A. Introduction

20. Trinidad and Tobago’s economy relies heavily on energy production. Oil production has long been a mainstay of the economy, though natural gas and petrochemicals have assumed greater importance in recent years. Petroleum reserves are therefore an important component of the wealth of the economy. In many countries with natural resource endowments, revenues from natural resources production have been used to support current budgetary expenditures. This raises the concern that some countries may rely too heavily on revenues from an exhaustible natural resource, and thereby reduce the net wealth of the country, leading to a lower standard of living in the future.

21. This section sets up a framework that can be used to evaluate the degree of dependence of Trinidad and Tobago’s budget on energy revenues and its long-term sustainability. Section 2 provides some background on energy production; Section 3 surveys the nature of the fiscal regime; Section 4 presents some simple simulations assessing the sustainability of Trinidad and Tobago’s fiscal position in the context of its reliance on revenues from petroleum, using a simple framework in which it is hypothesized that a country could sell all of its stock of natural resources and convert the proceeds into a financial asset from which it derives an income. Section 5 concludes.

B. Background

22. In 1998, petroleum and petrochemicals production accounted for 21 percent of GDP, 7 percent of total central government revenue and grants, and 46 percent of exports of goods and services. Oil production has declined over the past few decades and averaged about 122,000 barrels per day in 1998 compared to 240,000 in 1978. Total reserves are about 2.6 billion barrels of oil, about 57 years of supply at current production rates (see Section 1). Amoco Trinidad Oil Company, the wholly state-owned Petroleum Company of Trinidad and Tobago (Petrotrin), and the majority state-owned Trinmar are the major producers of oil. Petrotrin also owns the country’s only operating refinery, which manufactures petroleum products for local consumption and for export.

23. Natural gas production is currently over 1 billion cubic feet per day and is expected to grow to about 1.5 billion cubic feet per day in the next few years. Total reserves are about 30 trillion cubic feet (see Section 1), about 92 years of supply at current production rates, though industry estimates suggest that there may be several times as much in potential reserves. Natural gas is mainly used for power generation and petrochemicals (ammonia, methanol, and urea), and in the production of iron, steel, and cement. LNG is expected to become a major export with the coming on line of the ALNG plant in 1999. Although most gas is produced by private companies, the state-owned NGC is a monopolist in the purchase, transmission, and sale of gas. It also assists in the development of downstream gas-based industries (World Bank, 1997).

24. As in many countries, natural resources have at times been a mixed blessing to Trinidad and Tobago (Auty and Gelb, 1986). From 1973 to 1982, Trinidad and Tobago benefited from the sharp rise in oil prices, though much of these revenues were spent inefficiently on consumer subsidies, poor public investments, and transfers to inefficient state enterprises. As a consequence, the economy did not sufficiently diversify and the manufacturing and agricultural bases eroded as a result of an overvalued exchange rate. From 1982 to 1993, the decline in oil prices dragged Trinidad and Tobago into a decade long recession, which resulted in fiscal and current account imbalances, successive exchange rate devaluations, and substantial emigration of skilled labor from the country.

25. In recent years, the economy has sustained moderate economic growth, low inflation, and relative fiscal and external balance. In the 1990s, the discovery of large natural gas deposits induced foreign investments in the oil, gas, and petrochemical sectors in 1997 and 1998. These investments involved the purchase of imports of capital equipment and construction materials, resulting in a dramatic shift of the current account from surplus into a large deficit in the past two years. This shift is expected to reverse in the next few years as the projects are completed and production comes on line.

26. Tax revenues and royalties from the energy sector make an important contribution to the public finances. In recent years, however, there has been a significant erosion of these revenues, owing primarily to stagnant production of oil, to a decline in the prices of oil, natural gas, and petrochemicals, and to tax concessions related to new investments, which producers have used to offset tax liabilities on existing production. In 1998, the central government’s collections of 2 percent of GDP in tax revenues and royalties from oil and gas production were down from about 8 percent of GDP in 1996.² This decline in oil and gas revenues has been difficult for the budget to absorb, and has resulted in a significant weakening of the fiscal position in the past few years. While oil remains a dominant contributor to public revenues from energy resources, it is expected that in the next few years, revenues from natural gas and petrochemicals will begin to contribute a larger share.

C. Fiscal Instruments

27. The key difference between taxation of natural resource exploitation and other income-producing activities in an economy is that producers should compensate the government for the depletion of its publicly owned natural resource. The revenue instruments that apply to natural resources thus typically include both standard fiscal instruments, such as taxes and fees, and also royalties, which compensate the government for the loss of the natural resource (Nellor and Sunley, 1994). Production sharing agreements and payments of dividends or transfers from state-owned corporations may also serve in place of traditional tax and royalty instruments. Since Trinidad and Tobago’s energy resources are largely developed by the private sector, the government derives income from the sale of the rights to produce the natural resource plus any recurring levies on production. The choice of fiscal instruments and balance among them depends on the government’s desired revenue from natural resource production, timing of tax receipts, and degree of risk it wishes to bear.³

28. Lease or signature bonuses are typically upfront payments, which producers pay for the right to determine whether a particular area contains reserves and then to develop those reserves. These payments are typically determined by an auction, in which private producers participate, or they are awarded at the government’s discretion. Such schemes are generally easy to administer and they shift some of the risk of the project to the investor, since the investor must make an upfront payment even before development commences. This shifting of the risk may, however, reduce the amount producers are willing to pay for the rights to explore and develop natural resources.

29. Royalties are payments levied on volume or on the value of resources extracted. Royalties typically are viewed as compensating the government for the depletion of the resource. Royalties have several advantages as a fiscal tool. They are relatively easy to administer and ensure a minimum payment to the government. When levied on the basis of volume, the revenues are sensitive to price only in that they vary with production volume. When they are levied on the basis of value, they vary with respect to both production volume and the price per unit volume. Royalties have the disadvantage that they add cost to the production of a natural resource and therefore may influence production decisions, possibly resulting in reduced production of marginal deposits. If, however, they are seen as the price for depletion of the resource, then they are a useful signal determining the value of an investment. Royalties should be deductible against income taxes because they are a cost of production. For oil, the average worldwide royalty rate is approximately 10 percent of the wellhead price (Gray, 1997).

30. A corporate income tax typically applies to profits from natural resource production. The main advantage of a corporate income tax that if it provides economically appropriate allowances for capital investments and is thus truly a tax on profit, then it does not distort production decisions. However, corporate income tax revenues are more sensitive to price changes, investment decisions, and other economic variables than royalties. Hence, corporate income tax revenues fluctuate more than royalties with changes in profitability.

31. The main disadvantage of reliance on corporate income taxes is that they are difficult to administer. There are many ways in which multinationals engaged in natural resource production may attempt to reduce their corporate income tax liabilities. Examples include transfer pricing and thin capitalization. Transfer pricing refers to the internal prices that businesses set for resources shifted from one jurisdiction to another where the business has operations. By using artificially high prices when buying inputs and artificially low prices when selling products in jurisdictions where taxes are high, businesses shift profits into lower tax jurisdictions. It is usually difficult to establish the proper transfer price. Thin capitalization describes situations where businesses attempt to reduce their tax liabilities by financing operations with an excessive amount of debt (often parent companies lend to subsidiaries) to gain the advantages of high interest deductions, which reduce corporate income tax payments, and to shift interest income earned on these loans to lower tax jurisdictions (often the parent companies’ headquarters). These loans are not always undertaken in arms’ length relationships, particularly when the loans are between related companies. It is possible to limit thin capitalization abuses by various means, including limiting the amount of interest a business can deduct on an investment, and by requiring all loans to be set at genuine market rates and on market terms. But, as with transfer pricing, it is often difficult to enforce these limits.

32. Countries sometimes take an equity share in natural resource investments, via a state company or a partnership with a multinational. An equity share allows the government to share in the risks and returns of an enterprise. But unlike when resources are privately owned, a government that is an equity owner runs the possibility of losing its equity investment. Equity participation can take several forms. Under a working interest, the government puts up money so that it shares in the risk of an investment. It may earn no return if the project yields no profits. A less risky alternative is for the government to take a carried interest, under which funds are deemed to be loaned to the government by the project investors. Interest is charged on the government’s carried interest and the loan is repayable out of the government’s share of profits from the investment. The government gains an equity share only when the loan is paid off. One advantage of an equity share is that it gives the government more influence over the day-to-day operations of the enterprise, though often a government takes an equity share for political rather than economic reasons.

33. Countries may also engage in production-sharing agreements, under which the government and the private investors are partners (Sunley, 1998). The government contributes capital in the form of the natural resource and the private investors are responsible for exploration and developing costs and operating the project. The government and the private investors share production from the investment.

34. The government’s share of the natural resource may be paid in cash or in kind. It generally is broken down into three pieces: payments for the right to use natural resources, the government’s share of the production, and the profits tax on the investors’ share of production. Usually after a share of the production is used to compensate the government for the right to use resources, the remaining production is broken down into cost recovery and profit components of production. The cost-recovery share goes to producers and ensures that they are able to recover exploration, development, and operating costs. Sometimes, this component is limited by a ceiling amount. The profit component is split between the government and the investors in the project, with the exact split negotiated as part of the production sharing agreement.

35. In some respects, production sharing has features of a carried equity interest by allowing the government to share in the risks and returns of projects. Production sharing may be advantageous if it gives the government greater ability to monitor day-to-day operations of the natural resource production process because it is a part owner of the product. Increasingly, countries are making use of production-sharing arrangements for developing natural resources and moving away from the traditional royalty arrangements.

36. Countries typically offer incentives for foreign investment. These incentives are often provided as full or partial tax holidays for some period of years, generous allowances under the profits tax, and exemptions from royalties, import duties, excise, and value-added tax on imports of capital goods and other inputs. However, tax incentives are not an effective way to encourage investment. For businesses, they distort investment decisions so that these decisions are not based on economic fundamentals. For the government, they require lost revenues to be offset by higher revenues from other taxes. They are difficult to administer, and they create inequities between businesses otherwise engaged in the same activities. A better means to attract investment is to establish a well-structured corporate income tax, with generous depreciation allowances for capital investments, a moderate overall corporate tax rate, and appropriate loss carryforward provisions. In addition, investors are often more interested in a stable tax system and economic environment with transparent laws and regulations, and royalties and taxes that are internationally comparable rather than special privileges.

37. Trinidad and Tobago applies a complex tax regime to petroleum production that makes use of standard instruments. The tax regimes that apply to oil and gas are different, though both are based on production and income taxes. Under these regimes, oil and gas activities are categorized as either exploration and production, refining, or marketing operations. The profits of each type of business are taxed separately under the tax law.

38. For oil extraction, production-based payments consist of: (i) royalties of 10 percent on onshore oil sales and 12.5 percent of offshore sales; (ii) a petroleum production levy, which is levied on sales on a complex formulaic basis related to production levels and retail prices, or at a rate of 3 percent rate (whichever is less); and (iii) a small petroleum impost, which is used to cover administrative expenses of the Ministry of Energy. Income-based taxes consist: of (i) a petroleum profits tax levied at a 50 percent rate on profits from oil production; (ii) an unemployment tax levied at a 5 percent rate on profits from oil production (this tax is not deductible against the profits tax); and (iii) a supplemental petroleum tax levied on crude oil sales less certain allowances, at a sliding rate that varies with the price of oil, when the development license was granted, and when production began. The rates range from a low of 0 percent when the price is US$13.00 per barrel or less, to a maximum of 38 percent for onshore activities and 45 percent for offshore activities (if these activities were licensed and development began prior to 1988) when the price is US$49,51 per barrel or above. This tax is deductible in arriving at profits subject to petroleum profits tax.

39. For gas production, companies are liable to pay royalties at a rate negotiated with the government. Companies also pay the corporate income tax at the standard rate of 35 percent on profits and the petroleum impost. The supplemental petroleum tax and the petroleum production levy do not apply.

40. Trinidad and Tobago engages in production sharing in both oil and natural gas. Most new contracts for oil and gas development are being written as production-sharing contracts, following world trends in this area. Under these arrangements, the government accepts cash payments for the production share rather than actually taking possession of the natural resource. The production share is determined at the beginning of the contract and is negotiated with the government on the basis that it should cover amounts owed to the government on production. As set out in the contract, the production share may vary from year to year, depending on the costs of production, prices of the output, and other factors. If the production share in any period is in excess of the tax liability, then this excess accumulates in a fund, to be drawn down when the production share is insufficient to cover the tax liability, and if the production share is insufficient in any period, the government must wait to collect full payment. Over the life of the project, there is no reconciliation of the actual production share with the actual tax liability, even if they do not match. No royalties apply to these production-sharing contracts. Companies also pay in cash any signature bonuses and an annual fee per hectare of land covered under the agreement.

41. Trinidad and Tobago’s fiscal regime also offers many tax incentives to energy producers. The main incentive is an income tax holiday for up to 10 years on new investments, with eligibility determined according to criteria in the law. Tax incentives also often include among others exemption from import duties and value-added tax on imports, and exemption from withholding on payments of dividends to foreign shareholders.

42. Although it is difficult to make precise cross-country comparisons of natural resource tax regimes, Table 1 contrasts central government tax revenues from petroleum as a share of output in the petroleum industry in Trinidad and Tobago, and in Gabon, Indonesia, and Venezuela, three other major oil-producing countries, averaged over the years 1994-97.^{4 5} Trinidad and Tobago consistently took the lowest share of revenue relative to output of the petroleum industry compared to these other countries.⁶

Table 1.

Comparison of Public Revenues from Oil in Selected Countries

(Average value over the 1994-97 period)

^1/These figures do not equal the ratio of the above two numbers for each country because of rounding.

Table 1.

Comparison of Public Revenues from Oil in Selected Countries

(Average value over the 1994-97 period)

	Gabon	Indonesia	Venezuela	Trinidad and Tobago
	(In percent of GDP)
Petroleum production	42	8	21	29
Petroleum revenue	16	4	9	6
(In percent of petroleum production value) 1/
Petroleum revenue	39	46	45	21

^1/These figures do not equal the ratio of the above two numbers for each country because of rounding.

View Table

Table 1.

Comparison of Public Revenues from Oil in Selected Countries

(Average value over the 1994-97 period)

	Gabon	Indonesia	Venezuela	Trinidad and Tobago
	(In percent of GDP)
Petroleum production	42	8	21	29
Petroleum revenue	16	4	9	6
(In percent of petroleum production value) 1/
Petroleum revenue	39	46	45	21

^1/These figures do not equal the ratio of the above two numbers for each country because of rounding.

43. From a somewhat different perspective, Van Meurs et al (1997a,b) compare the fiscal regimes applied to oil and gas production of a number of countries, rating the fiscal regimes on the basis of the return on an investment in a standardized oil and gas field in each jurisdiction. This study rated Trinidad and Tobago’s general fiscal regime applied to onshore oil as “average,” and the offshore regime as “tough” It rated Trinidad and Tobago’s fiscal regime applied to natural gas as “average.” It also rated oil and gas production-sharing arrangements as “average.” Since these calculations are based on stylized investments, the judgments may not fully reflect all features of the fiscal regime, such as tax holidays and other tax incentives, which reduce the tax burden. In addition, this comparison ignores other considerations such as proximity to markets and features of the political and economic environment, which would influence the attractiveness of an investment.

D. Fiscal Sustainability of Revenues from Oil and Gas

44. Section 3 examined the tax regime in isolation from budgetary considerations. Revenues from oil and gas are, however, an important component of the budget and therefore it is important to determine whether the reliance on these revenues is appropriate. Given the nonrenewable nature of oil and gas reserves, it is essential to take an intertemporal approach that explicitly accounts for the diminishing stock of natural resources and other economic factors that affect the budget, such as the growth in income and population.

45. Several studies have developed models to examine the choice of a fiscally sustainable level of production of natural resources (Alier and Kaufman, 1999; Chalk, 1998; Liuksila et al, 1994; Tersman, 1991). In these models, the government is bound by the availability and value of natural resources, and by its intertemporal budget constraint.

46. This section takes a relatively simple approach, used in Tersman (1991), to assess fiscal sustainability. Petroleum resources are seen as generating a real return. This return arises in the hypothetical case in which the government sells its net petroleum wealth and invests the sum in financial assets earning this real return. In this analysis, the production decision is assumed to be outside the control of government, which is reasonable in Trinidad and Tobago as private producers are responsible for the bulk of production.⁷

47. A sustainable fiscal policy is somewhat arbitrarily defined as one which leaves the government’s net wealth unchanged. From a budgetary perspective, the criterion of leaving the government’s net wealth unchanged implies that the government can run a deficit on the nonpetroleum portion of the budget, which is offset by the real income generated from energy assets.^{8 9}

48. An alternative but perhaps more intuitive criterion than the one above is that with a growing population, the government may wish to keep wealth constant in per capita terms. This criterion implies that the revenues from energy resources can provide a subsidy to the budget on income generated by the real rate of return minus the rate of population growth. The total value of the subsidy and the net wealth of the government are both rising at the same rate as the population so the subsidy and net wealth per capita are constant.

49. Another intuitive criterion is one in which with a rising real income, the government may wish to keep wealth constant as a share of nonpetroleum GDP. This criterion implies that the revenues from energy resources can provide a subsidy to the budget on income generated by the real return minus the rate of real nonpetroleum GDP growth. To the extent that real nonpetroleum GDP is rising in per capita terms as well, this implies a lower subsidy than the criterion where per capita wealth is held constant. The total value of the subsidy and the net wealth of the government rise at the rate of real nonpetroleum GDP growth.

50. These three criteria for fiscal sustainability are evaluated in the simulation in Table 2, using parameters for Trinidad and Tobago in 1998 and assumptions discussed below. As a starting point, it is necessary to place a value on the nation’s oil and gas reserves. The government’s share is assumed to be 21 percent.¹⁰ Total reserves of oil are worth US$30.6 billion, when valued at about US$12 per barrel, from which the government is assumed to take US$6.4 billion in public revenues. Total reserves of natural gas are US$58.6 billion, when valued at US$69 per 1,000 cubic meters of gas, from which the government is assumed to take US$12.3 billion in public revenues.¹¹ The government’s share of petroleum wealth is therefore estimated at US$18.7 billion.¹² The public sector’s overall net wealth, after subtracting public debt, is US$16.0 billion. The stock of net petroleum wealth represented 350 percent of nonpetroleum GDP or US$12,300 per capita in 1998.

Table 2.

Trinidad and Tobago: Fiscal Sustainability of Oil and Gas Revenues in Trinidad and Tobago

Table 2.

Trinidad and Tobago: Fiscal Sustainability of Oil and Gas Revenues in Trinidad and Tobago

		1998	1999	2000	2005	2010	2020	2030	2040	2050
Parameters
	Population (millions)	1.3	1.3	1.3	1.4	1.4	1.6	1.7	1.9	2.1
	Real nonpetroleum GDP (US$millions)	4,554	4,691	4,832	5,601	6,493	8,726	11,728	15,761	21,181
	Real nonpetroleum GDP per capita (US$)	3,503	3,576	3,651	4,047	4,486	5,512	6,773	8,322	10,225
Overall nonpetroleum balance (US$millions)		-1,180	-1,215	-1,252	-1,451	-1,682	-2,261	-3,039	-4,084	-5,488
	percent of nonpetroleum GDP	-4	-4	-4	-4	-4	-4	-4	-4	-4
	per capita (US$)	-144	-147	-150	-166	-184	-227	-279	-342	-421
Current nonpetroleum balance (US$millions)		-680	-700	-721	-836	-970	-1,303	-1,751	-2,353	-3,163
	percent of nonpetroleum GDP	-2	-2	-2	-2	-2	-2	-2	-2	-2
	per capita (US$)	-83	-85	-87	-96	-106	-131	-161	-197	-242
(A) Permanent income held constant
Net assets (US$millions)		15,962	15,962	15,962	15,962	15,962	15,962	15,962	15,962	15,962
	percent of nonpetroleum GDP	350	340	330	285	246	183	136	101	75
	per capita (US$)	12,279	12,169	12,061	11,532	11,027	10,082	9,218	8,428	7,706
Subsidy (US$millions)		638	638	638	638	638	638	638	638	638
	percent of nonpetroleum GDP	14	14	13	11	10	7	5	4	3
	per capita (US$)	491	487	482	461	441	403	369	337	308
(B) Permanent income per capita held constant
Net assets (US$millions)		15,962	16,106	16,251	16,996	17,774	19,440	21,263	23,256	25,435
	percent of nonpetroleum GDP	350	343	336	303	274	223	181	148	120
	per capita (US$)	12,279	12,279	12,279	12,279	12,279	12,279	12,279	12,279	12,279
Subsidy (US$milllions)		495	499	504	527	551	603	659	721	789
	percent of nonpetroleum GDP	11	11	10	9	8	7	6	5	4
	per capita (US$)	381	381	381	381	381	381	381	381	381
(C) Permanent income in GDP held constant
Net assets (US$millions)		15,962	16,441	16,935	19,632	22,759	30,586	41,105	55,241	74,240
	percent of nonpetroleum GDP	350	350	350	350	350	350	350	350	350
	per capita (US$)	12,279	12,534	12,795	14,183	15,722	19,318	23,737	29,167	35,839
Subsidy (US$millions)		160	164	169	196	228	306	411	552	742
	percent of nonpetroleum GDP	4	4	4	4	4	4	4	4	4
	per capita (US$)	123	125	128	142	157	193	237	292	358

View Table

Table 2.

Trinidad and Tobago: Fiscal Sustainability of Oil and Gas Revenues in Trinidad and Tobago

		1998	1999	2000	2005	2010	2020	2030	2040	2050
Parameters
	Population (millions)	1.3	1.3	1.3	1.4	1.4	1.6	1.7	1.9	2.1
	Real nonpetroleum GDP (US$millions)	4,554	4,691	4,832	5,601	6,493	8,726	11,728	15,761	21,181
	Real nonpetroleum GDP per capita (US$)	3,503	3,576	3,651	4,047	4,486	5,512	6,773	8,322	10,225
Overall nonpetroleum balance (US$millions)		-1,180	-1,215	-1,252	-1,451	-1,682	-2,261	-3,039	-4,084	-5,488
	percent of nonpetroleum GDP	-4	-4	-4	-4	-4	-4	-4	-4	-4
	per capita (US$)	-144	-147	-150	-166	-184	-227	-279	-342	-421
Current nonpetroleum balance (US$millions)		-680	-700	-721	-836	-970	-1,303	-1,751	-2,353	-3,163
	percent of nonpetroleum GDP	-2	-2	-2	-2	-2	-2	-2	-2	-2
	per capita (US$)	-83	-85	-87	-96	-106	-131	-161	-197	-242
(A) Permanent income held constant
Net assets (US$millions)		15,962	15,962	15,962	15,962	15,962	15,962	15,962	15,962	15,962
	percent of nonpetroleum GDP	350	340	330	285	246	183	136	101	75
	per capita (US$)	12,279	12,169	12,061	11,532	11,027	10,082	9,218	8,428	7,706
Subsidy (US$millions)		638	638	638	638	638	638	638	638	638
	percent of nonpetroleum GDP	14	14	13	11	10	7	5	4	3
	per capita (US$)	491	487	482	461	441	403	369	337	308
(B) Permanent income per capita held constant
Net assets (US$millions)		15,962	16,106	16,251	16,996	17,774	19,440	21,263	23,256	25,435
	percent of nonpetroleum GDP	350	343	336	303	274	223	181	148	120
	per capita (US$)	12,279	12,279	12,279	12,279	12,279	12,279	12,279	12,279	12,279
Subsidy (US$milllions)		495	499	504	527	551	603	659	721	789
	percent of nonpetroleum GDP	11	11	10	9	8	7	6	5	4
	per capita (US$)	381	381	381	381	381	381	381	381	381
(C) Permanent income in GDP held constant
Net assets (US$millions)		15,962	16,441	16,935	19,632	22,759	30,586	41,105	55,241	74,240
	percent of nonpetroleum GDP	350	350	350	350	350	350	350	350	350
	per capita (US$)	12,279	12,534	12,795	14,183	15,722	19,318	23,737	29,167	35,839
Subsidy (US$millions)		160	164	169	196	228	306	411	552	742
	percent of nonpetroleum GDP	4	4	4	4	4	4	4	4	4
	per capita (US$)	123	125	128	142	157	193	237	292	358

51. The simulations in Table 2 assume that the real interest rate on petroleum wealth is 4 percent (Tersman, 1991) and that petroleum prices stay constant in real terms.¹³ The population is assumed to grow at 0.9 percent rate per year and real nonpetroleum GDP at a 3 percent rate per year.¹⁴ The overall central government deficit without petroleum revenues in 1998 was about 4 percent of nonpetroleum GDP or -US$153 per capita. The corresponding current deficit without petroleum revenues was about 2 percent of GDP or -US$83 per capita.¹⁵ The current balance may be more meaningful in that it nets out the effect of sales of capital assets, which merely represent a change in the composition of the government’s asset holdings, and capital expenditures which, if made for productive purposes, add to the stock of national wealth.

52. In simulation (A), which maintains a constant level of petroleum wealth of US$16.0 billion, the government could afford to allow petroleum revenues to provide a subsidy to the budget of US$638 million, representing 14 percent of nonpetroleum GDP and US$491 per capita in 1998. This figure is more than the present overall or current deficit, and hence suggests that Trinidad and Tobago could rely more heavily on petroleum revenues in its budget. Over time, however, steady economic growth would lead to a reduction in the subsidy to 3 percent of nonpetroleum GDP by 2050. Consequently, over time the nonpetroleum deficit would also have to narrow in order to maintain the country’s net wealth in absolute terms.

53. In simulation (B), the criterion of holding petroleum wealth constant in per capita terms at US$12,300 would reduce the subsidy to US$495 million or 11 percent of nonpetroleum GDP and US$381 per capita. While lower than the figure in (A), this criterion still suggests that the budget could increase its reliance on petroleum revenues without causing the wealth per capita of future generations to fall. Again, this subsidy would shrink over time, though at a slower rate than in (A), reaching 4 percent of nonpetroleum GDP by 2050. As in simulation (A), these results suggest that the deficit would have to be steadily narrowed.

54. In simulation (C), the criterion of holding petroleum wealth constant as a share of nonpetroleum GDP at 350 percent would further reduce the subsidy to US$160 million, or 4 percent of nonpetroleum GDP and US$123 per capita. In contrast to (A) and (B), this criterion for sustainability suggests that Trinidad and Tobago, with a deficit of about 4 percent of nonpetroleum GDP in 1998, was just poised at the edge of a sustainable position with respect to use of petroleum revenues to subsidize the budget, implying that the budget should not rely more heavily than at present on these revenues without leading to a reduction in net wealth as a ratio to nonpetroleum GDP. From the point of view of the current deficit, Trinidad and Tobago still has some room for a larger nonpetroleum deficit. The results of all three simulations are consistent in suggesting that Trinidad and Tobago should continue improving its nonpetroleum revenue base or make adjustments elsewhere in the budget to ensure a sustainable fiscal outcome over the medium term.

55. As with any simulation analysis, the outcome is sensitive to certain key assumptions. A higher real interest rate on petroleum wealth would, in this simulation, raise the allowable subsidy to the budget by providing higher income to the government on its wealth holdings. A price for petroleum that is rising in real terms would also raise the allowable subsidy. A higher level of petroleum reserves would likewise ease the budget constraint. Slower population growth or growth of the nonpetroleum economy would have no effect on the first criterion, in which wealth is held constant, but would raise the allowable subsidy where per capita wealth or wealth as a share of GDP, respectively, are held constant. If the government took a lower share of total revenues for public purposes then the allowable subsidy would also fall.

E. Conclusion

56. This section examines the fiscal regimes for oil and gas and the sustainability of the reliance on revenues from oil and gas in Trinidad and Tobago, The overall tax burden on oil and gas production does not appear to be high, compared to several other oil-producing nations. Nevertheless, any country that relies heavily on a nonrenewable resource faces the concern that its economic well being is not sustainable. By the criteria used in the simulation exercise, Trinidad and Tobago’s reliance on petroleum revenues to support the budget is not excessive. But by themselves, these criteria are not an argument for increasing the nonpetroleum deficit. Indeed, by strengthening its nonpetroleum fiscal position, Trinidad and Tobago may accumulate and invest its petroleum revenues, as have several major oil producers, such as Norway and Kuwait, and thereby increase its net wealth for future generations.