The En­er­gy Cham­ber of Trinidad and To­ba­go

Sav­ing to­day's en­er­gy wealth for fu­ture gen­er­a­tions should be a na­tion­al im­per­a­tive. Over the past decade, with the es­tab­lish­ment of the Her­itage and Sta­bil­i­sa­tion Fund (HSF), T&T has tak­en con­crete steps to set aside en­er­gy rev­enue sav­ings for a rainy day.

The HSF was es­tab­lished in 2007 as an in­stru­ment to save and in­vest any sur­plus of pe­tro­le­um rev­enues that ex­ceed­ed bud­get­ed pro­jec­tions. Be­fore the HSF, there was the In­ter­im Rev­enue Sta­bil­i­sa­tion Fund (IRSF) which was sim­i­lar to the HSF in that they both share the ob­jec­tive of sta­bil­is­ing gov­ern­ment rev­enue in the event of crude or nat­ur­al gas price de­vi­a­tions away from the bud­get­ed amount. How­ev­er, the HSF has an added ob­jec­tive, which is to save in the long run for fu­ture gen­er­a­tions.

When the HSF was cre­at­ed, the US$1.4 bil­lion in the IRSF was trans­ferred to the HSF. The HSF Act al­so in­cludes rules which out­line how the funds should be used, drawn down on and gov­er­nance arrange­ments of the fund.

The HSF cur­rent­ly has US$4.5 bil­lion, a US$500 mil­lion in­crease from 2011 (see Fig­ure 1). It should be not­ed that in 2011 while the Gov­ern­ment bor­rowed an ad­di­tion­al $1.4 bil­lion, they al­so set aside an ad­di­tion­al $2.9 bil­lion in the Her­itage and Sta­bil­i­sa­tion Fund (HSF). Un­der the gov­ern­ment ac­count­ing sys­tem, the trans­fer to the HSF is count­ed as re­cur­rent ex­pen­di­ture.

Oth­er sov­er­eign wealth funds

De­spite the fund be­ing hailed as the world's best per­form­ing sov­er­eign wealth fund in 2011, with a nine per cent in­vest­ment re­turn, there are sev­er­al crit­i­cal is­sues we must ad­dress when analysing the HSF.

Bench­mark­ing our fund's per­for­mance against that of oth­er sov­er­eign wealth funds (SWF's) in com­pet­ing en­er­gy provinces is, there­fore, a wor­thy ex­er­cise. The Sov­er­eign Wealth In­sti­tute's Linaburg-Madu­ell in­dex is a method of rat­ing trans­paren­cy in re­spect to sov­er­eign wealth funds. The in­dex rates whether sov­er­eign wealth funds pro­vide in­for­ma­tion on gov­ern­ment own­er­ship struc­tures, in­de­pen­dent­ly au­dit­ed an­nu­al re­ports, port­fo­lio mar­ket val­ue and re­turns.

Oth­er im­por­tant vari­ablesl, such as pro­vid­ing guide­lines on eth­i­cal stan­dards, in­vest­ment poli­cies, en­forc­ing of guide­lines, strate­gies and ob­jec­tives and iden­ti­fi­ca­tion of ex­ter­nal mangers are al­so rat­ed.

On the in­dex, this coun­try's HSF scores eight out of ten and T&T is ranked 18 out of 45 coun­tries. Coun­tries such as Chile, the Unit­ed Arab Emi­rates, Sin­ga­pore, Ire­land, Azer­bai­jan, Aus­tralia and Nor­way lead the in­dex in Q2 2012, while T&T ranked high­er than Chi­na, Kuwait, Malaysia, Qatar, Sau­di Ara­bia and Venezuela.

It should be not­ed, how­ev­er, that cau­tion must be tak­en when com­par­ing SWFs giv­en that many SWFs dif­fer in their ob­jec­tives and in­vest­ment strate­gies. A June 2012 In­ter­na­tion­al Mon­e­tary Fund (IMF) re­port on T&T, recog­nis­es the strong record of T&T's HSF, how­ev­er, it out­lines a num­ber of rec­om­men­da­tions to im­prove the per­for­mance of the fund.

Trans­fer­ring en­er­gy sav­ings to HSF

One of the key rec­om­men­da­tions com­ing out of the re­port is to trans­fer en­er­gy sav­ings to the HSF on­ly when pub­lic fi­nances are in sur­plus. Even when pub­lic fi­nances are in a bal­ance or in a deficit, trans­fers to the fund are typ­i­cal­ly fi­nanced via bor­row­ing (or by draw­ing down on gov­ern­ment de­posits at the Cen­tral Bank).

This is not sus­tain­able as it does not im­prove the net as­set po­si­tion of the gov­ern­ment. Al­so, loss­es are like­ly to be in­curred if the cost of bor­row­ing is greater than the in­vest­ment re­turn.

Sec­ond­ly, al­though the HSF per­forms the dual role of her­itage and sta­bil­i­sa­tion, there is a pref­er­ence to main­tain the her­itage func­tion over sta­bil­i­sa­tion. This is clear­ly seen by the lack of with­drawals from the HSF when en­er­gy rev­enues have fall­en sharply to­geth­er with con­ser­v­a­tive bud­get as­sump­tions about en­er­gy prices.

For ex­am­ple, in 2008/2009 when oil and gas prices fell dras­ti­cal­ly, the Gov­ern­ment ad­just­ed the bud­get and drew down on its de­posits in the Cen­tral Bank rather than from the fund. In­ter­est­ing­ly, a with­draw­al equiv­a­lent to 2.5 per cent of GDP would have been al­lowed at the time. The IMF rec­om­mends that the HSF Act be amend­ed to not on­ly clar­i­fy the sav­ings ob­jec­tive, but al­so to pre­serve the sta­bil­i­sa­tion ob­jec­tive in or­der to cush­ion pub­lic fi­nances from the im­pact of high fluc­tu­a­tions of en­er­gy prices.

An­oth­er in­ter­est­ing rec­om­men­da­tion com­ing out of the re­port is the need for the Gov­ern­ment to give the de­tails of the da­ta and ap­proach used to cal­cu­late the en­er­gy price an­nounced in the an­nu­al bud­get. Giv­en that the price used in the bud­get de­ter­mines the rev­enue thresh­old for con­tri­bu­tions in­to the HSF, there is a need to spec­i­fy the de­tails of the cal­cu­la­tions of en­er­gy price as­sump­tions for clar­i­ty.

Al­so, it al­lows for greater trans­paren­cy and a more mean­ing­ful as­sess­ment of the en­er­gy rev­enue po­si­tion at year's end. Cer­tain key ques­tions will gen­er­al­ly arise as it re­lates to the bud­get­ed crude and gas price. For ex­am­ple, is the bud­get­ed oil price the av­er­age of T&T ex­port crude? Is the bud­get­ed fig­ure more or less than the bench­mark crude price? As it re­lates to gas, is the price quot­ed the av­er­age of the well-head prices for the dif­fer­ent streams of gas or is it the av­er­age of the net­back prices?

Dur­ing the bud­get de­bate, the Min­is­ter of En­er­gy and En­er­gy Af­fairs ad­dressed these is­sues com­pre­hen­sive­ly and pro­vid­ed da­ta on well head gas prices and bench­mark prices. How­ev­er, this in­for­ma­tion needs to form part of the ac­tu­al bud­get pre­sen­ta­tion and be fil­tered to the gen­er­al pub­lic co­her­ent­ly.

In the end, al­though our HSF ad­heres well to the San­ti­a­go Prin­ci­ples for trans­paren­cy and gov­er­nance, the IMF re­port rec­om­mends that a pri­vate sec­tor au­di­tor be en­gaged to au­dit the HSF.

The Au­di­tor Gen­er­al cur­rent­ly au­dits the HSF ac­counts, but with the move to­ward a more di­ver­si­fied en­er­gy port­fo­lio, en­gag­ing an ex­ter­nal au­di­tor ex­pe­ri­enced in au­dit­ing for­eign in­vest­ments and as­set man­age­ment would al­low for greater trans­paren­cy and ef­fi­cien­cy of the Fund.

Con­clu­sion

This coun­try's en­er­gy re­sources are fi­nite and, while this cur­rent gen­er­a­tion ben­e­fits from our en­er­gy largesse, putting aside sav­ings for fu­ture gen­er­a­tions should be a moral oblig­a­tion.

Be­ing vig­i­lant and con­stant­ly analysing how our HSF's gov­er­nance frame­work is ad­min­is­tered will in­flu­ence how the coun­try us­es to­day's en­er­gy wealth to aid sus­tain­able de­vel­op­ment and a trans­par­ent han­dover of in­ter-gen­er­a­tional as­sets.

For more in­for­ma­tion on the ar­ti­cle, please con­tact Sher­win Long at:?sher­win@en­er­gy.tt, or Naz­era Ab­dul-Haqq at: naz­era@en­er­gy.tt Vis­it: www.en­er­gy.tt

Sum­ma­ry of key IMF rec­om­men­da­tions for the HSF

1. Root the HSF's de­sign with­in the gov­ern­ment's medi­um-term fis­cal strat­e­gy to align the sav­ings ob­jec­tives with the broad­er strat­e­gy for man­ag­ing pub­lic fi­nances and build­ing the na­tion's net wealth

2. Base sus­tained trans­fers to the HSF on a re­turn to pub­lic fi­nance sur­plus­es (Achieve net sav­ings of en­er­gy wealth by im­prov­ing the fis­cal po­si­tion.)

3. Amend the HSF Act to clar­i­fy that the sav­ings ob­jec­tive is pri­ma­ry while pre­serv­ing the sta­bil­i­sa­tion ob­jec­tive of the HSF to pro­vide some scope to man­age the im­pact of high volatil­i­ty of en­er­gy price on pub­lic fi­nance

4. In­crease the min­i­mum bal­ance and con­sid­er es­tab­lish­ing a floor that is a per­cent­age in­stead of or in ad­di­tion to an ab­solute dol­lar val­ue

5. Lim­it the max­i­mum with­draw­al to ten per cent of the bal­ance in a giv­en year and 25 per cent on a cu­mu­la­tive ba­sis up to a floor.

6. With an in­creased fo­cus on sav­ings, and tighter with­draw­al rules, con­sid­er pur­su­ing a longer-term in­vest­ment strat­e­gy.

7. Spell out more clear­ly the cal­cu­la­tion of the bud­get en­er­gy prices used to es­ti­mate en­er­gy rev­enues to make it eas­i­er to de­ter­mine ex-post the prices used

8. Length­en the time hori­zon for set­ting the bud­get en­er­gy price.

9. Make de­posits in­to the HSF se­mi-an­nu­al­ly rather than quar­ter­ly, on a year-to-date ba­sis, and with a lag af­ter the end of the pe­ri­od so de­posits can be made based on fi­nalised da­ta

10. En­gage the ser­vices of a pri­vate sec­tor au­di­tor with ex­pe­ri­ence in as­set man­age­ment