RIO NEGRO PROVES THAT CO-PARTICIPTION MUST BE ELIMINATED

The Argentine company YPF and the Malaysian company Petronas have entered into a partnership to develop the “Argentina LNG” energy project. The project consists of the extraction of gas in Vaca Muerta, its transportation to the processing terminal and its industrialization into Liquefied Natural Gas (LNG) for subsequent export. It is one of the most important productive initiatives in the country’s history. With investments in the order of USD 30 billion, it will allow Argentina to become the 5th largest LNG exporter in the world.

The decision on where to locate the project caused controversy. Although the companies stated that multiple factors were evaluated, the government of Río Negro efforts to build a favorable business climate for the project is noteworthy. This included an immediate adhesion to the RIGI (special regime for investments) and the alignment of other decisions, for example, provincial taxes, so that the project could be developed entirely in Rio Negro. It is a very illustrative experience of the relevance of a provincial government taking an active role in attracting investment.

The question is how much national fiscal resources Río Negro will receive through the federal co-participation of taxes for every 100 dollars generated by the “Argentina GNL” project. According to data from the Ministry of Economy it is estimated that:

• The national State will receive US$68.
• The provinces as a whole will receive the remaining 32 dollars.
• Of the 32 dollars, the province of Río Negro will receive 80 cents of a dollar.

These data highlight the perverse incentive generated by the federal co-participation of national taxes. Río Negro will receive less than 1% of the total national taxes generated by the project promoted by the province itself. On the other hand, more than 99% of the revenues will be shared between the national government and the other provinces.

This experience shows how important it is for the country’s progress to generate rules that encourage the provinces to seek their own development. Provincial governments have to internalize that their success depends more on their ability to attract productive investments than on begging for help from national officials. They need to spend less time traveling to Buenos Aires to ingratiate themselves with the national government and invest more energy in making their provinces a favorable business environment for production and creation of good jobs. In the case of Río Negro, there were exceptional circumstances. But for this attitude to be scaled to all types of projects and throughout the national territory, it is essential to replace the federal co-participation of taxes.

It is not impossible to replace the federal co-participation of taxes. What is impossible is to try to fix it. Co-participation is, by nature, a redistribution mechanism. Therefore, what one province gains, the other loses. Therefore, it is advisable to eliminate it by establishing, in its place, a fiscal matching mechanism. Each jurisdiction should be financed with the taxes it collects from its inhabitants. This could be achieved by establishing that the VAT absorbs the provincial and municipal sale taxes and that its collection remains in the territory where it was generated. In this way, the provinces that attract more productive projects will obtain more public revenues. To contemplate the situation of the provinces that lag behind in terms of development, a Convergence Fund can be envisaged to facilitate their transition by financing the social and productive infrastructure necessary to attract investments to their territories.

The mass attraction of investments requires a production-friendly environment. This depends on transformations at the three levels of government. For the provinces to have the incentives to do so, it is essential to eliminate the bad incentives generated by co-participation. This is a complex challenge, but it is possible. This is demonstrated by Brazil which, being a country as complex as Argentina, is already on the way to unifying the federal VAT with provincial and municipal sales taxes.