In contrast to 2010/11, there were only limited new measures introduced in the 2011/12 national budget that directly impact on the energy sector. Removal of VAT from equipment for oil and gas exploration
The removal of value added tax (VAT) from imports relating to offshore exploration and development activities is the most noteworthy measure introduced in 2011/12. This is a very positive development and one that will be welcomed by the energy sector. It will significantly increase efficiency within the offshore exploration and development sector and will reduce the cost of doing business, with no overall reduction in the Government revenue (as under the previous system, VAT was refunded once the equipment left T&T. The change will also reduce the working capital needed by service companies operating in the sector and will, therefore, also benefit local energy service companies which need to import equipment to execute contracts.
Further incentives for CNG and renewable energy
The Minister of Finance announced new tax allowances of 50 per cent for expenditure relating to equipment for both compressed natural gas (CNG) and liquefied natural gas (LNG) filling stations and a 50 per cent reduction in import duties on vehicles manufactured for use of natural gas. The reduction on import duties only applies to vehicles with an engine capacity smaller than 2300 cc. Given the desire to switch as much transport fuel as possible from diesel and gasoline to natural gas it is unclear why the reduced import subsidy is restricted to smaller vehicles, especially as there is a growing fleet of LNG-fuelled trucks which could potentially displace existing diesel trucks. The Minister of Finance also outlined further measures to encourage adoption of renewable energy technology. The new measures involve a 150 per cent of expenditure allowance for wear and tear for plant, machinery, parts and equipment used in the manufacturer to solar water heaters, wind turbines and photovoltaic systems.
These seem to be in addition to the allowances introduced last year for the purchase of these items.
Fiscal changes
The fiscal changes introduced in 2010/11 do appear to have had a positive impact on the energy sector, with the significant increase in onshore drilling and strong growth in the energy services sector being good indicators of new investment and improved confidence. The fiscal changes introduced in 2011/12 may appear minor, but are very positive for the energy sector. The removal of VAT from offshore exploration and production-related equipment in particular is a most welcome change.
Energy sector investment
The budget statement and the Medium-Term Policy Framework identify the need for increased investment as the key for driving forward economic growth. The energy sector has traditionally been the major location for investment in T&T. Over the recent past, there has been a lack of new projects coming on stream in the downstream sector. The mention of the AUM II plant, the solar park and the Carisal calcium chloride plant in the budget sends a positive signal, but both the budget statement and the Medium-Term Policy Framework make very little mention of the need for new investment in the upstream energy sector. The reality is that the majority of the $20 billion annual investment from the private-sector anticipated in the Medium-Term Policy Framework will be in the upstream energy sector. While the number one target of the Ministry of Energy is stated to be to increase oil production, this target is not mirrored in the cross-cutting targets outlined in the Medium-Term Policy Framework.
While improving competitiveness generally will help the oil production sector, there are particular issues of red tape and bureaucracy facing the sector that need to be urgently addressed. The Minister of Energy does not have direct control over these, so it would have been a positive signal if they were addressed in the overarching Medium-Term Policy Framework. It is also striking that the oil industry is not mentioned as a driving force for the south west peninsula growth pole outline in the Medium-Term Policy Framework. Given that this sector is one of the major employers within the southwest peninsular and the major contributor to economic growth in the region, it is surprising that it is not targeted as an industry for development, especially given the Ministry of Energy's priorities. This lacuna speaks to a need for greater co-ordination between the objectives of the various Ministries. The Energy Chamber trusts that the Medium-Term Policy Framework is regarded as a working document, rather than a finished product.
Equity participation in Petrotrin
The State Enterprise Investment Programme 2012 outlines a large number of proposed investment projects by both Petrotrin and the National Gas Company. In the case of Petrotrin, the State Enterprise Investment Programme report outlines $2.8 billion of investments over the next 12 months. The majority of this investment is listed as coming from the company's internal funds, including a $725 million Soldado drilling campaign and a $698 million for Phase I of a southwest Soldado development project.
Given the cashflow issues facing the company, primarily due to delays in receiving petroleum subsidy reimbursements, it may be a challenge to the company to raise these funds from internal sources. The Energy Chamber has made strong and repeated calls for Petrotrin to seek equity participation, rather than seeking to take on more debt to finance investments. The recent presentation by Wendell Mottley to the Energy Chamber's annual general meeting luncheon outlined a strong case for a public listing of T&T state-owned energy assets and provided the Colombian state-owned company, EcoPetrol, as an excellent example that we should emulate.
Energy services sector and local content
While both the Minister of Finance's budget statement and the Medium-Term Policy Framework address the potential of the energy services sector to increase exports, there is a lack of specific measures outlined in the budget to support this objective. Local content is acknowledged, but there are few commitments on concrete steps that will be taken to increase the participation by local companies in the energy sector. While the Medium-Term Policy Framework lists "Taking T&T's energy sector global" and "increase local content" as two of the top priorities for the Ministry of Energy, the specific measures to be undertaken have yet to be outlined. In the past, the Energy Chamber has encountered some difficulties in accessing funding from the Ministry of Trade and the Business Development Company, given their mandates to support the non-energy sector. In recent years, this has been much easier and there has been a clear recognition from the Ministry of Trade of the role in energy services in economic diversification, but the Energy Chamber would like to see further clarity about how these resources can be accessed by energy service companies seeking new markets.
Realising the Corporation Tax revenue projections
The 2011/12 budget is again based on a projected deficit. Expenditure is again expected to increase to an overall figure of $54.6 billion. While there is a clear need to continue to expand investment into new infrastructure if the economy is to flourish, the budget also anticipates an increase in current account expenditure. Personnel related expenditure is set to rise from $6.5 billion to $7.2 billion, with acquisition of goods and services rising from $5.8 billion to $7.3 billion. The budget is based on a fairly conservative oil and gas price and once oil and gas prices remain buoyant, oil and gas company taxation and royalties should meet expectations, assuming that there are no major upsets to production. The current investments in development drilling will, hopefully, also result in improved oil production. Nevertheless, under the Heritage and Stabilisation Fund legislation, oil and gas revenue in excess of budget is earmarked to be set aside, as happened this year.
The Energy Chamber is more concerned about the Government meeting the projected revenue figures from Corporation Tax. The "amnesty" effect in 2010/11 will not be repeated in 2011/12 and even with significantly improved collection methodology and new transfer pricing rules, it may be ambitious to expect to match the 2010/11 revenue figures. It should be noted that transfer pricing rules could cut both ways, especially with respect to the cap on management charges. The economic contraction of the last few years means that many companies will be carrying forward loses, so a return to economic growth may not necessarily result in significant new Corporation Tax inflows.
While T&T does have more macro-economic space than many other countries, it does not mean that further unnecessary debt needs to be taken on-board. A more aggressive approach to cutting waste in the public sector should be pursued, with the transfer and subsidies expenditure line being a particular concern. This does not necessarily mean cuts to social safety net expenditure: there are many items of expenditure under this heading that are earmarked for expenses relating to non-productive companies or companies in the process of being wound-up. In many cases, these on-going expenses are a result of slow or indecisive decision-making.