sources and uses of hydrocarbon wealth a comparative analysis 1974-79 and 1999-2004 1974-79 and...
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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.
??