Where we stand‎ > ‎News & Comment‎ > ‎


posted 6 Sep 2013, 07:42 by Gerry Kangalee
As budget day approaches in T&T a tsunami of calls by business organizations have been made to the Minister of Finance and all of them, save DOMA, have called for the (phased) elimination of the so-called fuel subsidies.

I refer to government transfers to reduce fuel costs as a “so-called” subsidy as many people believe that fuels in T&T are sold below production cost. Nothing is further from the truth! The wholesale/retail prices for gasoline, kerosene, auto diesel and LPG and the margins for both the Dealers and the Company are established by Pricing Orders under the Petroleum Act.

The elements of this price structure include ex-refinery price, excise duty, wholesale margin, retail margin, value added tax, road improvement tax. Petrotrin and NP realize hundreds of millions of dollars in profits and government earns many millions also on the collection of excise duties, VAT and road improvement tax levied on all sales.

The so-called subsidy is the difference between our pump price and world market price which the oil companies have argued is their economic price.

The reasons advanced by the business groups are consistent, as it relates to fuels; (1) the estimated transfer by government for 2013 is $4.5B and this expenditure is unsustainable (2) the benefit favours the rich in the society: the IMF quotes economist Justin Ram that 45% of this benefit goes to the richest in the society while only 4% go to the poorest.

In reviewing these positions one gets the impression that these organisations are very concerned that government should maximize its revenues and reduce its expenditure on transfers and subsidies.

However, in addition to these recommendations, there are calls by these business organisations for government to do the complete opposite. The only differences are they are called by different names, not SUBSIDIES or TRANSFERS but “INCENTIVES”, “STIMULUS” “REFOCUS OF EXPENDITURE” etc. and of course they are directed exclusively at the wealthy.

The Manufacturers Association (TTMA) has called for the removal of VAT on heavy equipment “to incentivize manufacturers”. The Energy Chamber was very detailed on the SUBSIDIES it wants for the companies it represents, many of whom have gross annual revenues which are multiples of T&T’s Gross Domestic Product. The goodly Chamber wants the Minister of Finance to,

1) Revise the Petroleum Act to recognize Production Sharing Contracts (PSC) in order to remove the petroleum tax liability from companies operating under PSCs (reduces fiscal risk for PSC operators).

2) Make a public commitment on no new petroleum taxes for Exploration & Production license operators.

3) Provide capital allowances for platform construction for isolated, marginal gas fields that need platforms. In order to promote local content these allowances should be restricted to platforms fabricated in Trinidad and Tobago. Tangible drilling allowance on plant and machinery used in marginal gas field development should also be increased to 30%.

4) Provide the right physical infrastructure to encourage investment. In addition, the Energy Chamber is advocating that port infrastructure and efficiency be improved and that the government ensures existing trade agreements are fully implemented, well understood and monitored.

5) Make further steps to fostering downstream manufacturing including providing assistance in identifying potential foreign investors with access to technology and markets (through InvesTT); developing market intelligence studies as well as identifying potential foreign buyers through ExporTT and overseas missions.

What is frightening about this is that the Minister of Energy is on record as “agreeing with major industry players that the upcoming national budget on September 9 should maintain a competitive fiscal regime”. He went on to say “we want to see incentives for exploration and production, but without compromising the base revenues.” (My emphasis)

The point made about not compromising base revenue is very revealing. Most citizens are unaware of the many reliefs enjoyed by transnational energy companies as their fiscal regime is a closely guarded State secret.

Oil companies are able to deduct the cost of their investments and reduce their tax liability. They are able to do so from existing revenues and not only from revenues of new production; this means that all the risk always trumpeted by oil companies in exploring for new oil is really borne by the citizens.

Many times these exploration costs are allowed for tax purposes well in excess of the actual costs; not to mention the rapid depreciation rate allowed. Some years ago this measure almost brought government operations to a standstill when (I believe) Amoco deducted a large chunk of expense in a particular quarterly return that left virtually no taxes to be paid to the T&T Treasury.

It is very instructive to note that the business organisations are for additional subsidies on top of the other subsidies enjoyed by business. None of these organisations saw it fit to review any of these benefits to see if government could or should afford their continuation.

Let us look at the so-called fuel subsidy a bit further. If we follow the figures provided by economist Justin Ram it means that 65% of the $4.5 billion go directly and indirectly to citizens of T&T who are not rich. This translates to $2.92 billion dollars that is divided to well over one million people. The first point that needs to be made is that the natural resources of the country belong to all citizens of the country. It does not belong to the Government, neither is it the property of the energy companies which are foreign-owned in the main.

We need to calculate the economic value of our oil, gas, pitch etc. and then we will better appreciate who really benefits most from our patrimony. What do we enjoy as owners of these resources? Adequate health care? Security? Good roads? Schools in good condition?

If this so-called subsidy is removed what do we expect the haulers who transport food, medical supplies, clothing, building materials will do? Even if it is phased out it simply means that the inevitable will be delayed. If the problem is regressivity, i.e. it favours the rich, the solution is to correct that problem not to eliminate the benefit bearing in mind the consequences of its elimination.

We know that all increased costs incurred by business operators will simply be passed on to the consumers so their position will remain cost neutral but the Minister of Finance will now have $5 billion more which will now be able to go to “INCENTIVES”, “STIMULUS” and “REFOCUS OF EXPENDITURE” to the tiny portion of the society who receive such considerations.

We must not feel intimidated to demand our fair share of the national patrimony; everybody else does and considerably more than their “fair” share.