Government seeks to formalise Heritage
Fund
Photo
courtesy bpTT
BpTT
chairman and CEO Robert Riley, second from left,
takes Prime Minister Patrick Manning, right, and
Energy Minister Dr Lenny Saith, left, on a tour
of the Ibis Deep exploration rig in July.
By Sherwin Long
The Trinidad Guardian
Port
Spain
Petroleumworld.com
10 08 06
Given
the wealth T&T is amassing from high energy
prices, the Government is seeking to better prepare
for a rainy day by revamping its revenue stabilisation
fund legislation.
Currently,
the country’s Revenue Stabilisation Fund has
$5.4 billion and the Heritage and Stabilisation
Fund Bill 2006 is before Parliament.
But,
according to the International Monetary Fund (IMF),
for the State to truly maximise its earnings it
must follow best practices plus fashion its new
fund after the Norwegian model.
The
stabilisation fund is based more on short-term price
swings while the heritage fund focuses on a long-term
solution to the vagaries of a resource-based economy.
However,
in order for T&T to emulate the success of Norway’s
State Petroleum Fund, several operational, asset
management and transparency standards should be
followed.
The
following is a summary of key elements of the Heritage
and Stabilisation Fund:
The
fund
According
to the legislation, the fund will provide savings
for future generations and weather the storm in
case of a drop in oil or natural gas prices.
Since
T&T’s hydrocarbon resources are a depleting
resource, the legislation wants to develop alternative
income to support state expenditure.
The
Government intends to transfer monies from the Revenue
Stabilisation Fund to the new fund and use money
earned from petroleum taxes and royalties.
From
petroleum production, the money deposited into the
fund will be based on a scale.
The
scale will be dependent on estimated petroleum revenues
for each quarter.
If
the revenues exceed the projection by more than
ten per cent this excess will be placed in the fund.
However,
if the revenues are lower than ten per cent then
the Finance Minister would have leeway on how much
money is deposited into the fund.
As
a check and balance against fluctuations, the deposit
will have to be made no later than one month following
the end of the quarter.
The
investment assets of the fund will be held in the
financial investment portfolio while “the
cash resources” will be held in the financial
investment account.
In
describing this account, the legislation states
that the “resources” will be invested
in “international investment instruments including
highly-liquid fixed income securities as well as
in bonds and equities.”
Annually,
a minimum of 60 per cent of the fund’s deposits
will be placed into this account.
The
legislation also considers conditions for withdrawing
cash from its coffers.
In
case the projected petroleum revenues for the year
fall below estimates by at least ten per cent there
are two options. The Government could withdraw:
60
per cent of the shortfall of revenues for the quarter
or
25
per cent of the standing balance in the fund at
the start of the quarter.
The
lesser amount of the two figures will be the figure
the Government withdraws.
A
five member board of governors will manage the fund.
T&T
vs Norway
Norway’s
State Petroleum Fund (SPF) has been branded as the
model for other nations to follow.
In
light of transparency and accountability, the SPF
is open to public scrutiny as its audited reports
are made public.
Similarly,
the proposed T&T legislation has these provisions.
The
fund is described as a public account and will be
audited annually by the Auditor General.
As
noted previously, a five member board of governors
will manage the fund.
The
board will report to the Finance Minister and will
submit a quarterly and an annual investment report.
If the minister requests, the board must also submit
a report on operation and performance of the fund
within a month of the request.
At
the end of the financial year, the minister will
lay the audited financial statements of the fund
in parliament.
Norway’s
SPF is managed by Norges Bank and the bank is legally
required to disclose information regarding the fund’s
management.
In
T&T’s legislation, the fund’s assets
will be managed by an investment entity.
Norges
Bank manages the SPF’s assets and monitors
the equity and bond portfolio investments.
The
T&T investment entity will be responsible for
appointing a global custodian for the fund as well
as documenting all transactions relating to the
fund’s management.
The
entity must submit quarterly and annual reports
to the fund’s board on the performance, holdings
and risk of the fund on month after each quarter.
Heritage
and Stabilisation Fund’s current practice
and best practices
Best
Practices
Current
practices are checked off with blue boxes
Operational
Aspects:
Coherent
integration within the budget.
Flexible
rules such as the fund financing the
overall
budget balance.
The
fund’s assets should constitute the net savings
of the government.
Parliament
should approve expenditures.
Countercyclical
fiscal policies should be adopted.
Asset
Management:
The
central bank or private investment managers may
manage the fund’s assets.
Assets
should be placed abroad.
Explicit
consideration of mix of assets, currencies, liquidity
and maturity of assets.
Explicit
restrictions to borrow, lend, make capital expenditures
directly or to use fund’s capital as collateral.
Transparency
and accountability:
Transparent
rules and operations.
Regular
and frequent (inter-year) reporting of the fund’s
operational guidelines, its asset flows and the
allocation and return on assets should be submitted
to legislature and made publicly available.
Clear
assignment of responsibilities and accountability.
Independent
audit of investment performance.
Comments
HSF
is in the form of an account at CBTT.
Rigid
rules: deposits and withdrawals occur when oil revenues
exceed budgeted revenues, which are based on a discretionary
reference price.
Withdrawals
authorised by MOF. Fiscal policy appears procyclical.
CBTT
submits a quarterly report of the operations of
the HSF to the Minister of Finance.
No
clear assignment of accountability.
Annually
audited by the auditor general or by another auditor
authorised by it
CBTT
manages HSF’s financial assets; it may appoint
professional investment bankers.
Assets
are denominated in foreign currency and are to be
invested in foreign currency securities issued by
sovereign countries.
What
the economists have to say
In
a recent Business Guardian interview economists
Lloyd Best and Dr Dhanayshar Mahabir gave their
take on the proposed Heritage and Stabilisation
Fund Bill 2006.
Mahabir
called on the Government to put all its savings
and surpluses into the fund and cap its budgetary
spending at $35 billion for the most.
He
said it would be prudent for the country to invest
in T-bills and long-term bonds.
Best
explained that there should be four separate funds.
He
said a heritage fund would take into consideration
environmental degradation and the fact that oil
and gas are depleting resources.
Added
to this fund would be a sterilisation fund, providence
fund and a separate stabilisation fund.
Best
noted that the amount of money going to the heritage
fund should be predetermined before income and expenditure
are determined.
Trinidad
Guardian
Thursday 5th October, 2006
Copyright
©2006 Trinidad Guardian. All Rights Reserved.
