Transcript Sources and Uses of Hydrocarbon Wealth

ACCOUNTING FOR THE PETRODOLLAR CONFERENCE
Arthur Look Jack Institute of Business UWI
Sources and Uses of
Hydrocarbon Wealth
A comparative Analysis
1974-79 and 1999-2004
Gregory McGuire
Lecturer Energy Economics
UWI St. Augustine
Nov-05
Presentation Outline
Simple Economic Model
Fiscal Operations Revenue Side
Aggregate Government Expenditure
Main Expenditure heads
Other Macro Economic Issues
Conclusion
Model of Economy
Onshore
Offshore
Revenue
•Light Manufacturing
•Exploration and
Production
•Petrochemicals
•LNG
•Services
•Finance
Government
Expenditure
•Construction
•Services
Non tradables (
Real Estate)
Social Services
FX.
earnings
exports
Foreign Exchange
Spending
Employment
Prices
Offshore Economy
Largely Foreign owned firms
Production and plant management
undertaken by nationals
Externally propelled firms
Firms are classic TNC and total
institutions.
Offshore Economy
Offshore injections: Five main channels




Payments to labour and supervisory staff
Purchases of goods and services
Payment to service Companies
Dividends to National and regional
conglomerates which hold equity
Onshore Economy
Cradle of nation’s economic activity.
National firms – SMEs
Engages nearly entire population
Determines the level of employment
State
Stands between the offshore engine: and
the onshore carriage.
It raises revenue from taxes of firms in
both sectors.
It spends on both current and capital
accounts
Responsible for planning ad executing
effective policies .
Model of Economy
Onshore
Offshore
Revenue
•Light Manufacturing
•Exploration and
Production
•Petrochemicals
•LNG
•Services
•Finance
Government
Expenditure
•Construction
•Services
Non tradables (
Real Estate)
Social Services
FX.
earnings
exports
Foreign Exchange
Spending
Employment
Prices
Periods of Analysis
1974-79: First five years of oil price
inspired boom.
1999- 04: First five years of volume
induced boom – ALNG
Government Current Revenue
1999-2004
TT$ millions
25000
20000
15000
Non Oil
10000
Oil
5000
0
1999 2000 2001 2002 2003 2004
Ye ars
Ave growth rate16%/annum compounded, oil growing by 31%and
non oil by 11% per annum.
Cumulative revenue TT $86 billion; oil share 32% or $TT 27 billion
Include 2005 data to September: Cumulative revenue = TT$ 114b.
TT$ Millions
Government Current Revenue
1974-1979
4500
4000
3500
3000
2500
2000
1500
1000
500
0
Non Oil
Oil
1974
1975
1976
1977
1978
1979
Years
Ave growth rate 22 %/annum compounded, oil growing
by 22 %and non oil by 24% per annum.
Cumulative revenue TT $15 billion; oil share 57 % or
$TT 8.8 billion
Oil
vs. Non Oil
Revenue (1999-2004)
(1973-79)
32%
43%
Oil
57%
Non Oil
68%
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?
“Oil Revenue” is narrowly defined to
mean taxes and charges from companies
under the Petroleum Taxes Act.
It does not include:



Taxes and Dividend Income from NGC.
Taxes and dividend income from the
petrochemical companies, service companies
engaged in the sector..
Taxes from Atlantic LNG
Government Revenue
10000
Gov. Energy Sector Revenue
$million
8000
6000
Other
4000
Gas
Oil
2000
0
1999 2000 2001 2002 2003 2004
years
Revenue is at least
16 % higher than
without with estimates
of revenue from
downstream
companies
Expenditure Side.
Government expenditure provides the fuel
for the onshore economy.
In a golden age, expenditure becomes the
greatest challenge. –
“ the imperative is to meet legitimate
demands for equity while avoiding waste,
expanding capacity and promoting
transformation towards viability.”
Expenditure Pattern 1999-2005
30,000.0
$ million
25,000.0
20,000.0
15,000.0
10,000.0
5,000.0
0.0
1999 2000 2001 2002 2003 2004 2005
years
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
5000
4000
Capital
Expenditure
3000
Rcurrent
Expenditure
2000
1000
0
1974 1975 1976 1977 1978 1979
Total recurrent expenditure amounted to $TT15 billion. Average growth rate
22% per annum compounded. Capital expenditure averaged 53% of total
Trends in Revenue and
Expenditure 1999-2005
30.0
$TT billions
25.0
Expenditure
20.0
Revenue
15.0
10.0
5.0
0.0
1999
2000
2001
2002
2003
2004
2005
Years
Recurrent expenditure growth= 15% per annum compounded, Revenue growth
16% per annum . What happens when rate of expansion of output or prices
decline??
Trends in Revenue and Expenditure
1974-79
TT$ million
5000
4000
3000
2000
1000
0
1974
1975
1976
1977
1978
1979
Yeras
Recurrent expenditure growth= 27% per annum compounded, Revenue
growth 22 % per annum . Total expenditure growth =24%
Some Observations
Given lower base and limited capacity o f
the 1970’s , capital expenditure was slow
to take off. Recurrent expenditure though
was growing faster than revenue.
Classification of Capital expenditure has
changed. For example in the 1970s some
transfers to state enterprises were
classified as Capital expenditure.
Some Observations
In current period much of capital
expenditure are off budget making direct
comparison difficult


State enterprises funding expansion. e.g.
NGC/NEC fund both equity and capital
projects without recourse to Government .
Special purpose companies responsible for
financing major projects: e.g. UdeCott.
Some Observations
In current period much of capital
expenditure are off budget making direct
comparison difficult


We see welcome moves to build capacity
outside energy in the form of Tamana Intech
Park .
State appears to be shying away from direct
investment. -
Distribution the Wealth
Total
transfers
and
subsidies
29%
Total
interest
15%
1974-79
Wages and
salaries
39%
Goods and
services
17%
Distribution the Wealth
Total
transfers
and
subsidies
39%
Total
interest
18%
1999-04
Wages and
salaries
30%
Goods and
services
13%
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
Initiative
Tax Relief
Food Subsidies
Agriculture Subsidies
Petroleum Products Subsidy
Cement
Electricity Subsidy
Education
Soft loans and grants
Tobago Travel
74-79
yes
yes
yes
yes
yes
yes
yes
yes
yes
99-04
yes
no
little
yes
no
yes
yes
yes
yes
Some Observations
Very similar channels of distribution in both
periods.
The absence of subsidies on cement and
food due to economic liberalization
policies in place since downturn.
Gasoline and electricity subsidy
significant-could be worth upwards of TT $
3 billion.
Saving For the Future
In the first period mechanism used was
Funds For Long Term Development .

In 1980, there were 21 such Funds including :
Culture, National Parks, Transportation, Primary
Schools.
Between 1974 and 1979- Total appropriation
was TT$ 5,360 million. Interest earned was
TT$ 400 million.
Note : Data sourced from Accounting For the
Petrodollar 1980.

Saving For the Future
Allocations to interim Revenue Stabilization Fund
3,000.0
2,593.1
2,500.0
2,000.0
1,305.7
1,500.0
1,000.0
500.0
415.0 600.0
497.4
0.0
0.0
1999
2000
2001
2002
2003
2004
In the second period
mechanism used is
Revenue Stabilization
Fund.
Total of TT$ 5411
million up to end fiscal
2004-05.
Several unanswered
questions.?
Saving For the Future
RSF as% rev.
10.00%
9.60%
9.00%
8.00%
7.00%
6.33%
6.00%
5.00%
4.00%
4.30%
3.47%
2.97%
3.00%
2.00%
1.00%
0.00%
0.00%
2000
2001
2002
2003
2004
2005
RSF allocations
seem to be growing
with income.
No set pattern, may
well be a residual
amount.
Concluding Remarks
Sources of Funds


Need for inclusion of downstream taxes and
royalty in what is classified as “oil revenue”.
Need to publish disaggregated data.
Uses of Funds


Need for clear policy and rules on Heritage
Fund as distinct from Stabilization Fund.
Return to approach of Funds for Long Term
Development to aid sequencing of projects.
Concluding Remarks
Uses of Funds




Need for clear policy and rules on Heritage
Fund as distinct from Stabilization Fund.
Need for general rules of fiscal policy
Return to approach of Funds for Long Term
Development to aid sequencing of projects.
Greater emphasis required on transformation
effort. Tamara seems to be a start , but I
would rather build on agro industry and
cultural products.
?