Two lead­ing econ­o­mists agree with the 2024 re­port from the T&T Ex­trac­tive In­dus­tries Trans­paren­cy Ini­tia­tive (TTEITI) that it is time to take a deep look at the Her­itage and Sta­bil­i­sa­tion Fund (HSF) to make it more vi­able.

Econ­o­mist Dr Mar­lene Attzs rec­om­mend­ed a re­struc­tur­ing of the HSF to en­sure sus­tain­able de­posits, con­trolled with­drawals, and long-term fi­nan­cial se­cu­ri­ty while econ­o­mist Dr Vaalmik­ki Ar­joon said it would be worth­while for the Min­istry of Fi­nance (MoF) and the Cen­tral Bank of T&T (CBTT) to se­ri­ous­ly con­sid­er broad­en­ing the de­posit cri­te­ria of the HSF to in­clude at least part of the ex­cess tax rev­enues gen­er­at­ed by the down­stream petro­chem­i­cal sec­tor.

In its two-page re­view with­in the re­port, the TTEITI stat­ed there needs to be a more thor­ough ex­am­i­na­tion of the his­tor­i­cal en­er­gy price as­sump­tions on which bud­gets are based and the ac­tu­al en­er­gy prices as well as the rules for both de­posits and with­drawals.

The HSF serves as both a cush­ion to keep the coun­try steady from eco­nom­ic shocks dur­ing times of cri­sis and as a sav­ings fund for fu­ture gen­er­a­tions.

The HSF quar­ter­ly in­vest­ment re­port for the pe­ri­od April 1 to June 30 2024, not­ed that the fund’s to­tal as­set val­ue de­clined from US $5.89 bil­lion to US $5.76 bil­lion, with an over­all re­turn of 1.38 per cent for the quar­ter.

Gov­ern­ment al­so with­drew US$209.5 mil­lion from the fund dur­ing this pe­ri­od.

Ac­cord­ing to the TTEITI, as­sess­ing the fund’s per­for­mance ne­ces­si­tates a look at glob­al trends in in­fla­tion and in­ter­est rate ad­just­ments and how these im­pact mar­ket con­fi­dence and the tra­jec­to­ry of oil and gas prices. It not­ed that in 2022 and 2023, buoyed by a surge in prices due to the Ukraine War, the Gov­ern­ment made its first de­posits in­to the fund since 2013, adding that while that was based on the da­ta avail­able, that called for a deep­er analy­sis.

An­oth­er is­sue that needs to be ad­dressed, the TTEITI iden­ti­fied, is how ex­cess rev­enue from oth­er links in the en­er­gy val­ue chain are in­cor­po­rat­ed in­to the HSF and not just be lim­it­ed to con­tri­bu­tions from oil and gas rev­enues.

The TTEITI said based on da­ta from the Gas Mas­ter Plan, with da­ta from be­tween 2009 and 2014, mid­stream and down­stream com­pa­nies con­tributed $31.2 bil­lion in cor­po­ra­tion tax­es.

“Tak­ing the con­tri­bu­tion of these com­pa­nies in­to ac­count, there is an op­por­tu­ni­ty to but­tress the fund, es­pe­cial­ly when petro­chem­i­cal prices are high.

“This may re­quire re­struc­tur­ing the ex­ist­ing for­mu­la or de­vel­op­ing an en­tire­ly new for­mu­la, with the petro­chem­i­cal sec­tor in mind,” the TTEITI ad­vised.

The Sun­day Busi­ness Guardian reached out to Attzs and Ar­joon to gar­ner their in­sights on the TTEITI’s re­view.

Attzs out­lined that while high com­mod­i­ty prices in 2022 and 2023 led to de­posits in­to the HSF, this was an ex­cep­tion rather than the norm.

“His­tor­i­cal­ly, con­tri­bu­tions to the HSF have been in­con­sis­tent, while with­drawals have been fre­quent,” she said, not­ing that amend­ments to the HSF Act in 2020, in­tro­duced in re­sponse to fis­cal chal­lenges dur­ing the pan­dem­ic, capped an­nu­al with­drawals at US$1.5 bil­lion and per­mit­ted with­drawals un­der spe­cif­ic con­di­tions, in­clud­ing nat­ur­al dis­as­ters, pub­lic health emer­gen­cies (such as COVID-19), and se­vere rev­enue short­falls caused by oil and gas price shocks.

De­spite these con­trols, con­tin­u­ous with­drawals with­out sus­tained con­tri­bu­tions threat­en the long-term vi­a­bil­i­ty of the fund, Attzs added.

Re­gard­ing the need for re­form she said the HSF faces mul­ti­ple risks, in­clud­ing de­clin­ing en­er­gy pro­duc­tion and volatile glob­al en­er­gy prices, per­sis­tent bud­get deficits lead­ing to in­creased de­pen­dence on with­drawals and a nar­row rev­enue base, since it is pri­mar­i­ly de­pen­dent on oil and gas roy­al­ties.

Giv­en these chal­lenges, Attzs rec­om­mend­ed it is time to re­struc­ture the HSF to en­sure sus­tain­able de­posits, con­trolled with­drawals, and long-term fi­nan­cial se­cu­ri­ty.

In out­lin­ing pro­posed re­forms, Attzs ad­vised:

1. Adopt a dual-fund mod­el

The Eco­nom­ic De­vel­op­ment Ad­vi­so­ry Board (EDAB), of which she was a mem­ber, rec­om­mend­ed in 2016 that the HSF be split in­to two dis­tinct funds:

(a) Sta­bil­i­sa­tion fund – A short-term buffer to sup­port gov­ern­ment rev­enue short­falls and

(b) Fu­ture gen­er­a­tions fund – A long-term sav­ings fund strict­ly re­served for na­tion­al de­vel­op­ment projects such as ed­u­ca­tion, in­fra­struc­ture, and eco­nom­ic di­ver­si­fi­ca­tion.

This mod­el, she said, aligns with glob­al best prac­tices (eg. Nor­way’s sov­er­eign wealth fund) en­sur­ing both short-term fis­cal sta­bil­i­ty and in­ter­gen­er­a­tional sav­ings.

2. Di­ver­si­fy rev­enue sources feed­ing the HSF

Ex­pand con­tri­bu­tions be­yond up­stream oil and gas rev­enues, in­tro­duce rev­enue from new sources such as car­bon trad­ing, re­new­able en­er­gy projects, and pri­vate sec­tor tax­a­tion, Attzs said.

“To pre­pare for a post-fos­sil fu­el fu­ture, a per­cent­age of HSF earn­ings should be ded­i­cat­ed to non-en­er­gy in­vest­ments, such as re­new­able en­er­gy projects (so­lar, wind), blue, cir­cu­lar, and cre­ative (or­ange) econ­o­my ini­tia­tives and tech­nol­o­gy-dri­ven in­dus­tries to di­ver­si­fy the eco­nom­ic base,” she ex­plained.

While the HSF has been in­stru­men­tal in sta­bil­is­ing the econ­o­my, Attzs em­pha­sised that its cur­rent struc­ture is un­sus­tain­able.

She main­tained with­out bold pol­i­cy changes, T&T risks de­plet­ing its sav­ings, leav­ing fu­ture gen­er­a­tions with­out a fi­nan­cial cush­ion, re­main­ing over­ly ex­posed to en­er­gy price volatil­i­ty and weak­en­ing long-term sav­ings through re­peat­ed with­drawals.

“Re­struc­tur­ing the HSF in­to a dual-fund mod­el, broad­en­ing its rev­enue sources, and in­vest­ing in long-term eco­nom­ic sus­tain­abil­i­ty are crit­i­cal steps to en­sure sus­tain­able na­tion­al de­vel­op­ment and that the wealth ac­crued ben­e­fits both present and fu­ture gen­er­a­tions,” she stressed.

Ar­joon not­ed that con­tri­bu­tions to the HSF cur­rent­ly come from pe­tro­le­um rev­enues ex­ceed­ing bud­get­ed amounts by at least ten per cent.

The most re­cent de­posits – US$163.9 mil­lion in Sep­tem­ber 2022 and US$182.2 mil­lion in De­cem­ber 2022 – were bol­stered by a re­vised gas pric­ing strat­e­gy that in­cor­po­rates not on­ly the Hen­ry Hub but al­so high­er-priced glob­al bench­marks such as the Japan Ko­rea Mark­er and the UK Na­tion­al Bal­anc­ing Point.

Ar­joon not­ed that by lever­ag­ing these el­e­vat­ed in­ter­na­tion­al prices, T&T gen­er­at­ed high­er gas rev­enues in 2022, al­low­ing for larg­er con­tri­bu­tions to the fund than would have been pos­si­ble had we re­lied sole­ly on the con­ven­tion­al, low­er-priced Hen­ry Hub nat­ur­al gas bench­mark.

It this re­gard, he said, “It would be worth­while for the Min­is­ter of Fi­nance (MoF)and the Cen­tral Bank (CBTT) to se­ri­ous­ly con­sid­er broad­en­ing the de­posit cri­te­ria of the HSF to in­clude at least part of the ex­cess tax rev­enues gen­er­at­ed by the down­stream petro­chem­i­cal sec­tor. If this had al­ready been the es­tab­lished prac­tice, we might have been able to make ad­di­tion­al con­tri­bu­tions in re­cent years, par­tic­u­lar­ly giv­en high­er methanol and am­mo­nia prices since 2021/2022.”

In adopt­ing this ap­proach, Ar­joon ex­plained the fund’s in­flows would be more di­ver­si­fied and not on­ly re­liant on oil and gas rev­enues, po­ten­tial­ly en­hanc­ing its sta­bil­i­ty – es­pe­cial­ly dur­ing pe­ri­ods when oil and gas prices are volatile but petro­chem­i­cal prices re­main ro­bust, as seen in re­cent years.

He said this will cre­ate a more sub­stan­tial buffer for the gov­ern­ment to re­ly on dur­ing pe­ri­ods of low en­er­gy prices, re­duced rev­enue streams and broad­er eco­nom­ic down­turns.

“By pro­vid­ing greater in­su­la­tion to the econ­o­my, it helps avert the dras­tic bud­getary cuts that could oth­er­wise jeop­ar­dise em­ploy­ment and the pro­vi­sion of es­sen­tial pub­lic ser­vices. Such a strat­e­gy to help im­prove the bal­ance of the fund can al­so be viewed favourably by cred­it rat­ings agen­cies,” Ar­joon added.

How­ev­er, he said, broad­en­ing the de­posit cri­te­ria to in­clude a por­tion of ex­cess down­stream rev­enues may re­duce the fi­nances avail­able for im­me­di­ate gov­ern­ment spend­ing.

While this ap­proach can help pre­vent over­spend­ing dur­ing com­mod­i­ty price surges and high­er rev­enues in the petro­chem­i­cal sec­tor, it could al­so con­strain short-term fis­cal flex­i­bil­i­ty, Ar­joon fur­ther ex­plained.

Con­se­quent­ly, he said it is im­per­a­tive for the MoF and the CBTT to clear­ly de­fine the share of ex­cess petro­chem­i­cal rev­enues to be di­rect­ed to the fund, en­sur­ing that this does not im­pede the abil­i­ty of the gov­ern­ment to meet its bud­getary oblig­a­tions, lead­ing to a larg­er fis­cal deficit.

Ar­joon stat­ed that in ad­di­tion to broad­en­ing the fund’s de­posit cri­te­ria to in­clude sur­plus down­stream rev­enues, its in­vest­ment strat­e­gy should be re­fined to max­imise re­turns and fur­ther strength­en the fund’s over­all val­ue.

Not­ing that since its in­cep­tion, the fund has fol­lowed a “plain vanil­la” ap­proach, re­ly­ing on tra­di­tion­al in­stru­ments like glob­al eq­ui­ties and fixed-in­come se­cu­ri­ties, Ar­joon said the in­vest­ment com­mit­tee should now con­sid­er al­lo­cat­ing a small por­tion of the fund to more so­phis­ti­cat­ed, high­er-risk prod­ucts—such as pri­vate eq­ui­ty, de­riv­a­tives, and struc­tured prod­ucts—to cap­ture ad­di­tion­al re­turn po­ten­tial.

While these in­vest­ments can sig­nif­i­cant­ly en­hance per­for­mance, they war­rant a mea­sured al­lo­ca­tion giv­en the as­so­ci­at­ed risk, Ar­joon added.