The Heritage and Stabilisation Fund 101 – Part One

21 April 2016


In the first of a three-part series we take a look at the Heritage and Stabilisation Fund of the Republic of Trinidad and Tobago.160418 HSF 101 - Image 1

The Heritage and Stabilisation Fund (HSF) was created by Act number 6 of 2007 and received Presidential Assen
t on the 15th March 2007. The HSF is a successor fund to the Interim Revenue Stabilisation Fund (IRSF), with the balance on the IRSF being transferred to the HSF by provision of section 12 of the Act.

What is the purpose of the fund?

The purpose of the fund is to save and invest surplus petroleum revenue derived from production business in order to:

  • Cushion the impact on, or sustain public expenditure capacity during periods of revenue downturn whether those are caused by a fall in prices of crude oil or natural gas (the stabilisation element of the fund).
  • Generate an alternative stream of income so as to support public expenditure capacity as a result of revenue downturn caused by the depletion of non-renewable petroleum resources (this may be defined as the part heritage and part stabilisation element of the fund).
  • Provide a heritage for future generations of citizens of Trinidad and Tobago from savings and investment income derived from the excess petroleum revenues (the heritage element of the fund).

What does the fund comprise of?

The HSF comprises of three elements:

  • Monies transferred from the IRSF.
  • Petroleum revenue deposited in the fund as surplus income under the terms of Section 13 of the Act (discussed in more detail below).
  • Assets acquired and earned from investments made by the HSF.

When is the Government obliged to add to the fund?

Section 13 of the Act deals with additions to the fund.

The requirement to make deposits to the fund is measured quarterly. Where Petroleum Revenues collected in each quarter:

  1. Exceed the estimated petroleum revenues for that quarter of the financial year by more than 10%, the US$ currency equivalent of the excess shall be withdrawn from the fund and deposited to the fund in accordance with section 14(1) of the Act.
  2. Or in the event that the estimated petroleum revenues do not exceed 10%, the Minister of Finance may direct that the currency shall be transferred from the consolidated fund for investment into the HSF.

Deposits to the HSF must be made no later than the end of the month following the quarter in respect of which the deposit was calculated. Rather confusingly section 14 of the Act states that in aggregate a minimum of 60% of the excess revenues must be deposited to the HSF during the financial year. The Auditor General raised this apparent contradiction in the legislation by way of an emphasis of matter in their audit opinion on the financial statements of the HSF to 30th September 2014.

There is no provision within the Act to require a specific audit that the Government complies with the terms of Section 13. However, the Act does provide for an annual audit of the financial statements of the HSF by virtue of section 21 of the Act. Annual audits of the HSF are currently performed by the Auditor General of Trinidad and Tobago.

When is the Government allowed to dip into the fund?

Withdrawals of the fund are governed by Section 15 of the Act.

Where Petroleum Revenues collected in any financial year fall below the estimated petroleum revenues for that year by at least 10%, withdrawals may be made from the fund.

The amount that can be withdrawn from the fund is measured as the lower of:

  1. Either 60% of the amount of the shortfall of petroleum revenue for that year or,
  2. 25% of the balance standing to the credit of the fund at the beginning of the year.

Section b) is assumed to refer to the 1st October as the HSF prepares its accounts annually to the 30th September each year.

Must a minimum balance be maintained on the fund and is the fund subject to Tax?

In accordance with section 15(3) of the Act a minimum balance of US$1 billion must be maintained in the fund.

Although withholding tax may arise on income derived by the fund in the United States of America the income of the fund is exempt from both Income and Corporation tax in Trinidad and Tobago in accordance with section 17 of the Act.

Who manages the fund – no fat cat brokers here!

The fund is actively managed by the Central Bank of Trinidad and Tobago. The responsibilities of the Central Bank in respect of the management of the fund are contained in schedule A of the Act.  In deciding on which investments to make the Central Bank must apply the “prudent investor standard of an investment manager.” Schedule A provides for the levy of a fee by the Central Bank for the services that it provides in managing the fund. The fee charged is based on the market value of the fund.

The basis for calculating the fee due to the Central Bank for management of the fund is not covered by the Act, and the basis for the fee charged is not disclosed in the annual financial statement prepared by the fund. The amount charged by the Central Bank for the year ended 30th September 2014 was US$1,631,748 (2013: US$1,476,467).

Under Schedule B of the Act the duty of care of the Central Bank in managing the fund is defined and restricted to cover only situations that lead to “loss resulting from gross negligence or wilful misconduct.” Under Schedule B the Government of the Republic of Trinidad and Tobago provides a blanket indemnity to the Central Bank against any loss arising from their stewardship and management of the fund.

Future Blog Entries on the HSF

In the second blog entry we look at the performance of the fund, the type of investments the fund has made, and how it ranks internationally against other “sovereign funds”. In the third we look at the future of the fund and discuss the desirability of splitting the fund into two distinct parts that reflect the dual purpose of the fund, and we assess other desired reforms.

Definitions used in this blog entry

In accordance with the terms of the Heritage and Stabilisation Fund Act, Petroleum Revenues means the aggregate of the supplemental petroleum tax, petroleum profits tax and royalties but does not include unemployment levy, the oil impost and signature bonuses. The term Consolidated Fund is not defined in the Heritage and Stabilisation Fund Act but is assumed to mean the general revenue and expense account of the Government of the Republic of Trinidad and Tobago as defined in section 13 of the Exchequer and Audit Act of 1959.

The 2016 Budget Review and the HSF

On the 8th April 2016 the Minister of Finance presented his mid-year budget review.

In respect of the HSF the following was stated in that presentation:

According to the Minister of Finance the Heritage and Stabilisation Fund (HSF) is not “a trophy to be kept on a shelf and never be touched” and that the fund caters for withdrawals when the revenues from petroleum taxes are lower than projected by 10%.

Currently Trinidad and Tobago faces a situation where those revenues are 75% lower than expected and accordingly withdrawals will be made from the fund.

The Minister highlighted that other countries in similar situations, such as Saudi Arabia, have withdrawn significantly from their own funds, and that the Government of Trinidad and Tobago plans to do the same.

Closing thoughts – time to consider your investing strategies

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