than any other city in the state of Rio de Janeiro.

Facing looming cuts, Campos mayor Rosinha Garotinho halted public housing and sanitation projects worth R$400 million in recent weeks. She welcomed the temporary decision and met with STF Justices to discuss the royalties bill in Brasília last week.

“I’m handing out a report on the region that shows the chaos that the loss of royalties would unleash, the drastic drop in revenue and how many thousands of people might not receive assistance as a result,” Garotinho told Globo.

The STF could issue a final ruling on the law at the end of April.