In contrast to the scrutiny that government spending is usually subjected to, tax expenditures do not have to be approved by the legislature year after year, and many have no expiration dates. While there are ceilings on direct expenditures, tax expenditures often escape such spending discipline. Kraan (2006) proposes ways of ensuring that off-budget and tax expenditures do not impair the proper functioning of the budget.

Some countries have been compiling tax expenditure reports for years. These include OECD countries that require tax expenditure reports by law, typically annually. Some subnational entities also report tax expenditures on a regular basis. The reports are often annexed to the budget, rather than presented in the budget alongside direct spending programs so that trade-offs can be considered. Of the 10 OECD countries reviewed recently, only Germany was found to present tax expenditures together with outlay subsidies every other year in a subsidy report, attached to the draft budget. The 20 largest tax expenditures of the German central government are presented in the draft budget every year, but these estimations are not integrated with information on spending programs (OECD 2010c).

Tax expenditures are more difficult to estimate than direct expenditures. Because tax expenditures are concessions that fall outside a tax norm, the benchmark rate structure, accounting conventions, and eligible deductions need to be established. Tax expenditure valuation measures the difference in revenue due to deviations from the tax norm. Ex post assessments evaluate forgone revenue and do not consider taxpayers’ behavioral responses to eliminating a particular tax break (such as by reducing activity levels or shifting activities to capture other tax breaks). Ex ante assessments more dynamically consider the additional revenue that would accrue from repealing tax expenditures, considering taxpayers’ behavioral responses and hence requiring estimation of critical elasticities. Forgone revenue (ex post) calculations are simpler to carry out, and therefore are more common. The OECD (2013a, 33– 36) provides an overview of different approaches to defining a tax norm and calculating tax expenditures. A far more detailed treatment—including legal, conceptual, procedural, and measurement issues—is available in OECD (2010c).

In upstream oil and gas, there are significant payments that are technically not taxes. They include royalties, bonuses (of which signature and production bonuses are most common), and production share in countries with production sharing contracts. Fiscal concessions given on these terms should be treated similarly to tax expenditures.

# **Shifting of risks to government**

Market returns depend heavily on how market risks and rewards are allocated among parties in an industry or transaction. Government interventions that shift risks normally absorbed by the private sector on to other parties implicitly boost expected returns from that activity and alter market choices among different options for providing energy services. Various forms of government assumption of risks are detailed in Table A.1.

Among them, contingent liabilities have many similarities to tax expenditures: they are outside the budgetary framework in many developing countries because they require little or no spending at the time of issuance, and are far less scrutinized than direct expenditures. Government credit guarantees, 27