The Energy Chamber CEO, Mr. Thackwray Driver, members of the Energy Chamber, specially invited guests, representatives of the media, ladies and gentlemen good afternoon.
First, allow me to the opportunity to say what an honour it is for me to have been invited to deliver the feature address to this luncheon meeting on the topic “Connecting the Domestic, Financial and Energy Sectors”. Indeed, this occasion affords me and by extension the Trinidad and Tobago Unit Trust Corporation, the organization which I have the privilege to lead at this time, to add its voice to the discussions on local content and local participation in the domestic energy sector, with particular emphasis on domestic capital involvement.
At the outset the following points must be underscored: The importance of the Energy Sector’s contribution to the Trinidad and Tobago economy is unchallenged, despite efforts to address inherent concentration risk and the sector’s recent failings, in terms of declining output. The data show that in 2010, the energy sector accounted for 35.7% of GDP, 52.3% of government revenues and 81% of foreign exchange earnings. In addition, over the last ten (10) years the petroleum sector on average accounted for 90% of total Foreign Direct Investment.
There is no doubt that Trinidad and Tobago has profited greatly from its energy sector. In recognition of this fact and in an effort to promote economic diversity and sustainability, the government has endeavoured to utilize the energy sector as the facilitator of economic diversification through the development of the alternative and renewable energy sector, as well as downstream sector expansion.
In support of this thrust, during this presentation today, I will seek to explore with you some ideas or suggestions on ways to achieving a greater level of connectivity between the local private capital and the domestic energy sector. To create a context for the discussions, I will first examine the demand for energy and energy related assets by local private capital providers. In this instance local private capital would include institutional investors such as pension funds, life insurance companies, the National Insurance Board and mutual funds. While we acknowledge the role of state capital as the largest single local investor in the domestic energy sector it will not be the focus of my presentation today.
Following an examination of the demand-supply dynamic, I will then seek to demonstrate using empirical evidence the various ways in which local capital accessed, or attempted to access, investment opportunities in the energy sector. The penultimate theme is one that will shed considerable light on the potential of local private capital supply relative to demand for capital in the domestic energy sector. The address is concluded by focusing on the possibilities we can consider as we seek to better connect local private capital to investment opportunities in the energy sector.
To examine the appetite of local private capital for energy and energy related investments, I will specifically draw on UTC’s experience to date as an institutional investor in the Energy Sector to establish the backdrop against which my proposals should be considered.
The Corporation’s earliest opportunity to invest in the energy and energy related domestic sector arose with the issuance of a T&TEC bond in the late 1980s. This was followed by the failed management buyout bid which was piloted by a local investment Banker, in collaboration with a foreign Investment Bank, to acquire TRINGEN. Since those initiatives a number of offerings have been presented to the Corporation.
Over the last thirteen (13) years, the Corporation has had the opportunity to participate in approximately forty-three (43) energy and energy related investments across the entire energy value chain. These opportunities ranged from Exploration, Development & Production to Distribution. Currently, UTC has committed Energy Sector investments in excess of TT$454.7 million or US$71.6 million. These investments account for approximately 2.58% of the Corporation’s funds under management.
If the UTC’s appetite for energy related investments were to be extrapolated across the entire financial system, that is, both the money and capital markets, local private capital would have funded the energy and energy related sector to the extent of TT$6.2 billion, or US$1 billion with TT$ 1.6 billion or a quarter billion US$ coming from the money market and TT$4.6 billion US dollars or three quarter billion US dollars being sourced from the capital market.
Moreover, when private local capital allocation to the energy sector as a percentage of Gross Domestic Product is examined, it amounts to approximately 3.5% of GDP, this situation speaks to the extent to which local capital in the domestic energy sector is denominated by local state capital and foreign direct investments.
Notwithstanding the need to diversify the economy away from its heavy dependence on the energy sector, the current low level of participation by local private capital in the most productive sector of the Trinidad and Tobago economy must be reversed. In 2007, UTC’s efforts to address the issue resulted in the establishment of the Energy Fund. To achieve its investment objective of capital growth, this Fund invests in a portfolio of energy and energy related assets locally, regionally and internationally. The Fund’s assets include bonds and equities as well as non-traditional assets such as private equity.
In addition to UTC’s Energy Fund, both individual and institutional investors have the opportunity to invest indirectly in the local energy sector by purchasing securities on international exchanges. Through brokers or exchange platforms, investors can acquire securities issued by international energy players such as BP, BG, Repsol, Schlumberger or Halliburton all of whom operate out of Trinidad. This avenue allows the investor to acquire a stake in a company whose income is generated principally from the energy sector. The major setback to this approach is that such investments are geared towards the global performance of the company as opposed to being specific to its operations in Trinidad and Tobago.
Our experience as an institutional investor shows that it is possible to access domestic energy sector investments via primary or secondary market offerings. These investments comprised the following asset classes: conventional bonds, stocks and shares. On the one hand, primary market offerings have been relatively infrequent and have typically come by way of project sponsors and investment bankers. On the other hand, secondary market offerings have been limited to MoraVen Holdings and National Enterprises Limited, with NEL not being a pure energy play given the inclusion of NFM and TSTT in its portfolio. By and large, the domestic energy sector opportunities have generally been in the form of project financing associated with processing plants and distribution.
The set back to investing at the project financing stage is that the securities issued by the company are not traded and as a consequence are illiquid by nature. In addition, investors assume significant amounts of project risk ranging from sourcing a strategic partner to cost over-run and project completion. Based on the complexity of the project and the industry as a whole institutional investors are at great risk if their core competency does not lie in energy sector management as the due diligence required is significant and remains the lender’s responsibility.
Regionally, primary market issues have also been the norm via private placements arranged by local merchant banks. These assets are not tradable and could present liquidity management challenges. By contrast, more entry and exit opportunities are on offer in international secondary markets by way of listed equities and to a lesser extent bonds. Even where illiquid energy investments have been presented by international energy players, risk diversification has been achieved through limited partnerships that give access to a portfolio of projects.
Having reviewed private local capital investor appetite for energy and energy related investments and the issues involved in accessing these opportunities in the domestic energy sector, I now turn my attention to the potential of local private capital to finance investment in the domestic energy sector. Using cumulative energy sector FDI over the nine-year period ending December 2009 as a proxy for capital, we can estimate demand for capital by the domestic energy sector. On the supply side, we can estimate the supply of local private capital to meet the need of the domestic energy sector by using the assets mobilized by institutional investors, namely pension funds, life insurance companies, the NIB and mutual funds.
As at September 2010, the supply of local private capital stood at TT$118.9 billion or US$18.72 billion whereas the cumulative demand for local energy sector capital over the nine years ending December 2009 amounted to TT$136.16 billion or US$21.44 billion. The data show that the demand for capital in the energy sector over the last nine years as measured by FDI exceeded the supply of private local capital by TT$17.27 billion or US$2.7 billion. This means that the total supply of local private capital fell short of the domestic energy sector demand for capital by 15%.
This estimate of US$18.7 billion that I am using as a proxy for private local capital assumes no diversification, as such, the other sectors of the economy, for example, manufacturing, construction and agriculture to name a few would be deprived of capital. Further, if we were to extend the analysis to compute capital demand in the domestic energy sector since its establishment the inability of local private capital to meet industry demands would be significantly more pronounced. This does not mean that local private capital cannot be deployed in the energy sector. In fact, what this suggests is that the allocation of local capital to the energy sector in T&T must be driven by profitability, efficiency and productivity.
Given that the supply of local private capital is limited and resource utilization must be optimised, the following five (5) measures aimed at achieving greater linkages between the domestic energy and financial sectors are submitted for consideration.
One: Access to the domestic energy sector by local private capital must form part of energy policy at the highest level and minimum domestic private capital participation rates in new energy and energy related projects must be stipulated.
The allocation to local private capital should be based on total project cost, with the proportion allocated varying with the capital size of the project and the level of risk mitigators embedded in the project financing structure.
Two: Joint ventures should be encouraged as a preferred method for pursuing certain downstream energy and energy related projects. This would encourage local enterprises to partner with international companies to undertake energy projects which they would not have otherwise undertaken.
Three: Revitalize the near dormant Energy Holding Corporation Ltd, which was established in 1997 with the express purpose to promote and facilitate the deployment of local capital in energy and energy related projects. The portfolio of energy assets spanning the energy value chain which this company will hold is expected to provide local private capital with the capacity to effectively manage the energy sector specific risk. With this approach much could be accomplished toward the goal of achieving greater local involvement in the energy sector.
FOUR: Encourage the rating of energy companies and energy issues by regional credit rating agencies. This will go a long way in helping local private capital to understand and appreciate the risk and returns associated with the domestic energy sector which in turn is expected to encourage greater participation.
Five: Convert National Enterprises Limited (NEL), into a pure energy play investment by removing NFM which is already listed on the local exchange and by removing TSTT and listing it on the stock exchange while adding other state-owned energy assets to the portfolio. This recommendation could be achieved in relatively short order.
SIX: Establish a medium to long term target at the national level to increase local private capital share of investment in the domestic energy sector to 20% its current share of from 6.2%.
To sum up, the possibilities for the forging of linkages between domestic capital and the local energy sector are not endless or obvious.
The capital requirements of the domestic energy sector, the relatively small size of the local private capital market which is further complicated by ownership and international alignment issues and the allure of laissez faire rhetoric contribute to the challenge we must face.
In spite of the foregoing, the case for action is compelling and we must continue to strive for the establishment of meaningful and permanent linkages between local private capital and the domestic energy sector. We at the UTC are open for business and stand ready to evaluate and invest in suitable projects which coincide with our risk profile.
I thank you.