Transcript the Case of Trinidad and Tobago.

Efforts to Prevent
the Resource Curse
Paradox:
The Case of Trinidad
and Tobago
By
Ewart S. Williams
March 2013
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Trinidad & Tobago: Our Location
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Background

Trinidad and Tobago is a small Caribbean island with a
population of 1.3 million people.

Oil production in Trinidad and Tobago dates back to the early
1900s, but oil began to displace agriculture as the prime mover
of the economy in the 1950s.

With the commercialization of natural gas and the development
of a downstream petrochemical sector in the mid-1970s, the
dominance of the energy sector in the economy was further
consolidated.
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
We are a fairly small oil producer with output peaking at around
230 thousand barrels per day in the mid-1970s.

Currently oil production has fallen below 90 thousand barrels
per day.

Oil and gas production together is now the equivalent of around
800 thousand barrels per day.

Our petrochemical sector has assumed a certain strategic
importance; we are now one of the world’s major fertilizer
suppliers and the major supplier of natural gas to the east coast
of the US.
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Crude Oil and Natural Gas Production
Crude Oil
Natural Gas
2001
2003
800,000
600,000
400,000
200,000
2012
2011
2010
2009
2008
2007
2006
2005
2004
2002
0
2000
Barrels of Oil Equivalent per Day
1,000,000
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The Energy Sector

Currently, the energy sector accounts for:
 44 per cent of GDP
 58 per cent of government revenues (check)
 83 per cent of total exports.

About 60 per cent of crude oil production comes from three
foreign companies ( BP, BHP Billiton and Repsol); the remaining
40 per cent is produced by our state-owned oil and gas
company, Petrotrin.

Natural gas production is dominated by three foreign
companies (BP, British Gas and EOG).
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Economic Contribution of the Energy Sector
/per cent/
1992
2002
2012p
Energy GDP/Total GDP
26.2
28.3
43.7
Energy Revenue/Total Revenue
29.8
23.4
54.3
Energy Exports/Total Exports
68.4
75.7
83.01
Energy Sector Employment/Total
Employment
3.8
3.3
3.62
1/ Estimate for the period January to September 2012.
2/ For the first quarter of 2012.
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Energy Reserves

To better highlight some of the challenges that Trinidad and
Tobago faces, as an oil and gas economy, our latest Ryder-Scott
report aptly tells the story.

While proven oil reserves are projected to last only 12-14 years,
there are possible reserves estimated at the equivalent of 35
years production.

The shift from possible to proven reserves requires significant
investments in exploration, which were not taking place for
several years, because (according to the investors) of the
disincentives of the energy tax regime.
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
Whatever the merits of that claim, the reality is that with all the
new discoveries, including in Africa, foreign investors now have
many options and we need to reform our energy tax regime in
order to compete.

The Government has begun to implement a program of energy
tax reform, which is already showing some signs of success.
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Oil and Gas Reserves
Oil (million barrels)
In years of production1
Proven
606
14
Probable
335
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Possible
1,561
35
Total
2,502
57
Gas (trillion cubic feet)
In years of production1
13.3
9
6.0
5
6.2
4
25.5
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Sources: Ministry of Energy and Energy Affairs (2007 Oil Audit) and Ryder Scott Company (2011 Gas
Audit).
1/ Based on oil production of 44.3 million barrels in 2007 and gas production of 1.5 trillion cubic feet in
2011.
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Gas Reserves and Production
50
40
30
20
10
Natural Gas Production (in Billions of m3)
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0
Reserves-to-Production (in years)
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Some of the Benefits from the Energy Sector

Our overriding macro-economic strategy has been and continues
to be “to convert the rents from the offshore economy to build a
vibrant, internationally competitive onshore economy”.

The ultimate objective of the strategy is not solely to increase
economic growth, employment and living standards in the short
term but, to achieve long term economic sustainability --- in
other words, the idea is to be able to maintain or increase living
standards when oil and gas resources have been depleted.

Against this stated objective, how have we done?
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Selected Economic Indicators
Trinidad and Tobago
Real GDP Growth (%)
4.9
(Average 2000-2012)
Energy (%)
7.6
(Average 2000-2012)
Non-Energy (%)
3.5
(Average 2000-2012)
16,000
(2012)
Inflation Rate (%)
7.2
(y-o-y: December 2012)
Unemployment Rate (%)
5.4
(Mar 2012)
Population (millions)
1.3
(2012 )
GDP per Capita (US$)
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Social and Economic Performance

There is no doubt that over the past several decades, energy
revenues have financed improvements in the economic and social
infrastructure, facilitated the expansion of employment and led
to significant improvements in personal incomes and social
welfare.
For example:
 Since the setback from the oil shock of the mid 1980s, per capita
incomes have more to doubled to around US$16,000 over the last
decade.

Poverty levels have declined to 12-16 percent.

External reserves now stand at a robust US$ 9.3 billion, the
equivalent of 12 months imports.
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Social and Economic Performance (cont’d)

Buoyant energy revenues have obviated the need for government
borrowing, leaving a relatively manageable public debt burden
( 51.6 per cent of GDP).

With low debt and ample reserves, the international rating
agencies have maintained an Investment Grade rating for
Trinidad and Tobago.

The downstream expansion of the energy sector (into methanol,
fertilizers, iron and steel) is widely considered a major success
for a small island economy.

We have made great improvements in our social infrastructure,
and the expansion of educational opportunities which is statefinanced up to the tertiary level stands out.
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Emerging Challenges
But with all these successes:




Have we avoided the resource curse?
Are we close to our stated objective of transforming our
economy into an internationally competitive, dynamic economy,
which is less dependent on the energy sector?
The answer is definitely not.
And what’s worse, the prospects for our natural gas industry
are uncertain, in part, because the projected expansion in shale
gas will have a major impact on gas prices and the fortunes of
countries like Trinidad and Tobago and other emerging gas
producers such as Mozambique.
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Our Major Challenges and Some Possible
Lessons
Many of the challenges that Trinidad and Tobago have been facing
are common to resource-rich countries and either are being faced
or will eventually be faced by the new African producers as they
try to manage the windfall gains from their energy resources.
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Some Unintended Consequences

The economy has been subject to booms and busts, with booms
characterized by overheating, significant price and wage
pressures and housing bubbles

Downturns have seen sharp increases in unemployment, large
fiscal deficits and stresses in the financial system

The severity of the downturn in the mid-1980s forced Trinidad
and Tobago into a standby arrangement with the IMF.
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Unintended Consequences (cont’d)

Evidence points to some increase in income inequality as the
incomes of the more educated increase faster than the rest of the
labor force.

While the non-tradable sectors (construction and services) have
expanded rapidly, export manufacturing has stagnated and
agriculture and tourism have languished.
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
The abundance of energy revenues has prompted the erosion of
the non-energy tax base and a proliferation of government
subsidies, which have weakened the underlying structure of the
public finances and reduced the efficiency of the economy.

Efforts to significantly ramp-up public investment have exposed
weaknesses in project implementation and serious skills and
management gaps in the public sector
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Un-intended Consequences (cont’d)

The rise in incomes has outpaced the growth
infrastructure such as roads (thus traffic jams),
exponential growth of the financial system and
innovations have outpaced our regulatory capacity;
legislative reform has been lagging)
in some
and the
financial
(financial

Rising expectations and a get-rich mentality of certain sections
of the population have contributed to a major rise in crime (both
violent and white collar crime).
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Our Major Challenges and Some Possible
Lessons for Mozambique (cont’d)
Because of time constraints I will focus on four major challenges
that we are currently addressing (with varying degrees of success)




Fiscal policy management in the context of large increases in
revenues from depleting assets
The challenge of developing a vibrant non-energy tradable
sector (the Dutch disease phenomenon)
Promoting increased local participation
in the foreigndominated resource sector
Sharing the wealth between current and future generations.

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Fiscal Policy Issues

There are several aspects to the fiscal policy challenge in my
country and indeed in most resource-rich countries.

There is first of all the choice of overall policy stance, and the
tendency for the Government to spend most of the windfall
revenues. This pro-cyclical fiscal stance invariably leads to
overheating in booms, increasing inflationary pressures and
resulting in the appreciation of the real exchange rate.

A second issue is getting the right balance between social
objectives (reflected in allocations to subsidies and transfers)
and spending on economic infrastructure (a priority for future
growth).
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(a). Fiscal Policy Issues

Given the high level of poverty in Mozambique, the Government would need to
allocate significant funds toward poverty alleviation.

But even so care must be taken to have targeted programs and to achieve a high
level of efficiency in social sector spending.

We in Trinidad and Tobago faced a serious problem in trying to implement an
expanded investment program with the limited range of technical and project
management resources available to the public sector.

To increase project implementation the Government tried other options viz;
(i) the creation of a system of special purpose vehicles (which permitted the recruitment of
the appropriate skills by-passing the civil service complicated and bureaucratic procedures) ;
(ii) A regime of outsourcing called BOLT – Build, Operate, Lease and Transfer;
(iii) government-to-government arrangements.
Each of these options has presented its own challenges for transparency and the
avoidance of corruption.
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(b). Fiscal Policy Issues

On the revenue side there is also the need to guard against the erosion of the nonenergy tax base.

With ample energy sector revenues, there is a tendency for non-energy tax
administration to become lax, for governments to easily give into political pressures
to ease the tax burden. ( removal of VAT, energy subsidies, property tax etc.)

Some analysts suggest that the approach should be to see the energy taxes as
temporary revenues (a windfall), that should not lead to a proportionate easing of
the domestic tax effort.

Of course, a major challenge for any resource rich country is the formulation of an
energy tax regime that ensures a fair share for the country and its people but, at the
same time provides adequate incentives for investment.

Arriving at a suitable tax regime is invariably a harrowing experience because of
transfer pricing problems that arise in vertically-integrated multi-national
corporations and the disparity between the local and the corporations’ technical
expertise.
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Ensuring the Development of the Non-energy
Tradable sector

In Trinidad and Tobago, the non-energy sector has contributed greatly
to the rapid growth of economic activity and employment.

Most of this growth (in the non-energy sector) has come from nontradables – in particular, a construction boom, an explosion in the
distribution sector (fancy malls etc. ) and an expansion of banking
activity (reflected in sizable increases in consumer credit).

All these activities are good for short-term employment creation, but
they depend on the surge in government expenditure, which in turn
depends on continued energy revenues abundance.

In summary, these activities are not sustainable.
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(a). Ensuring the Development of the Non-energy
Tradable sector

There was a decline in agriculture from the equivalent of 10-11 percent
of GDP to 3 percent of GDP, in part, because the level of wages in
government ‘make work’ schemes made agricultural work unattractive
and because with higher incomes consumers, could afford imported
food.

There was a decline in non-energy manufacturing exports and tourism,
in part, because of a decline in competitiveness due to wage pressures,
a decline in productivity and the appreciation of the real exchange rate.

Declines in investment in the tradable goods sectors because investors
could easily make money through investments in property
development and other less risky activities.

There is no doubt that Trinidad and Tobago has suffered and continues
to suffer an acute case of Dutch Disease.
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(b). Developing the Non-tradable Sector
(contd)

We are now trying to address the non-energy sector challenge,
within the framework of a consultative process involving
Government, business and labor and through a targeting of
specific industries for development, including through publicprivate sector initiatives.

Our conclusion is that, in our economy, simply concentrating on
the establishment of an enabling environment and waiting for
private sector initiative may be insufficient for true economic
transformation
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Promoting Increased Local Participation in the
Resource-based Sector

In Trinidad and Tobago, we have set the promotion of increased
local participation in the energy sector as an critical economic as
well as socio-political objective.

We consider this important not only for the financial linkages
and the value added involved but also for the impact that local
content could have on knowledge transfer and for effective policy
formulation.

We have defined local content broadly to include:



local service providers;
local capital investment and financing; and
increasing the level of local technical and management expertise in
the foreign companies.
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(a). Promoting Increased Local Participation in
the Resource-based Sector

Even in the absence of a comprehensive strategy, we have built up a
sizable corps of local service providers.

However, there is still the contention that, given Trinidad and
Tobago’s open door policy, too often local service companies face
unfair competition from foreign counterparts.

On this basis, some stakeholders will like to see local content
legislation, along the lines of what obtains in Ghana, Nigeria and
Brazil.

It would be important however, that any legislation introduced is
consistent with the Government’s free trade stance and the need to
promote competition.
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(b). Promoting Increased Local Participation in
the Resource-based Sector

We have had very limited success in integrating the local finance and energy sectors.
The foreign energy companies make little or no use of our capital market and none
are listed on the stock exchange.

Investment in the sector is largely financed by foreign direct investment, intercompany transfers and retained profits.

We are now meeting a significant part of our skills requirement from locals.

Prior to the 1980s, strong industry training programs ensured skilled manpower.

Programs were discontinued around the middle of the 1980s, when the industry
went into a slump. When industry picked up in the early 1990s, state-funded
institutions began to provide the training.

Currently, in most cases, the domestic operations of the large international energy
corporations are headed by locals. Of course ultimate decision-making continues to
reside abroad.
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Addressing Stabilization and Intergenerational equity

Perhaps belatedly, in 2007 the Trinidad and Tobago Government
formally introduced a Heritage and Stabilization Fund (HSF) as an
instrument of macro-economic management as well as a savings
vehicle.

As you know, over the past two decades many resource rich countries
have introduced sovereign wealth funds.

By putting excess revenues aside, the HSF addresses the vexing problem
of the pro-cyclicality in fiscal policy and accrues savings for future
generations.

Permit me 5-10 minutes to outline the salient features of our Heritage
and Stabilization Fund.
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The HSF