Sources and Uses of Sources and Uses of Hydrocarbon WealthHydrocarbon Wealth

A comparative AnalysisA comparative Analysis 1974-79 and 1999-20041974-79 and 1999-2004

Gregory McGuire

Lecturer Energy Economics

UWI St. Augustine

ACCOUNTING FOR THE PETRODOLLAR CONFERENCE

Arthur Look Jack Institute of Business UWI

Nov-05

Presentation Outline Presentation Outline

Simple Economic Model Simple Economic Model

Fiscal Operations Revenue SideFiscal Operations Revenue Side

Aggregate Government ExpenditureAggregate Government Expenditure

Main Expenditure headsMain Expenditure heads

Other Macro Economic Issues Other Macro Economic Issues

ConclusionConclusion

Model of Economy Model of Economy

expo

rts

Offshore

•Exploration and Production

•Petrochemicals

•LNG

•Services

Onshore

•Finance

•Light Manufacturing

•Construction

•ServicesGovernment

Expenditure

Revenue

FX

. earn

ing

s

Social Services

Foreign Exchange Spending

Employment

Prices

Non tradables ( Real Estate)

Offshore Economy Offshore Economy

Largely Foreign owned firmsLargely Foreign owned firms

Production and plant management Production and plant management undertaken by nationalsundertaken by nationals

Externally propelled firmsExternally propelled firms

Firms are classic TNC and total Firms are classic TNC and total institutions.institutions.

Offshore EconomyOffshore Economy

Offshore injections: Five main channelsOffshore injections: Five main channels Payments to labour and supervisory staffPayments to labour and supervisory staff Purchases of goods and servicesPurchases of goods and services Payment to service CompaniesPayment to service Companies Dividends to National and regional Dividends to National and regional

conglomerates which hold equityconglomerates which hold equity

Onshore Economy Onshore Economy

Cradle of nation’s economic activity.Cradle of nation’s economic activity.

National firms – SMEsNational firms – SMEs

Engages nearly entire populationEngages nearly entire population

Determines the level of employment Determines the level of employment

State State

Stands between the offshore engine: and Stands between the offshore engine: and the onshore carriage.the onshore carriage.

It raises revenue from taxes of firms in It raises revenue from taxes of firms in both sectors.both sectors.

It spends on both current and capital It spends on both current and capital accountsaccounts

Responsible for planning ad executing Responsible for planning ad executing effective policies .effective policies .

Model of Economy Model of Economy

expo

rts

Offshore

•Exploration and Production

•Petrochemicals

•LNG

•Services

Onshore

•Finance

•Light Manufacturing

•Construction

•ServicesGovernment

Expenditure

Revenue

FX

. earn

ing

s

Social Services

Foreign Exchange Spending

Employment

Prices

Non tradables ( Real Estate)

Periods of AnalysisPeriods of Analysis

1974-79: First five years of oil price 1974-79: First five years of oil price inspired boom.inspired boom.

1999- 04: First five years of volume 1999- 04: First five years of volume induced boom – ALNG induced boom – ALNG

Government Current RevenueGovernment Current Revenue

1999-20041999-2004

Ave growth rate16%/annum compounded, oil growing by 31%and Ave growth rate16%/annum compounded, oil growing by 31%and non oil by 11% per annum.non oil by 11% per annum.Cumulative revenue TT $86 billion; oil share 32% or $TT 27 billion Cumulative revenue TT $86 billion; oil share 32% or $TT 27 billion Include 2005 data to September: Cumulative revenue = TT$ 114b.Include 2005 data to September: Cumulative revenue = TT$ 114b.

0

5000

10000

15000

20000

25000

1999 2000 2001 2002 2003 2004Years

TT

$ m

illi

on

s

Non Oil

Oil

Government Current RevenueGovernment Current Revenue

1974-19791974-1979

Ave growth rate 22 %/annum compounded, oil growing Ave growth rate 22 %/annum compounded, oil growing by 22 %and non oil by 24% per annum.by 22 %and non oil by 24% per annum.Cumulative revenue TT $15 billion; oil share 57 % or Cumulative revenue TT $15 billion; oil share 57 % or $TT 8.8 billion $TT 8.8 billion

0500

10001500200025003000350040004500

1974 1975 1976 1977 1978 1979

Years

TT

$ M

illi

on

s

Non Oil

Oil

Oil vs. Non Oil Oil vs. Non Oil

Revenue (1999-2004)

32%

68%

(1973-79)

57%

43%Oil

Non Oil

The official data suggests that oil revenues had a significantly larger share of the total Government revenue pie in the seventies than they do today.

What’s Missing? What’s Missing?

““Oil Revenue” is narrowly defined to Oil Revenue” is narrowly defined to mean taxes and charges from companies mean taxes and charges from companies under the Petroleum Taxes Act.under the Petroleum Taxes Act.

It does not include:It does not include: Taxes and Dividend Income from NGC.Taxes and Dividend Income from NGC. Taxes and dividend income from the Taxes and dividend income from the

petrochemical companies, service companies petrochemical companies, service companies engaged in the sector..engaged in the sector..

Taxes from Atlantic LNGTaxes from Atlantic LNG

Government Revenue Government Revenue

Gov. Energy Sector Revenue

0

2000

4000

6000

8000

10000

1999 2000 2001 2002 2003 2004years

$milli

on

Other

Gas

Oil

Revenue is at least Revenue is at least 16 % higher than 16 % higher than without with estimates without with estimates of revenue from of revenue from downstream downstream companies companies

Expenditure Side.Expenditure Side.

Government expenditure provides the fuel Government expenditure provides the fuel for the onshore economy.for the onshore economy.

In a golden age, expenditure becomes the In a golden age, expenditure becomes the greatest challenge. – greatest challenge. –

“ “ the imperative is to meet legitimate the imperative is to meet legitimate demands for equity while avoiding waste, demands for equity while avoiding waste, expanding capacity and promoting expanding capacity and promoting transformation towards viability.”transformation towards viability.”

Expenditure Pattern 1999-2005 Expenditure Pattern 1999-2005

0.0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

1999 2000 2001 2002 2003 2004 2005

years

$ m

illio

n

Total recurrent expenditure amounted to $TT104 billion. Average growth rate 15% per annum compounded. Capital expenditure only 7.6 % of total

Expenditure Pattern 1974-79 Expenditure Pattern 1974-79

0

1000

2000

3000

4000

5000

1974 1975 1976 1977 1978 1979

CapitalExpenditure

RcurrentExpenditure

Total recurrent expenditure amounted to $TT15 billion. Average growth rate 22% per annum compounded. Capital expenditure averaged 53% of total

Trends in Revenue and Trends in Revenue and Expenditure 1999-2005Expenditure 1999-2005

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1999 2000 2001 2002 2003 2004 2005

Years

$T

T b

illi

on

s

Expenditure

Revenue

Recurrent expenditure growth= 15% per annum compounded, Revenue growth 16% per annum . What happens when rate of expansion of output or prices decline??

Trends in Revenue and Expenditure Trends in Revenue and Expenditure 1974-791974-79

Recurrent expenditure growth= 27% per annum compounded, Revenue growth 22 % per annum . Total expenditure growth =24%

0

1000

2000

3000

4000

5000

1974 1975 1976 1977 1978 1979

Yeras

TT

$ m

illio

n

Some ObservationsSome Observations

Given lower base and limited capacity o f Given lower base and limited capacity o f the 1970’s , capital expenditure was slow the 1970’s , capital expenditure was slow to take off. Recurrent expenditure though to take off. Recurrent expenditure though was growing faster than revenue.was growing faster than revenue.

Classification of Capital expenditure has Classification of Capital expenditure has changed. For example in the 1970s some changed. For example in the 1970s some transfers to state enterprises were transfers to state enterprises were classified as Capital expenditure. classified as Capital expenditure.

Some ObservationsSome Observations

In current period much of capital In current period much of capital expenditure are off budget making direct expenditure are off budget making direct comparison difficult comparison difficult State enterprises funding expansion. e.g. State enterprises funding expansion. e.g.

NGC/NEC fund both equity and capital NGC/NEC fund both equity and capital projects without recourse to Government . projects without recourse to Government .

Special purpose companies responsible for Special purpose companies responsible for financing major projects: e.g. UdeCott. financing major projects: e.g. UdeCott.

Some ObservationsSome Observations

In current period much of capital In current period much of capital expenditure are off budget making direct expenditure are off budget making direct comparison difficult comparison difficult We see welcome moves to build capacity We see welcome moves to build capacity

outside energy in the form of Tamana Intech outside energy in the form of Tamana Intech Park . Park .

State appears to be shying away from direct State appears to be shying away from direct investment. - investment. -

Distribution the Wealth Distribution the Wealth

1974-79

Goods and services

17%

Total transfers

and subsidies

29%

Total interest

15%

Wages and salaries

39%

Distribution the Wealth Distribution the Wealth 1999-04 Wages and

salaries30%

Goods and services

13%

Total interest

18%

Total transfers

and subsidies

39%

The major shifts noted are : The greater share of Transfers and subsidies now 39% compared to 29% in the first period.

Correspondingly ; Wages and salaries now only 30% as opposed to 39% earlier perhaps reflecting reduction in Public Service.

Channels for Wealth Distribution Channels for Wealth Distribution Initiative Initiative 74-7974-79 99-0499-04

Tax Relief Tax Relief yesyes yesyes

Food SubsidiesFood Subsidies yesyes nono

Agriculture Subsidies Agriculture Subsidies yesyes littlelittle

Petroleum Products Subsidy Petroleum Products Subsidy yesyes yesyes

CementCement yesyes nono

Electricity Subsidy Electricity Subsidy yesyes yesyes

Education Education yesyes yesyes

Soft loans and grantsSoft loans and grants yesyes yesyes

Tobago Travel Tobago Travel yesyes yesyes

Some ObservationsSome Observations

Very similar channels of distribution in Very similar channels of distribution in both periods. both periods.

The absence of subsidies on cement and The absence of subsidies on cement and food due to economic liberalization food due to economic liberalization policies in place since downturn.policies in place since downturn.

Gasoline and electricity subsidy Gasoline and electricity subsidy significant-could be worth upwards of TT $ significant-could be worth upwards of TT $ 3 billion. 3 billion.

Saving For the Future Saving For the Future

In the first period mechanism used was In the first period mechanism used was Funds For Long Term Development .Funds For Long Term Development . In 1980, there were 21 such Funds including :In 1980, there were 21 such Funds including :

Culture, National Parks, Transportation, Primary Culture, National Parks, Transportation, Primary Schools. Schools.

Between 1974 and 1979- Total appropriation Between 1974 and 1979- Total appropriation was TT$ 5,360 million. Interest earned was was TT$ 5,360 million. Interest earned was TT$ 400 million.TT$ 400 million.

Note : Data sourced from Accounting For the Note : Data sourced from Accounting For the Petrodollar 1980. Petrodollar 1980.

Saving For the Future Saving For the Future

In the second period In the second period mechanism used is mechanism used is Revenue Stabilization Revenue Stabilization Fund.Fund.

Total of TT$ 5411 Total of TT$ 5411 million up to end fiscal million up to end fiscal 2004-05. 2004-05.

Several unanswered Several unanswered questions.? questions.?

Allocations to interim Revenue Stabilization Fund

0.0

415.0

2,593.1

1,305.7

497.4600.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

1999 2000 2001 2002 2003 2004

Saving For the Future Saving For the Future

RSF allocations RSF allocations seem to be growing seem to be growing with income.with income.

No set pattern, may No set pattern, may well be a residual well be a residual amount. amount.

3.47%

4.30%

0.00%

2.97%

6.33%

9.60%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2000 2001 2002 2003 2004 2005

RSF as% rev.

Concluding RemarksConcluding Remarks

Sources of FundsSources of Funds Need for inclusion of downstream taxes and Need for inclusion of downstream taxes and

royalty in what is classified as “oil revenue”.royalty in what is classified as “oil revenue”. Need to publish disaggregated data.Need to publish disaggregated data.

Uses of FundsUses of Funds Need for clear policy and rules on Heritage Need for clear policy and rules on Heritage

Fund as distinct from Stabilization Fund.Fund as distinct from Stabilization Fund. Return to approach of Funds for Long Term Return to approach of Funds for Long Term

Development to aid sequencing of projects. Development to aid sequencing of projects.

Concluding RemarksConcluding Remarks

Uses of FundsUses of Funds Need for clear policy and rules on Heritage Need for clear policy and rules on Heritage

Fund as distinct from Stabilization Fund.Fund as distinct from Stabilization Fund. Need for general rules of fiscal policy Need for general rules of fiscal policy Return to approach of Funds for Long Term Return to approach of Funds for Long Term

Development to aid sequencing of projects. Development to aid sequencing of projects. Greater emphasis required on transformation Greater emphasis required on transformation

effort. Tamara seems to be a start , but I effort. Tamara seems to be a start , but I would rather build on agro industry and would rather build on agro industry and cultural products. cultural products.

??