In the last issue we traced the evolution of the philosophy and practice of national ownership in the key energy sector. We observed a complete 3600 turnaround in the practice of state ownership over the forty-year period since independence.  My own contention is that the retreat from owning a stake in energy sector enterprises was a cardinal error made by Governments past and present. In the process, T&T seems to have stood still in comparison with other hydrocarbon exporters with respect to reaping the potential benefits of national participation in the hydrocarbon sector.  This is more than adequately demonstrated by the great strides made by state owned PETRONAS-Malaysia and SABIC- Saudi Arabia as well as our own CL Financial.   Coincidentally, PETRONAS – the Malay national oil company was established in August 1974, the same time as Trintoc.   Similarly, the creation of SABIC in 1976 has its local parallel in the form of the National Energy Corporation – with precisely the same mandate.   This essay explores the possible benefits from national ownership drawing relevant examples from the success stories of the aforementioned firms and highlighting the extent to which T&T has stepped backwards.  

 

 The stream of benefits that may flow from national ownership in the energy sector can be broadly categorized into four areas. Firstly, national ownership creates greater opportunity for increasing in national wealth. Conventionally, taxation of economic rents earned is the major channel through which the resource rich countries derive benefits from the exploitation of natural resources.  It is well known however that the taxation system less than efficient. Significant leakages occur from well-known sources such as transfer pricing and manipulation of allowances.  MNCs regularly use TP policies as strategic tools to increase subsidiary profits when the subsidiary is in a foreign country with a lower tax rate. The subsidiary, in turn, creates value that can yield more profits in the country of entry and minimize effective tax rates. It is not surprising for example that the share of in recent times we have heard the Energy Minister lament Government’s difficult in determining the appropriate value for LNG exports.   Greater national ownership provides the country with a share of profits in addition to its tax revenue the share of profits opens up possibilities for reinvestment in other aspects of the business.

 

This is particularly important in the upstream business where the bulk of the rents accrue.  The Malaysia strategy for dealing with this problem was to vest, the country’s entire oil and gas resources discovered or undiscovered in PETRONAS.  Commercial development of oil and gas resources has been pursued through joint ventures and production sharing contracts. PETRONAS has also leveraged its relationship with major MNCs in Malaysia to spread its wings to numerous ventures in 35 countries.  In contrast, initial moves made under the NAR government to have Petrotrin as a partner in upstream exploration seems to have been discontinued, to the long-term disadvantage of the Company.  

 

 Holding equity provides a share of profits which can be a useful source of funds for reinvestment. The success of CL Financial is living testimony of this possibility. Beginning with fledging investment in a methanol plant in 1993, the conglomerate has been able to expand its assets base to five methanol plants and two ammonia plants within twelve years.  Its ratio of capital investment in T&T to profits is likely to have surpassed that of every foreign enterprise in the energy sector. Profits accruing to foreign MNC is usually repatriated for distribution to shareholders and reallocation among competing investments options.

 

Secondly national ownership enhances the opportunity for building national technological capability. SABIC has been able to build a major world class R& D centre for the petrochemical industry. National capability has evolved to the point where SABIC is now a vendor / licensor of technology rather than simply a licensee.  Its massive global network demonstrates a capability with international marketing and logistics. The experience of the Methanol Holdings Trinidad Limited (MHTL), a CL Financial subsidiary, group emphasises the importance of control of the strategic decisions of the firm. MHTl manages its own shipping fleet and marketing activity. In contrast, within the foreign owned petrochemical companies, these functions are performed out of the head office denying locals the opportunity to learn the tricks of the trade.   At the level of plant operations and maintenance, the CL Financial subsidiary- Process Plant Services Limited – has developed world class expertise.

 

 Thirdly, national ownership provides greater opportunity for creating and cementing linkages within the economy. MNCs operating in the energy sector have often been described as total institutions. The term describes the fact that the institutions are self-contained and self-sufficient relating more to their head offices than to the local institutions. The local banking fraternity has repeatedly argued that MNCs walk with their bankers thereby limiting financing opportunities.   The emergence of local content legislation in many resources rich low-income countries reflects the widespread concern about the absence of inter sector linkages.   In Malaysia, PETRONAS has been able to create significant linkages locally and internationally.   A good example is its move into the shipping business.  The company first ventured into the shipping business in 1994 with the delivery of its first LNG tanker. By 1997 however, the PETRONAS fleet had grown to five tankers and it acquired a stake in the Malaysia International Shipping Corporation to reap the benefit of economies of scale in the highly competitive global shipping business.   Few will recall that we also had a company called the Shipping Corporation of Trinidad and Tobago (SCOTT), now defunct.  The Malay experience elicits thoughts about what may have been possible with SCOTT given the tremendous expansion in shipping activity generated by the energy sector.

 

Fourth, national ownership creates the platform for globalization.   There are several examples of national enterprises in resource countries that have evolved into global enterprises.   Both PETRONAS and SABIC have grown from start-up in their domestic industry in the mid 1970’s to emerge as major global corporations today.  PETRONAS operates in more than 30 countries.  SABIC now has 18 manufacturing affiliates in three continents. CL Financial has also spread its wings with an investment in a methanol plant in Oman.    Consistent and permanent reliance on direct foreign investment limits the possibilities of T&T firms ever going global in the energy business. 

 

A word of caution is necessary. Local history will show that while ownership is a necessary condition for maximizing the benefits articulated above it is by no means a sufficient condition. The Vision 2020 Energy Sub Committee concludes in its report that “the imperative to develop national enterprises that are internationally competitive beyond the geographical boundaries of Trinidad and Tobago is not currently embraced by the existing state enterprises in the sector, namely Petrotrin NGC and NP” , despite their abundance of physical and human resources  and financial assets.   Petrotrin, the state owned vertically integrated oil and Gas Company, (including its predecessor companies Trintoc and Trintopec and Trinmar) is as old as PETRONAS. While PETRONAS has grown to become a global player and fortune 500 Company, PETROTRIN remains a taxpayer’s burden, parochial in its business practice if not in its intent.  NGC, a highly successful state enterprise has not moved beyond its initial token investment in LNG Train1. This despite the rapid expansion of the natural gas trade globally and its highly touted success with respect to business development and contract negotiations.   The experience suggests that principal cause of stagnation among these state enterprises is the obfuscation of its primary business by the non-business demands of the shareholder.   This is sometimes compounded by a lack of business acumen.   The Vision 2020 energy subcommittee recommends “an infusion for commercial culture ushered in by joint venture activity with the national private sector.”   This would have to be accompanied by changes in the governance structure of these enterprises in order to provide some measure of protection from state interference.