DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK PUBLIC COUNTRY STRATEGY WITH THE REPUBLIC OF TRINIDAD AND TOBAGO 2011-2015 This document was prepared by Iwan Sewberath Misser (CCB/CTT - Team Leader), Emmanuel Abuelafia (CCB/CCB), Gabriel Castillo (CCB/CTT) and Michael Hennessey (CCB/CCB). The team received valuable inputs from Jose Jorge Saavedra and Diego Morris (CMF/CBA); Juan Antonio Ketterer, Mie Iwasa and Andrea Terán (ICF/CMF); Vashtie K. Dookiesingh (MIF/CTT); Peter Stoute- King (CFI/CTT); Vanessa Defournier (VPP/VPP); Benjamin Santa Maria (ICS/CTT); Jorge Von Horoch (ICF/ICS); Ryan Burgess (EDU/CTT); Ian Ho-A-Shu (SPH/CTT); Gerard Alleng (INE/ECC); Natacha Marzolf and Christaan Gischler (INE/ENE); Jesus Tejeda (ENE/CGY); Marcello Basani (WSA/CGY); Christian Dunkerley and Alejandro Taddia (INE/TSP); Magda Theodate and Denise Salabie (PDP/CTT); Maria Jordan (CCB/CCB); Dale James, Jennifer Raffoul, and Dorri Agostini (CCB/CTT). Rocio Medina-Bolívar and Rafael Cavazzoni Lima (VPC/VPC); Clark Sand, Carina Cockburn, and Gerard Johnson (CCB/CCB) also contributed their comments and guidance. Maria Jordan was in charge of document production.
Transcript
DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK PUBLIC
COUNTRY STRATEGY
WITH
THE REPUBLIC OF TRINIDAD AND TOBAGO
2011-2015
This document was prepared by Iwan Sewberath Misser (CCB/CTT - Team Leader), Emmanuel Abuelafia (CCB/CCB), Gabriel Castillo (CCB/CTT) and Michael Hennessey (CCB/CCB). The team received valuable inputs from Jose Jorge Saavedra and Diego Morris (CMF/CBA); Juan Antonio Ketterer, Mie Iwasa and Andrea Terán (ICF/CMF); Vashtie K. Dookiesingh (MIF/CTT); Peter Stoute-King (CFI/CTT); Vanessa Defournier (VPP/VPP); Benjamin Santa Maria (ICS/CTT); Jorge Von Horoch (ICF/ICS); Ryan Burgess (EDU/CTT); Ian Ho-A-Shu (SPH/CTT); Gerard Alleng (INE/ECC); Natacha Marzolf and Christaan Gischler (INE/ENE); Jesus Tejeda (ENE/CGY); Marcello Basani (WSA/CGY); Christian Dunkerley and Alejandro Taddia (INE/TSP); Magda Theodate and Denise Salabie (PDP/CTT); Maria Jordan (CCB/CCB); Dale James, Jennifer Raffoul, and Dorri Agostini (CCB/CTT). Rocio Medina-Bolívar and Rafael Cavazzoni Lima (VPC/VPC); Clark Sand, Carina Cockburn, and Gerard Johnson (CCB/CCB) also contributed their comments and guidance. Maria Jordan was in charge of document production.
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TABLE OF CONTENTS
I. COUNTRY CONTEXT...................................................................................................... 1
II. PRIORITY SECTORS FOR BANK SUPPORT 2011-2015 ..................................................... 2
III. BANK FINANCING UNDER THE STRATEGY ..................................................................... 9
IV. STRATEGY IMPLEMENTATION ..................................................................................... 10
A. Country Systems .............................................................................................. 10 B. Donor Coordination ......................................................................................... 11
V. RISK ASSESSMENT ...................................................................................................... 11
LIST OF ANNEXES
ANNEX I MACROECONOMIC INDICATORS ANNEX II MACROECONOMIC SITUATION ANNEX III CPE RECOMMENDATIONS ANNEX IV FINANCIAL SCENARIOS ANNEX V DONOR COORDINATION ANNEX VI DEVELOPMENT EFFECTIVENESS MATRIX
ELECTRONIC LINKS TO BACKGROUND INFORMATION
Climate Change Sector Note Energy Sector Note Social Protection Sector Note Water and Wastewater Sector Note Financial Sector Note Education Sector Note Private Sector Note Private Sector and Competitiveness Sector Note Transport Sector Note Public Sector Modernization Sector Note Fiduciary Technical Note Development Effectiveness Matrix Economic Growth in a Dual Economy Impact of the Global Financial Crisis – Changes in Paradigms Prosperity for All: Manifesto of the People's Partnership Portfolio Alignment with the new Country Strategy Tobago Brief Civil Society Consultation Summary
CBTT Central Bank of Trinidad and Tobago CDB Caribbean Development Bank CLICO Colonial Life Insurance Company CPD Country Program Document CS Country Strategy CSO Central Statistical Office CSOs Civil Society Organizations CXC Caribbean Examination Council DBI Doing Business Index DEM Development Effectiveness Matrix EC Energy Conservation ECCE Early Childhood Care and Education EE Energy Efficiency EU European Union FSAP Financial Sector Assessment Program FY Fiscal Year GCI General Capital Increase GCR Global Competitiveness Report GDP Gross Domestic Product GORTT Government of the Republic of Trinidad and Tobago IDB Inter-American Development Bank IFC International Finance Corporation IMF International Monetary Fund KCP Knowledge and Capacity Building Products KWh Kilowatt hour LAC Latin America and Caribbean MIF Multilateral Investment Fund MOE Ministry of Education MoE&EA Ministry of Energy and Energy Affairs MoF Ministry of Finance MoH Ministry of Health MoPH&E Ministry of Planning, Housing and Environment MoPSD Ministry of the People and Social Development MoT Ministry of Transport MoW Ministry of Works NSG Non-Sovereign Guarantee OAS Organization of American States OVE Office of Evaluation and Oversight PAHO Pan American Health Organization PBL Policy Based Loan PBP Programmatic Policy Based Loan PEFA Public Expenditure and Financial Accountability PPP Public-Private Partnerships PSIP Public Sector Investment Program RE Renewable Energy SCF Structured and Corporate Finance Department
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SGO Sovereign Guarantee Operation SME Small and Medium Enterprises SOEs State Owned Enterprises SSN Social Safety Net TC Technical Cooperation TCCTP Targeted conditional Cash Transfer Program UN United Nations UNDP United Nations Development Program UNICEF United Nations Children Education Fund USAID United States agency for International Development WB World Bank WEF World Economic Forum WASA Water and Sewerage Authority
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EXECUTIVE SUMMARY1
Trinidad and Tobago is one of themore prosperous countries in the region with per capita income of US$15,000 and its social results are correspondingly positive. It grew at an average annual rate of 7% for the 15 years preceding the global financial crisis. It has international reserves equivalent to over a year of imports and its exchange rate is stable. The country‟s robust growth, solid
reserves and high living standards are due mainly to the energy sector that dominates the economy, and accounts for 42% of GDP, 80% of exports and 90% of foreign exchange earnings. This very positive situation, however, faces significant risks.
The fiscal revenue generated by the energy sector fuels an extensive regime of subsidies that reduce costs and increase living standards. However, these same transfers distort private economic activity and reduce incentives to make public expenditure efficient and effective. This reliance by the non-energy sector and the public sector on the energy sector means that there is significant vulnerability to energy revenues. While its commodity producing neighbors registered positive growth throughout the international crisis, Trinidad and Tobago‟s economy contracted by
3.5% in 2009 and remained flat in 2010. This was due mainly to falling output in the energy sector, which was in turn due to the rising extraction costs as reserves are increasingly found in deep water or tar sands. Production has steadily declined from 230.000 to 100.000 barrels a day between 1978 and 2010. Moreover, modest growth rates are expected in the medium term.
Trinidad and Tobago faces the significant development challenge of gradually transitioning its economy into a post-hydrocarbon model, while continuing to improve its standard of living. This transition will require several reforms to enable the non-energy sector to flourish even without the current subsidy regime. Public sector spending will have to become more efficient and effective, and the multiple subsidies and transfers supporting patronage systems and distorting incentives for private sector activities will have to be rationalized and targeted to create incentives for the transition to the post-hydrocarbon economy. Alternative sources of revenue will also have to be identified to offset declining revenues from the energy sector.
The 2011-2015 Country Strategy proposes a significant increase in lending which reflects the mutual agreement to a more vibrant and close engagement. The priority areas include: i) financial sector regulation and supervision; ii) public sector management; iii) education; iv) social protection; v) climate change; vi) energy; vii) water and sanitation; and viii) transport. Tobago‟s
development challenges will be addressed in a cross cutting manner, with a special focus being given to the priority areas of energy, climate change, and water and sanitation.
The Bank‟s financing framework for sovereign-guaranteed approvals for 2011-2015 implies a substantial increase in the pace of both approvals and disbursements. The strategy reflects a major re-engagement with Trinidad and Tobago and its scope is appropriate given the scope of the reform process. The envisaged approval level is US$1.5 billion for the strategy period, with average annual disbursement of US$210 million, which would cover around 60% of the projected gross financing needs of the country during the strategy period. The main risk is the possible negative impact on the private sector and consumers from the reduction of the extensive subsidy regime.. This will be mitigated by the Government‟s strong
commitment to the reform agenda, higher efficiency in public services, assisting private groups to transition to the post hydrocarbon economy, increased public participation in ownership of
1 The present Country Strategy will be in effect from November 2011 to December 2015.
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government assets, developing a framework for public-private partnership and public outreach. Debt dynamics are sound and fully consistent with the proposed envelope.
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RESULTS FRAMEWORK
Country Development Goals
IDB
Intervention
Sector
IDB Strategic
Objectives
Expected Results of the
Strategy Indicators
Baseline Values
(Date, Source) 2
Aspirational CS
Targets3
We will develop strategies to create an environment for investment by increasing domestic savings, facilitating competitive interest rates, securing property rights, by establishing good governance practices, by widening, expanding and deepening domestic value-added production and by managing to achieve a low rate of inflation (p. 22)
1.
Fin
an
cia
l S
ecto
r R
egu
lati
on
an
d S
up
erv
isio
n
To reduce the vulnerabilities of the financial sector and avoid systemic crisis
Supervisory and Regulatory framework improved
% of the total assets of the financial system under the regulatory purview of the Central Bank
76% (2010, CBTT)
80% (2015)
% of banks of the banking system for which individual financial soundness information is disclosed yearly by the CBTT
0% (2010, CBTT) 100% (2015)
% of life insurance companies that use CPPM valuation rule for life insurance liabilities
0% (2010, IMF) 100% (2015)
% of Insurance companies that use a risk based capital regime
0% (2010, IMF) 100% (2015)
% of Occupational Pension funds regulated by the Occupational Pension Act
0% (2010, CBTT) 100% (2015)
Percentage of Occupational Pension Funds that present reports annually to the CBTT
0% (2010, CBTT)
100% (2015)
2 Unless otherwise indicated, the baseline indicators were derived from the diagnostic studies, Sector Notes, referred to in the electronic links, portfolio review documents and the National Budget. Progress on baselines will be monitored by the Bank and will be measured at least once (at end of strategy period); frequency of interim measurements will be determined during programming process. 3 These aspirational targets will be revised and/or replaced, on a case by case basis, through the programming documents elaborated throughout the Country Strategy period.
2
Good Governance: “The focus in
this area will be on three (3) key elements for the purpose of ensuring transparency, accountability, participation and effective representation as essential principles of good governance. “
“Our government will table
amendments to provide for and/or strengthen provisions for … Access
to official information…Containment
and eradication of corruption, The introduction of procurement legislation which is fair, efficient and transparent.” (p. 15) “Empower the Auditor General to
conduct compliance, financial, operational, forensic, performance and value audits.” (p. 18)
2.
Pu
bli
c S
ecto
r M
an
ag
emen
t
To support the Government‟s
reform agenda aimed at improving transparency, efficiency and effectiveness of public expenditure, including SOEs
Strengthened the budget process Time horizon for Public Sector Investment Program presentation to Cabinet
1 year (2010, MoF) 3 years by FY 2015/16
Enhanced project cycle management
Percentage of procuring entities using Standard Bidding documents
0 (2010, Procurement Regulator Report)
100% by 2015
Percentage of new Public Investment project approved by Cabinet and incorporated in the PSIP program that have independent pre investment assessment (economic and social )
0 (2010, MoF)
100% by FY 2015/16
Scope/Nature of audit performed (including adherence to audit standards) – PEFA score
B (2008, PEFA)
A (2015)
Enhanced Governance Structure for SOEs
Number of fully owned SOEs 47 (2010, MOF) Reduction (To be constructed by August 2011).
The curriculum for all other certification programmes for teachers (including Secondary Education Management Programme (SEMP)) will be reviewed to evaluate philosophy, relevance and competence-building concerns. In keeping with the philosophical underpinnings of diversity in teaching/learning, teacher education to support a curriculum for transformation will be strengthened. We will work with higher educational institutions to strengthen teaching quality and relevance in the secondary and primary system.” (p.
30)
3.
Ed
uca
tion
To contribute to the development of the country‟s
youth, and the promotion of a highly skilled labour force to drive new economic activity
Universal early childhood care and education
% of gross enrolment rates in ECCE centers
86.9% (2009, MoE)
94% (2015)
Improved teacher training
Trained teachers in selected schools apply new assessment and teaching methods
0% (2010, MoE) 80% (2015)
3
“The issues of poverty eradication,
closing the divide between rich and poor and providing a safety network for the poor and vulnerable, are fundamental to the strategy of development that we embrace.” (p. 7)
4.
So
cia
l P
rote
ctio
n
To improve the effectiveness and efficiency of social safety net programs
Improved targeting of social safety net programs
% of beneficiaries above the cut-off point for eligibility for the Targeted Conditional Cash Transfer Program (TCCTP)
20% (2010, TCCTP) 5% (2015)
% of students for the wealthiest quintile that receive free school meals through the School Nutrition Program
25% (2010, MoE)
10% (2015)
Strengthened monitoring and evaluation capabilities of Ministry of the People and Social Development
Number of social safety net programs evaluated in accordance with updated monitoring and evaluation framework
1 (2010, MoPSD) 10 (2015)
Improved participation and reliability of social programs managed by CSOs
% of Government certified CSOs administering Government social programs
0% (2011) 100% (2015)
“We need to review the approved
National Environmental Policy” (p.
52) “We will increase the energy
efficiency of our industries…We will
establish an incentive scheme that will support …heavy industry and
buildings which engage in energy-saving measures” (p.53)
5.
Cli
ma
te C
ha
ng
e
To support the mainstreaming of climate change adaptation and carbon reduction into national development.
Adopted Climate change policy % of the new public policies reviewed by the Climate Change Office of the MoH&E following the new climate change policy guidelines.
0 (2010, MoPH&E)
100% (2015)
Climate Change adaptation integrated into key sectors4
% of key sector Ministries with issue of climate change covered under their sectoral development policies
0 (2011, MoPH&E)
100% (2015)
# of operations in each key sector that have introduced
climate change considerations into their
design
0 (2011) 1 (2015)
Reduction in Carbon Intensity Total CO2 emissions 49,772 thousand metric tons of carbon dioxide (2008)
5% reduction (2015)
4 These key sectors would be the ones included in the National Climate Change Policy (currently in draft form), namely: agriculture, human health, human settlements, coastal zones, and water resources.
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“The energy sector: The focus will be
on investment and partnership opportunities in third –and fourth-generation renewable energy alternatives linked to research” (p.
22) “Provide incentives for R&D on alternative energy sources”(p. 55) “We shall effectively utilize the
Green Fund for the restoration of areas that have been damaged by poor and dangerous practices…We will
increase the energy efficiency of our industries…We will establish an
incentive scheme that will support …heavy industry and buildings which
engage in energy-saving measures”
(p.53)
6.
En
erg
y
To support the country in developing a more efficient, sustainable and cleaner energy matrix
Strengthen regulatory and legal framework to contribute to a more sustainable energy sector with increased efficiency and transparency.
% of energy supplied by RE sources
0% of energy supplied by RE sources (2011, MoE&EA)
3% of energy supplied by RE sources (2015)
Mwh of energy saved as result of EE and EC measures
0 MWh of saved energy as a result of EE and EC measures (2011, MoE&EA)
8000 MWh of saved energy as a result of EE and EC measures (2015)
Maximized efficient production and use of fossil fuels
% of electricity generation from combined cycle gas plants.
12% of electricity generation from combined cycles gas plants (2011, MEEA)
17% of electricity generation from combined cycle gas plants.
Barrels per day of production of Low sulfur diesel
0 barrels per day of production of Low sulfur diesel (2011, MoE&EA)
40000 barrels per day of production of Low sulfur diesel (2015)
“We shall create an action plan for
sewage treatment and clean water for all” (p. 53)
7.
Wa
ter
an
d S
an
ita
tio
n
To improve environmental conditions through decreasing the uncontrolled discharge of untreated wastewater into the environment, and to improve the supply and sustainability of public water and wastewater management services
Rehabilitated and expanded wastewater system
% of population covered by centralized wastewater treatment systems
30% of the population, (2011, WASA)
35% of the population, (2015)
Wastewater flow treated according to the 2006 Water Pollution Rules (m3/sec)
1.41 (2011, WASA) 1.65 (2015)
Reduced non-revenue water % of Non Revenue Water (1-billed volume/produced volume)
44 (2011, WASA) 38 (2015)
Improved WASA labor productivity
Number of employees per 1,000 connections
12.5 (2011,WASA) 8 (2015)
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“Our policy on infrastructure will be based on ensuring quality, reliability and maintenance of existing infrastructure while adopting transparent and fair procurement practices. We commit to making significant improvements to the nation‟s infrastructure … all guided
by a national transportation study. (p. 61) • Roads & Bridges – A National Roads and Bridges Authority will be established to determine the appropriate network of major roads, highways. (p. 61) “Traffic planning and management”
(p. 19)
8.
Tra
nsp
ort
To support the Government‟s reform agenda aimed at implementing a comprehensive road maintenance and rehabilitation system to improve the quality, sustainability and safety of the roads
Strengthened the institutional capacities required to implement a road planning, rehabilitation, and maintenance system
Yearly Transfers to the Road Fund
0 TBD (2012)
Yearly Cost of routine maintenance (average for the road network )5
US$ 5000 per lineal kilometer (2010, MoW)
US$ 4750 per lineal kilometer (2015)
Operationalized Roads‟
Authority, Road Maintenance Fund, and the Weight Control System
Yearly Funds from the RF used for road maintenance and rehabilitation
0
TBD (2012)
% of the highways, main roads and secondary roads rehabilitated6 that were identified using the new policy and planning framework
0% (2011, MoW)
TBD (increase) November 2011
Implemented results-based performance maintenance
% of highways, main roads and secondary roads in poor and critical condition (with international Roughness Index (IRI) higher than 3)
26% (2009, MoW) To be determined (reduction) November 2011
9.
Co
un
try
Sy
stem
s
Promote efficiency, transparency and accountability in the use of public funds
Increase in use of the country financial management subsystems in Bank financed Projects
% of the active portfolio that use the following subsystems: • Accounting & Reporting
Internal Audit External Control
% of the active portfolio that use the following subsystems: • •Accounting & Reporting
- 0% • External Control - 0%
% of the active portfolio that use the following subsystems: •Accounting &
Reporting - 20% • External Control - 30%
5 Routine maintenance as defined as heavy patching, hand patching, crack sealing and shoulder grading. 6 Rehabilitation happens when standard maintenance procedures would not bring the road to an adequate level of services so a larger intervention is required such as pavement and shoulder restoration and replacement, structural resurfacing and shoulder widening.
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Increase in use of the country procurement subsystems in Bank financed Projects
% of the active portfolio that use the following subsystems: •National Information System •National Price Comparison
Methods •National Methods for
Contracting •Individual Consultants
National System for Procurement Subject to NCB
% of the active portfolio that use the following subsystems: •National Information
System - 0% •National Price
Comparison Methods -0% •National Methods for
Contracting Individual Consultants- 0%National System for Procurement Subject to NCB-0%
% of the active portfolio that use the following subsystems: •Use of National
Information System - 0% •Use of National Price
Comparison Methods -100% •Use of National
Methods for Contracting Individual Consultants- 100%Use of National System for Procurement Subject to NCB-0%
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I. COUNTRY CONTEXT
1.1 Trinidad and Tobago has been one of the fastest growing countries in the region during the past two decades7. The country‟s GDP amounts to US$20 billion and
US$15,000 in per capita terms (2010). Trinidad and Tobago is a dual economy, dominated by the energy sector, which accounts for 42% of the country‟s GDP,
80% of its exports and 90% of its foreign exchange earnings. The country‟s
economy contracted by 3.5% in 2009, and remained flat in 2010. Moreover, structural weaknesses indicate that the relatively high growth rates of the past will remain elusive, and only modest growth rates are expected in the medium term.
1.2 Trinidad and Tobago‟s energy sector faces a number of important challenges in
the medium and long-term. Recent estimates project that stocks of oil and gas reserves are nearing exhaustion.8 Moreover, production of crude oil has been declining substantially in recent years (32% since 2006), as some of the country‟s oil fields are maturing. Gas production has remained relatively stable, but uncertainty remains with respect to the price of this commodity, due to developments in new extraction technologies (such as those related to shale gas), and expected supply increases associated with several worldwide investments to come on-stream in the future. These trends in the gas industry, combined with increasingly high exploration and extraction costs in Trinidad and Tobago, have led to a decrease in the level of investment in the energy sector.
1.3 In this context, the sustainability of the country‟s non-energy sector of the economy also faces significant challenges. The non-energy sector of the economy is highly dependent on public sector expenditure and subsidies, which are in turn dependent on the energy sector revenues that account for more than half of total revenues. Moreover, governance structures for allocating public expenditure are deficient and lack transparency, thereby making them vulnerable to political patronage. Fiscal accounts were heavily impacted by the decrease in energy revenues (40%) between 2008 and 2009, combined with the Government‟s
decision to maintain a high expenditure level. Fiscal deficit amounted 5.6% of GDP in FY 2008/09 and registered an almost balanced budget in FY 2009/10. However, there is a need to consolidate fiscal accounts, as it is expected that the government will run fiscal deficits in the medium term.
1.4 Tobago represents a unique development challenge for the country. Tobago has a tourism based economy with higher poverty, income inequality and retail prices, but lower unemployment than Trinidad. The economy of the island is even more heavily dependent on transfers and subsidies than Trinidad. Tobago suffers from low capacity to manage and mitigate environmental risks, which in turn affects its main economic activity, tourism.
7 Growth averaged 7% per year between 1993 and 2008. 8 At current extraction rates, proven natural gas reserves are estimated at 10 to 15 years and oil reserves at around 20 years (Ryder Scott Report 2010).
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1.5 Given the outlook for its energy sector, and the dependence of the non-energy sector of the economy on Government support, Trinidad and Tobago faces the significant development challenge of transitioning its economy into a post-hydrocarbon model, while continuing to improve its standard of living. This transition will require that a number of reforms be undertaken so as to foster an environment in which non-traditional economic activities can flourish independently and the development of human capital can adapt to meet new requirements. Public sector spending will have to become more efficient and effective, and the multitude of subsidies and transfers feeding patronage systems and distorting incentives for private sector activities will have to be rationalized and targeted to support this transition. The country will also need to identify additional sources of revenue to replace the decreasing revenues from the energy sector.
1.6 The current Government was elected in May 2010 with a decidedly reform oriented agenda. Its victory at the polls, after the former Government had been in power for only two and a half years, has provided this administration with a mandate to transform the country and put it on a new path away from an entitlement model fueled by transfers to one that is competitive and sustainable, while reducing its heavy reliance on the energy sector. The Government‟s
development plan is embodied in its Election Manifesto. The medium term plan will be formalized by the end of 2011.
II. PRIORITY SECTORS FOR BANK SUPPORT 2011-2015
2.1 The proposed Country Strategy (CS) is designed to take advantage of a unique opportunity to support the country‟s decision to embark on a new development
path. It reflects the shared priorities of the Government and the Bank, and will provide both technical and financial support to the ambitious reform process in the following areas: (i) financial sector regulation and supervision; (ii) public sector management; (iii) education; (iv) social protection; (v) climate change; (vi) energy; (vii) water and sanitation; and (viii) transport. Private sector development9, fiscal sustainability10, and integral solutions for local governments within the framework of the Sustainable Emerging Cities initiative have been identified as areas for further dialogue with the Government. A CS Update will be presented to the Board if specific interventions are identified and agreed with the Government once the Bank has finalized its assessment of these areas.
2.2 The proposed CS will contribute to the fulfillment of the Bank‟s 9th General
Capital Increase (GCI-9) goals in several ways. The increased level of engagement that it represents will contribute to the goal of supporting small and vulnerable countries. Interventions in education, social protection and water will contribute to the goal of lending for poverty reduction and equity enhancement.
9 In areas such as (i) improving policies and institutions to promote entrepreneurship and investment in non-energy sector; (ii) improving the enabling environment for business development; and (iii) strengthening public-private dialogue on issues of competitiveness, innovation, diversification and growth. 10 In areas such as taxation and tax administration.
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Support in the climate change and energy sectors will contribute to the goal of lending to support climate change activities, sustainable energy and environmental sustainability. And finally, given its relevance as the regional financial center for the Caribbean, the support to enhance the financial sector regulation and supervision will contribute to the goal of supporting regional integration.
2.3 Financial Sector Regulation and Supervision: Considered the regional financial center for the English-speaking Caribbean, Trinidad and Tobago has a relatively well developed financial sector11. However, the global financial crisis has exposed its vulnerabilities to systemic risk and highlighted the need for more sophisticated financial regulation12. The stability of the sector is essential to transitioning the economy into a post-hydrocarbon model. Moreover, the recent crisis has highlighted Government‟s limited institutional capabilities to identify systemic risks and to propose adequate prudential measures in the financial sector. The Ministry of Finance and the Central Bank have already embarked on a wide range of reforms to improve regulation of insurance companies and to enhance supervision of other actors13 in the sector to improve reporting standards, coordination among supervisory agents, and data dissemination.
2.4 The objective of the IDB‟s interventions will be to reduce the vulnerabilities of the financial sector and reduce the probability of systemic crisis. The associated interventions will focus on: (i) reforming the regulatory and supervisory framework for the financial sector; and (ii) strengthening the institutional capacity of the Government in the area of risk identification and management.
2.5 A major risk to the interventions in the sector is the complexity of the issues to be addressed by the reforms, and that the consultative process with relevant stakeholders could take longer than expected. This will be partially mitigated by strong technical support for the Government in policy formulation and implementation. Also, the Bank is working in close coordination with the IMF on the design and implementation of required reforms for the sector.
2.6 Public Sector Management: The Public Sector Investment Program (PSIP) has been a significant contributor to capital formation, representing an average of 12% of GDP in the last 5 years, despite plummeting revenues. Fundamental reforms are necessary to improve transparency, efficiency and effectiveness of these expenditures. The public sector suffers from systemic institutional capacity problems in the areas of public procurement, monitoring and evaluation, among
11 The Financial sector is composed by banks, insurance companies, credit unions, Unit Trust Corporation and other minor actors. The regulatory bodies are the CBTT, the Security and Exchange Commission, and the Commission for Credit Unions. 12 The IMF identify several weaknesses in the regulatory and supervisory system such as outdated legislative framework for insurance companies, lack of reporting standards, and lack of coordination among supervisors, amongst others. Moreover, there is no coordinated effort for identification and prevention of systemic risks. For further clarification see Impact of the Global Financial Crisis – Changes in Paradigms. 13 Specifically, credit union and occupational pension and securities industries.
others.14 The budgetary system does not allow for the development of a rolling system of performance-informed budgeting linked to strategic planning. State Owned Enterprises (SOEs) provide goods and services in many sectors of the economy and, in some cases, compete with private companies, while at the same time relying heavily on Government transfers. The SOEs follow their own procurement procedures and often fail to utilize best practices with regard to their governance structures. Furthermore, poor country data represent a challenge for decision making.15
2.7 The objective of the interventions in this sector will be to support the Government‟s reform agenda aimed at improving transparency, efficiency and effectiveness of public expenditure, including SOEs. The interventions will focus on: (i) strengthening the policy-making processes, as well as coordination, planning and monitoring of public expenditure, with a special focus on the PSIP; (ii) enhancing project cycle management; including planning, and pre-investment activities, procurement practices and monitoring and evaluation capacity; (iii) improving information flows for decision making; by improving the data quality and availability; and (iv) establishing a framework for strengthening the governance of SOEs.
2.8 One major risk is that new business processes and technical innovations require cultural changes that are expected to disrupt power relationships and public employment terms and scope, and would likely be met with resistance. The strong mandate received at the polls is a powerful endorsement of the Government‟s
reform agenda and will be a key contributor to the political capital needed to make these changes. Training, outreach and consensus building activities for middle management are also envisaged as specific mitigating measures.
2.9 Education: Transitioning the economy to a post-hydrocarbon model will require significant changes in the productivity and skill mix of the work force. Although performance indicators such as enrollment and drop-out rates compare favorably to regional averages, Trinidad and Tobago faces a number of challenges in this area. Student performance and learning outcomes have been low in national exams (less than 50% of students earned five passes in the CXC exam). School violence and indiscipline have also been increasing.16 The early childhood care and education (ECCE) centers, mainly administered by the private sector, vary greatly in approach and quality17. The Government is addressing the above
14 State Owned Enterprises adhere to their own business practices, including their own procurement procedures which fall outside the scope the standard regulations of the Central Government. New investment projects lack independent economic and social evaluations, and usually face cost overruns. These investment projects also lack formal impact evaluation procedures. (PEFA report 2009 for Trinidad and Tobago). 15 “The Central Statistical Office (CSO) is in a desperate situation. Its output is low, un-timely, of undocumented quality … many of the main users have given up on the CSO and its ability to produce statistics”, “The restructuring of the Central Statistical Office of Trinidad and Tobago”, Stats Sweden (2007). The Bank is providing technical assistance for the reform process of the CSO. 16 Legall, G. (2007). Report of the Third SEMP Census of Public Secondary Schools. Deosaran (2004) found that there is higher incidence of indiscipline by Afro-Trinidadians compared with other groups. 17 The infrastructure in approximately 65% of centers is considered to be in poor or critical condition, and less than 5% of the centers meet new standards on space, layout, teacher training and teacher-child ratios.
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mentioned issues, and is in the process of involving a wide range of stakeholders, including the private sector and Civil Society Organizations (CSOs), in realigning the provision of key educational services.
2.10 The IDB‟s interventions in this sector will contribute to the development of the country‟s youth, and the promotion of a highly skilled labour force. Interventions will focus on: (i) improving access and quality of services of the ECCEs by improving infrastructure, strengthening supervision of private providers, harmonizing curricula, and training teachers; (ii) improving quality, equity and relevance of primary schools by improving infrastructure and teacher training; and (iii) strengthening the support of youth at risk with a special focus on violence reduction18. Possibilities for NSG support may exist in the construction of education infrastructure through SCF financing.
2.11 The primary risk in this area is the limited institutional capacity of the public agencies in the sector. To mitigate this risk, the Bank is providing technical support to accompany the reform process in its areas of intervention.
2.12 Social Protection: Although Trinidad and Tobago is a relatively high income country, poverty is estimated at 17% of the population, with “pockets of poverty”
reaching 30% in some areas. Government has an extensive social protection system, comprising approximately 120 programs across different line Ministries, which account for 5% of GDP. The four main conditional cash transfers programs account for approximately TT$2 billion in annual Government expenditures19. The social protection system is challenged by poor interagency coordination, weak targeting mechanisms and the lack of rigorous monitoring and evaluation mechanisms. The Ministry of the People and Social Development (MOPSD) suffers from low institutional capacity in the above mentioned areas. To address these challenges, Government is seeking to improve the efficiency and effectiveness of its Social Safety Net (SSN) programs. In addition, Government plans to improve the quality and reliability of the services outsourced to CSOs20. The social protection system requires reform not only to prepare for a future with lower hydrocarbon revenue, but to also contribute in a transparent and rational way to the transition to the new economic model.
2.13 The objective of the Bank‟s interventions in this sector will be to improve the
effectiveness and efficiency of SSN programs. Specific activities will include: (i) Consolidation of its four main cash transfer programs and improvements in targeting outcomes; (ii) Institutional strengthening of MOPSD, which includes
18 Additionally, the Bank will provide support to the Government in areas such as school-to-work transition, special needs students and information and communication technology. 19 The conditional cash transfer programs are: Targeted Conditional Cash Transfer Program (TCCTP); the Senior Citizens Grant; the Public Assistance Grant; and the Disability Grant. The programs target the same groups but each program requires separate applications, investigations by staff, and documentation. Also, there are cases of duplication of benefits. The consolidation of these programs will improve targeting, monitoring and save transactional cost. 20 There are approximately 1200 registered CSOs which provide a range of social services, namely, vocational education, community development in rural areas, health services for the aged and care services for abandoned children and the socially displaced. The CSOs have shortfalls of infrastructure and resources and governance.
6
monitoring, learning and evaluation capacity; and (iii) Improving the supervision of the CSOs that receive public funds to provide social services.
2.14 The specific risks are: (i) geo-political concerns associated with the dissemination and publication of poverty data; (ii) resistance from stakeholders who benefit from the current leakages in the system due to weak targeting systems and poor application of eligibility criteria; and (iii) sustained stakeholder commitment to the reform process. The Bank will support the MOPSD to manage the dissemination of sensitive information. Technical support will be provided to an advisory committee to manage interagency coordination, and to prepare a communication strategy, focusing on increasing public knowledge regarding eligibility criteria and operational rules of SSN programs. The political capital of the government will be key to effecting the improvements.
2.15 Climate Change: Trinidad and Tobago is vulnerable to the impacts of climate change, particularly to sea level rise, changes in rainfall patterns and temperature increase. This vulnerability is accentuated by factors such as the small size of the country, fragility of its ecosystems, relative distance from developed country markets and vulnerability to exogenous economic shocks, limited technological resources, insufficient technical capacity, and limited ability to reap benefits of economies of scale21. The implications of changes associated with climate change on the socio-economic and environmental conditions are expected to be significant, particularly in the key sectors of agriculture, human health, human settlements, coastal zones and water resources22. Moreover, the country has very high per capita greenhouse gas (GHG) emissions, on the order of 7.58 metric tons of carbon (in 2010 it was ranked number 6 globally)23. The Government is strongly committed to improving the management of the economic and environmental risks resulting from climate change, as well as lowering its GHG per capita emissions, as evidenced by the steps that it has taken to develop a National Climate Change Policy.
2.16 The Bank will support the mainstreaming of climate change adaptation and carbon reduction into the country‟s development program. Interventions will focus on: (i) integration of climate change mitigation and adaptation concepts into key sector policies24; and (ii) formulation of a stand-alone carbon reduction strategy and policy. In addition, pilot activities related to coastal zone management in Tobago will likely be supported by technical assistance.
2.17 Risks include: (i) lack of coordination among the different agencies involved in the thematic area; and (ii) resistance to participation in energy efficiency audits by public agencies. To mitigate these risks, the Bank is supporting the establishment
21 National Assessment Report on the Five Year Review of Progress made in Implementation of the Mauritius Strategy for Further Implementation of the Barbados Programme of Action, September 2010.
22 Draft National Climate Change Policy for Trinidad and Tobago, 2009. 23 Carbon Dioxide Information Analysis Center (CDIAC). http://cdiac.ornl.gov/trends/emis/top2007.cap 24 As identified in the draft National Climate Change Policy, these sectors are: agriculture, human health, human settlements, coastal zones, and water resources.
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of focal points within each ministry on issues related to climate change. For the latter, the Bank is working closely with the involved agencies to build up the required support for the undertaking of audits and inspections.
2.18 Energy: In addition to its relevance for the economy, the oil and gas sector is also the paramount source of energy for the country. However, the energy sector is the subject of significant distortions. Energy prices are among the lowest in the region (around US$0.04kw/h) and energy use rates among the highest25. These factors, further exacerbated by the energy subsidy mechanism in place for fossil fuels, provide few incentives for the use alternative cleaner energy sources26 and for encouraging the efficient use of fossil fuels. In addition, there is low capacity, the institutional framework lacks appropriate energy regulations and a formal energy policy is lacking. As a first step, the Government initiated a process to develop a National Energy Policy, which is currently in drafting stage, and includes the promotion of energy efficiency (EE), energy conservation (EC) and renewable energy (RE)27. The Government also introduced tax incentives to promote investment in RE in the 2010/11 budget.
2.19 The objective of the IDB‟s interventions in the sector will thus be to support the country in developing a more efficient, sustainable and cleaner energy matrix. The interventions will focus on: (i) strengthening the regulatory and legal framework to contribute to a more sustainable energy sector; and (ii) promote efficient and rational production and use of fossil fuels. The Bank will also provide technical assistance to Tobago in the area of developing and implementing sustainable energy activities. NSG opportunities may arise in downstream energy, RE and EE activities through the SCF window through PPP arrangements.
2.20 The principal risks include: (i) lack of sustained Government commitment to advance in the transition to a sustainable energy economy, irrespective of oil and natural gas price fluctuations; (ii) lack of expertise required to support such a transition and; (iii) delays in effecting the policy and regulatory changes envisioned. These risks are to be mitigated by technical assistance supported by the Bank, the permanent open dialogue with the GORTT in this regard.
2.21 Water and Sanitation: The wastewater sector in Trinidad and Tobago is in a dire state. The sector faces a number of challenges, including limited expansion of the central sewers, below-cost tariffs, lack of alignment between public policies and private developers (hundreds of defective private schemes exist that are polluting the environment), and poor maintenance. The sewerage system is dilapidated and in urgent need of rehabilitation. The water supply system also suffers from challenges related to high overhead, inadequate tariffs, aging infrastructure, and a
25 The production and distribution of electricity is mixed between public and private enterprises but prices are regulated. 26 This factor limits the scope of the Bank‟s operations in the sector. 27 Feed-in tariffs; net metering, renewable portfolio standard and open distribution and transmission grid network access, energy audits and substitution of more efficient equipment.
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lack of adequate maintenance. These problems have led to a gradual deterioration in the network, a high level of non revenue water (up to 44%), and low service levels. The Bank will also start the diagnostic of the solid waste management system in the country. The Water and Sewerage Authority (WASA), a state owned enterprise, is the primary entity responsible for the delivery of water and wastewater services under the 1965 WASA Act. The Regulated Industries Commission establishes the principles on which tariffs will be based.28 The water and sewage agency is not currently financially viable since its revenues fall far short of its expenditures.
2.22 The IDB‟s interventions in this sector will aim to improve environmental conditions through decreasing the uncontrolled discharge of untreated wastewater into the environment, and to improve the supply and sustainability of public water and wastewater management services. The interventions will focus on: (i) improving the operational efficiency and financial sustainability of WASA; (ii) rehabilitating and expanding29 the wastewater system; and (iii) improving the sustainability of the wastewater and water systems. NSG operations are envisaged in the implementation of a metering system for residential customers with SCF financing.
2.23 The risks include: WASA‟s lack of institutional and financial independence, the lack of a comprehensive wastewater and water sector strategy to guide activities in the sector, and a lack of resources to finance the strategy. The Bank is currently providing technical assistance to review the current institutional framework and challenges, and to identify priority areas of intervention.
2.24 Transport: Although the road system is extensive and comparatively well developed, many of the roads are narrow and follow difficult alignments. Road maintenance has been sporadic, resulting in 26% of the roads being classified as in poor or critical condition. Another difficulty is the elevated cost of road construction and maintenance, due to high wages and high prices of materials. Road safety is also an issue, with steadily increasing accidents and road fatalities. Given that around 13% of capital expenditure is dedicated to the sector, it is essential to improve the transparency, efficiency and effectiveness of public expenditures in this area. The responsibilities for planning and maintenance of the road system rely on several different ministries without a homogeneous framework. There are urgent needs for a comprehensive policy and planning framework and an institution capable of implementing coherent activities under this framework, a role expected to be covered by the Roads‟ Authority. In addition, the Road Maintenance Fund will institutionalize the provision of funding to maintenance activities. The Government policy in the area focuses on ensuring quality, reliability and maintenance of existing infrastructure.
28 The RIC is currently reviewing an updated water tariff scheme. 29 After the institutional reforms are initiated.
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2.25 The objective of the Bank‟s interventions in the sector is to support the
Government‟s reform agenda aimed at implementing a comprehensive road
maintenance and rehabilitation system to improve the quality, sustainability and safety of the roads. Interventions will focus, on a first stage, on: (i) strengthening the institutional capacities required to implement a road planning, rehabilitation, and maintenance system30; and (ii) operationalizing the Roads‟ Authority and Road Maintenance Fund31. After the new institutional framework is in place, the Bank expects to support road maintenance and rehabilitation activities. NSG operations are envisaged, particularly in the rehabilitation and operation of roads using SCF financing through PPP arrangements.
2.26 The main risk is weak coordination between line ministries involved in the road sector. The Bank will support the creation of an inter- departmental coordination committee including the line ministries as well as the MoF.
III. BANK FINANCING UNDER THE STRATEGY
3.1 The financing needs of the Government have increased in the last couple of years because of the shortfall in revenues and the maintenance of fairly high expenditure levels. The Government aims to correct the imbalance by fiscal year 2013/2014. However, in the short term the Government will continue to face extraordinary financial needs as it gradually eliminates commitments to bail out private investors in failed financial institutions, and resolves longstanding pay disputes. Nevertheless, the public debt stock is low by regional standards (48% of GDP in September 2010), and is sustainable in the medium term.
3.2 The financial scenario was designed to reflect the intention to increase the Bank‟s
engagement with Trinidad and Tobago. The basic premise is that the Bank will
30 Special efforts will be devoted to the collection of essential statistics for the sector. 31 The Bank will support, among other activities, the development of maintenance standards, performance-based contract documents, and social and environmental management actions. 32 The level of Approvals for 2012 are indicative and consistent with the assumptions underlying the 2011 Long Term Financial Plan.
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provide countercyclical support until the economy regains dynamism, while at the same time providing technical assistance and financial support for the reform agenda. The envisaged approval level is US$1.5 billion for the strategy period and the disbursement projection amounts to US$1.1 billion. The expected average annual disbursement of US$213 million would cover around 60% of the projected gross financing needs of the country during the CS period33, and the Bank‟s
exposure would increase from 5% to 14% of total debt.34 This increase is not a reason for concern since the stock of debt is well below standard benchmarks. The Bank‟s relatively high share of total multilateral debt is explained by the fact that the IDB has the single largest portfolio of all multilateral lending agencies.
IV. STRATEGY IMPLEMENTATION
A. Country Systems
4.1 Financial Management: The Public Financial Management (PFM) system in Trinidad and Tobago is focused mainly along the lines of expenditure control. While the PFM system functions reasonably well along traditional lines, there is need for the system to be modernized so that it is able to provide real-time and accurate financial management information. The accounting and reporting system for non-salary expenditure is largely paper based, manual and not well integrated or interfaced between operating units or information sub-systems. There is a lack of independence in the external function, whilst the internal audit function suffers from inadequacies. Furthermore, the PFM system lacks the application of modern approaches and techniques in the area of fiscal planning and management. As a result of the weaknesses noted, the PFM subsystems are used to a minimal extent in Bank financed projects35. Currently the treasury and budget subsystems are used in all loan projects, since their use is mandatory as per the financial regulations of the country. The fiduciary systems are expected to be modernized and strengthened with initiatives introduced with the Government‟s reform efforts
in public capital expenditure management and the Bank‟s technical support in the area of public sector management. Increased use of the national fiduciary subsystems in Bank financed loan projects should be achieved.
4.2 Procurement: The national procurement system has evolved little since the diagnostic recommendations highlighted in the European Union‟s Public
Financial Expenditure & Accountability (PEFA) report of 2008. The Central Tenders Board (CTB) was created to ensure the principles of equity and fair competition in the awarding of Government contracts. However, a number of agencies, particularly SOEs, have been granted the authority to award Government contracts, using procedures other than those contained in the CTB
33 The financing needs of the Government are estimated in US$ 1.7 billion between FY 2011/12 and FY 2014/15. Domestic financing is assumed 30% as expressed by the Minister of Finance in its 2010/11 budget speech. 34 This increase reflects both the increase in lending and the expected reduction in the debt stock, due to improvements in the fiscal situation. 35 The budget and treasury country subsystems are used in 100% of projects in execution, but the accounting, reporting, internal audit and external control subsystems are not used in any projects in execution.
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legislation. Procuring Entities, with the approval of Cabinet, award large value contracts directly to the SOEs, which, in turn, award subcontracts according to their own procedures. This system has created contradictions in the award of public contracts and the perception of corruption, as evidenced by the constant negative media attention related to contracts awarded through the SOEs. Currently, no country systems are used in Bank financed projects. The IDB-financed program for public capital expenditure support in Trinidad & Tobago and the associated operational input for the procurement component of the program will reinvigorate the national procurement modernization effort. Among the expected results of the project are the introduction of legislation, development of standard bidding documents, an e-procurement strategy, and procurement practices and procedures that enhance the fairness and efficiency of the system. Following the execution of the necessary baseline studies and consultancies for strengthening these systems, greater reliance on the country‟s public procurement
and financial management systems is expected (especially in the areas of price comparison, contracting of individual consultants and firms).
B. Donor Coordination 4.3 Historically, Trinidad and Tobago‟s engagement with bilateral and multilateral
development agencies has generally been limited and uncoordinated among sectors. Despite this, the Bank still maintains the position as the lead multilateral partner in the country. There is no formal, Government lead coordinating mechanism for development agencies to avoid duplication of effort and share sector knowledge. The Ministry of Finance has recognized the need to formalize a structured approach to multilateral development dialogue and has decided to organize the priority areas of intervention as follows (i) Public financial management with the European Union, the WB and IDB; and (ii) private sector development with the WB/IFC and the IDB for the public offering program. Annex V provides additional details on activities in sectors in which activities are being coordinated with other donors.
V. RISK ASSESSMENT
5.1 Macroeconomic Risks: Even though macroeconomic indicators have deteriorated because of the crisis, the outlook remains favorable36. The debt stock of the Public Sector remains below 50% of GDP, the international reserves account is stable at 30% of GDP, and the country has accumulated around 16% of GDP in the Heritage and Stabilization Fund. However, macroeconomic stability faces several risks. Both non-energy fiscal and external accounts are unsustainable in the long run because of the high dependence on the revenue generated by the energy sector, whose reserves are expected to dwindle in the coming decades. In the short run, there is a need to consolidate the fiscal accounts, not only of the Central Government but also of the other public entities
36 There are plans mandated within the framework of the Report on the Ninth General Increase in the Resources of the Inter-American Development Bank to Produce analyses of the macroeconomic sustainability of the borrowing member countries (including annual reviews), but the corresponding process and implications of this activity are yet to be defined by the Bank‟s Board of Executive Directors.
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(where most expansion of expenditures has been observed). Delays in economic recovery and lower than expected prices of key commodities could also prolong the period during which fiscal stimulus in excess of revenue is necessary. Furthermore, the fiscal consolidation process could hinder economic activity as the non-energy sector of the economy is highly dependent on fiscal stimuli. The Government also needs to meet outstanding payments to complete its bail out of failed financial institutions37 while managing its impact on the fiscal accounts. Substantial risks in the financial sector may still remain, suggesting that close monitoring of certain financial institutions will continue to be necessary. Moreover, the inflexible exchange rate regime poses an additional limitation on efforts to boost the competitiveness of the non-energy sectors of the economy. The Bank is collaborating with the Government in the areas of macroeconomic management, financial supervision and competitiveness enhancement. The Bank maintains close surveillance of the economy and coordinates closely with the IMF on matters related to economic policy and the financial sector.
5.2 Political Risks: The Government could face resistance in implementing the reform program, as it will shift power relationship within the targeted sectors and reduce benefits. However, the Government has shown a strong commitment to these reforms by including them as part of its electoral Manifesto and taking concrete steps to implement them. During its first year in office, the Government already submitted to Parliament key reform proposals for the procurement system, homogenizing procurement practices across ministries and SOEs. The Government‟s ongoing efforts to resolve the public sector wage dispute while maintaining fiscal discipline also demonstrates its capacity to tackle sensitive issues effectively. This strong commitment, combined with the ample majority that the ruling coalition has in Parliament, will mitigate the risk of the reform process being derailed. Negotiations with private investors in failed financial institutions could erode the political capital of the ruling coalition, which would impact negatively to their ability to undertake such an ambitious reform agenda.
5.3 Implementation Risks: Given the ambitious nature of the Government‟s reform program there is a risk of delays in its implementation resulting from institutional capacity constraints.38 In order to mitigate this risk the Bank will provide technical support to the implementation process of the reforms. With regard to investment projects, there are also concerns about Government‟s capacity to execute a substantially larger portfolio, given the institutional capacity constraints. However, the Government is currently implementing a US$2.4 billion annual capital expenditure program, demonstrating its capacity to execute an extensive investment program. Moreover, the Bank is supporting the enhancement of the procurement practices, which is expected to cover all procuring agencies. In order to mitigate these risks, the Bank will make use of the multi-phased implementation modality whenever possible, which would not allow approvals of new phases until prior phases are executed satisfactorily. Moreover,
37 For further information please refer to the document “Impact of the Global Financial Crisis – Changes in Paradigms“ 38 Ultimately affecting the level of approvals and disbursements.
the Bank contemplates institutional strengthening and policy support in all the key areas where investment loans are envisaged. Overarching outreach and consensus building activities are also envisaged as part of the specific operations. There is also a risk that the relatively higher transaction costs of the Bank financed operations in comparison with alternative sources of funding (own resources or bilateral donors) could hinder the execution of the Bank‟s portfolio. The
successful reform process of the procurement system will equate the transaction costs associated with different sources of funding, as they all will be subject to the same enhanced procurement procedures.
5.4 Private Sector Risks: For the NSG operations, an important implementation risk is that the legal framework for PPPs may not be operational in time to support interventions in the priority areas of water, wastewater, transport and education, during the Strategy period. The Bank is providing technical assistance for the development and operationalization of a legal and institutional framework to support such PPPs.
Annex I
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MACROECONOMIC INDICATORS
2006 2007 2008 2009 2010*
GDP (US$ Million) 18,405 21,734 27,133 19,701 20,596 GDP per capita (US$) 14,158 16,719 20,871 15,155 15,843 Natural Gas Production (MMCM/d) 3,878 4,089 4,182 4,391 4,320 Total Crude Production (MB) 52.1 43.8 41.8 39.1 35.9 Unemployment Rate 6.2 5.6 4.6 5.0 6.0 Inflation (year-to-year %) 8.3 7.9 12.0 7.0 16.0 Food 23.2 17.4 25.9 12.7 32.0 Core 3.6 4.4 6.2 4.1 4.1 Exchange Rate (%) 6.3 6.3 6.3 6.3 6.3 International Reserves (US$ Million) 6,761 6,659 9,394 8,652 9,111 Deposit Rate 6-12 months (%) 3.7 3.9 4 3.2 1.8 Change in Gross Private Sector Credit 16.2 21.7 13.4 -4.4 -3.9 Expenditure Central Government (%GDP) 32 29 32 37 30 Capital Expenditure (%GDP) 4 6 6 7 4 Fiscal Balance (% GDP) 2 0 2 -5.6 -0.4 Central Government Debt (%GDP) 17 16 14 20 22 (*) preliminary Source: Ministry of Finance and CBTT
Annex II
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MACROECONOMIC SITUATION
The country is experiencing a mild economic recovery driven by energy prices, but there are significant medium term risks. In the short run, the Government is addressing the current challenges in the financial system, the relatively high level of inflation, the de facto peg of the domestic currency and the fiscal discipline of the public entities. In the medium to long term, however, the high dependence on oil and gas production, the uncertainty about the effectiveness of the policies adopted to diversify the economy and the related problems of fiscal and current account sustainability need to be addressed, in order to avoid a sharp adjustment in the future when reserves of oil and gas are depleted.
Both the non energy fiscal and the current accounts are unsustainable in the
long run. The non-energy fiscal deficit is above its sustainable level given the relatively short expected lifespan of hydrocarbons production. Similarly, the non-energy current account deficit is much higher than the calculated sustainable level. The country has accumulated a significant net international creditor position that will help smooth the required transition to a less energy-dependent economy in the years to come.
The public entities constitute a risk to fiscal sustainability. The public entities represent an important proportion of public expenditure and their deficits have been growing over time. These entities issue debt with and without government guarantees and there is no proper record keeping system in place. The GORTT could face further contingent liabilities going forward that could affect the fiscal results and even the debt dynamics if the GORTT would has to honor some of the public entities‟ debt.
The GORTT is in the process of settling the outstanding issues with the
CLICO’s policyholders. The GORTT so far devoted US$ 1.1 billion in the rescue package of the failed financial institutions but the net fiscal cost is yet to be determined as there is no clarity about the value of the assets remaining in CLICO. However, the GORTT has contracted an international accounting firm to update the financial reports of Clico and its sister company the CL Financial Group. The GORTT announced in September 2010 a scheme to return the investment to the policyholders of the failed institutions. So far, the GORTT has returned, in cash, the investment of the policyholders with balances below TT$ 75000 (around US$ 11000) as well as through a compassionate window, devoting US$ 61 million. The GORTT has recently announced in Parliament an enhanced scheme to settle all outstanding policyholders and investors; while at the same time enacting special legislation for protecting the assets of the CLICO. Under this enhanced scheme the investors will receive 20-year bonds with zero interest rate, but would have the opportunity to exchange the bonds with a maturity of 11 to 20 years for units of a trust fund composed by Republic Bank shares.
Annex II
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Inflation pressures subsided. Domestic supply shocks had increased food prices sharply during 2010 as food price inflation reached almost 40% in August 2010. After this increase fuelled by a severe drought that affected the domestic supply of staple commodities, inflations levels are around 1% monthly. There is a risk that increasing commodity prices in international markets will convert this domestic shock into a more persistent one and keep food prices at elevated levels.
Trinidad and Tobago is vulnerable to oil and gas price shocks. The economic activity is highly dependent on the energy sector so any further contraction in the sector will imply a further slowdown in economic growth for the country. As was mentioned in the document, oil and gas revenues represent around 50% of the total revenues of the government and a decrease in the prices of these commodities will increase fiscal deficit and impact on the fiscal and debt sustainability. The government could need to reduce expenditure contracting the economy even further. On the external sector, given the reduction in the inflows of foreign exchange, there is a risk of losing substantial reserves in the case that the CBTT decides to defend the de facto peg with the US dollar.
Annex III
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CPE RECOMMENDATIONS
Country Program Evaluation Recommendations
Recommendations of the Country
Program Evaluation 2000-2008
Incorporation into the Country Strategy
2011-2015
The IDB should offer a menu of assistance to the Government of Trinidad and Tobago for the following key areas: a) Support the Government’s efforts by
targeting specific development gaps, in
order to help T&T achieve developed
country status by 2020. Several sectors should be strategically selected in agreement with the Government. Activities should be based on Economic Analysis and they should target both the supply and demand sides.
The CS targets specific areas for intervention which represent the shared priorities between Government and the Bank. The reforms envisaged in the Strategy target both the supply and demand sides as they include the strengthening of enabling environments in the priority areas, as well as activities in the priority areas. The project teams will collaborate closely with SPD in order to ensure that cost benefit analyses are performed and taken into consideration for individual operations.
b) Provide counter-cyclical support
during downturns. Social protection programs could also be used to shelter the poorest from volatility.
The CS was structured to provide countercyclical support by providing fast-disbursing resources at the beginning of the strategy period, while at the same time introducing the required reforms to enhance the effectiveness of public investment, benefiting the interventions to be supported by new investment. The CS also addresses social protection programs via the social sector priority area.
c) Engage the Government regarding the
sustainability of fiscal spending beyond
the depletion of energy resources. The focus should be on how to increase the effectiveness and efficiency of expenditures. If requested by the Government, the IDB should work with other multilaterals to provide research and technical assistance regarding the implementation of savings mechanisms.
The Bank has been supporting the Government‟s initiatives to increase the
efficiency, effectiveness and sustainability of public investment through several Modernization of State operations, most notably, the Public Capital Expenditure Management Program PBP. (which first operation was approved in 2010). The Bank will continue to provide support in this area, through the Public Sector Management priority area of the CS, and will also aim to strengthen the governance of SOEs and increase the accountability of the social safety net expenditures. The Bank is coordinating with other
Annex III
2
Recommendations of the Country
Program Evaluation 2000-2008
Incorporation into the Country Strategy
2011-2015
multilateral institutions in key areas of support.
The IDB should tailor its instrument mix
to T&T’s needs. Aside from countercyclical support, T&T‟s income-level suggests it should be supported in the medium term via high quality analytical work and Technical Assistance (both as part of loans and as standalone TCs) in place of financing infrastructure. Thus the Bank should redevelop its relationship with T&T to become a provider of a strategic program of higher quality Knowledge and Capacity-Building Products (KCP) and other Technical Assistance activities.
The present strategy is the result of extensive technical work already completed and an ongoing policy dialogue. The CS contemplates the continuation of support for high quality analytical work and technical assistance both in the priority areas of the CS and others emerging areas of importance. The Bank can have additionality in financing infrastructure if the operations are designed in such a way that they focus not only on the infrastructure but also on institutional strengthening and capacity building activities to improve coordination, planning and sustainability of the investments.
The IDB should improve the
effectiveness of its Technical Assistance. The portfolio of these activities should be strategically identified to maximize externalities and have the potential to be scaled up. Exchange of expertise should be encouraged. Technical Assistance should be anchored on selected long term strategic partnerships. To ensure that these activities are demand-driven and high quality, the IDB should follow the lead of the World Bank and pilot fee-for-service contracts in T&T (including contingent recovery arrangements with appropriate incentives). Furthermore, these activities should put much greater emphasis on building local capacities to manage and execute activities through to successful completion. Finally, the success of these activities should be measured by systematic solicitation of client feedback as envisioned in the Development Effectiveness Framework.
The technical assistance to be provided under the 2011-2015 Country Strategy will be aligned with the priority areas, or the areas for further dialogue, cited in the Strategy, reflecting its demand-driven nature. As mentioned as one of the mitigating factors in the “Implementation
Risks” section of the Strategy, technical
assistance to support the reform process and institutional capacity building is envisaged in several of the Strategy‟s
priority areas. All technical assistance interventions will be consistent with the Bank‟s Development Effectiveness
Framework.
The IDB should provide stronger and
strategic support to the private sector. Bank activities regarding the business climate should be targeted toward the
The Private Sector Development was identified as a key area for technical assistance during the strategy period. Support in this area will be focused on
Annex III
3
Recommendations of the Country
Program Evaluation 2000-2008
Incorporation into the Country Strategy
2011-2015
removal of market failures and constraints to competitiveness, while encouraging the diversification of the economy. The IDB should conduct research and pilot various policies proposed by the academic literature and used by other countries to stimulate private sector development, such as investing in R&D, marketing abroad, mechanisms for private sector dialogue like the East Asian „deliberation councils,‟ and
industrial zones, etc.
providing assistance on improving the enabling environment for business development and innovation, trade facilitation and investment attraction. Productive development policies such as those aimed at strengthening innovation and public-private dialogue are identified for technical assistance.
The IDB’s activities should reflect more
consensus, be more feasible and flexible,
and more evaluable. Activities should have realistic objectives, be simple, and consensus should be cultivated across a broad set of stakeholders and informed by analytical work. All activities should also include outcome indicators, baselines, targets, and track these data over time.
The new strategy reflects the shared priorities between the Government and the Bank, and is the result of extensive background work in the key areas of support. The CS takes into account feedback provided from Government and other stakeholders throughout the Strategy preparation process, such as civil society organizations. “SMART” outcome
indicators with baselines and targets have been developed in each of the priority areas and are consistent with the Bank‟s
Development Effectiveness framework. The IDB should make a large push for
broad data generation and analysis. The data deficit is so large in T&T that the Bank should support data generation as a public good. This large push for data should also improve the design of activities. It will also support the efforts of the Government and the newly realigned IDB to focus on Management for Results. Furthermore, the Central Statistical Office should be strongly supported.
Interventions in the Social Protection priority area will include strengthening the Monitoring and Evaluation capabilities of the line ministry involved in the delivery of social safety net programs. In the Public Sector Management priority area, the Bank envisages technical cooperation to strengthen the Government‟s capacity in
management for results. Moreover, some of the programs already in execution and the new interventions contemplate the collection of primary data in order to undertake impact evaluations. Moreover, the Bank has already agreed with the GORTT on technical assistance to strengthening the CSO.
Annex IV
1
FINANCIAL SCENARIOS
Financial Scenarios
The financial scenario reflects the renewed development partnership between the Government and the Bank. The scenario envisages an approval envelope of US$ 1.5 billion and disbursements for US$1.1 billion during the strategy period. Compared to the previous strategy period, the proposed financing scenarios imply an historic level of approvals and a strongly positive net flow of resources to the country.
The increases in the exposure indicators reflect the above mentioned reengagement of the Government with the Bank as well as the medium term fiscal program of the country. The Government expects to run fiscal surpluses by year 2013/14, and part of these resources could be devoted to reduce the stock of debt of the country
The fiscal situation has been deteriorating since 2009. The worsening in the fiscal accounts reflects the impact of the sharp decrease in energy revenues, the cost of the bailout of the financial system, and the decision of the Government to maintaining a relatively high level of capital and current expenditure. The fiscal results of the public entities not included in the Central Government‟s budget have also deteriorated
substantially in recent years. The financial scenario used for the elaboration of the Country Strategy assumes that the Government adopts active policies in order to turn the fiscal accounts to surplus by fiscal year 2014/1540. Under this assumption, the financing needs of the country diminish over time, amounting almost US$ 1.8 billion between FY 2011/12 and FY 2014/15. The Government announced that it will modify the strategy to finance its fiscal imbalance from a preeminent domestic source to a strategy of financing a substantial proportion of the deficit from external sources. The financial programme
39 The level of approvals for 2012 are indicative and consistent with the assumptions underlying the 2011 Long Term Financial Plan. 40 The fiscal measures assumed are an increase in the efficiency of tax collection as well as a reduction in transfers to public entities, issues that are in close alignment with the policies announced by Government.
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assumes that the Government will start repaying some of the debt with the private sector in FY 2014/15, as well as transferring resources to the Heritage and Stabilization Fund.
Fiscal programme and Total Financing Needs – Active Scenario
Historically, Trinidad and Tobago‟s engagement with bilateral and multilateral development
agencies has generally been limited in the number and volume of interventions, and uncoordianted among sectors. Despite this, the Bank still maintains the position as the lead multilateral partner in the country. Due to the absence of a formal, Government-led, coordinating mechanism for development agencies, the Bank adopted a proactive approach to engage other donor agencies to discuss ongoing developmental issues and share sector knowledge. The information emanating from these meetings deepened sectoral relationships among bilateral and multilateral donor agencies. The Ministry of Finance, however, has recognized the need to formalize a structured approach to all dialogue with development agencies so as to optimize Official Development Assistance to the country. The Government‟s strategy as it relates to donor
coordination is to focus on the most important areas of intervention, namely: (i) Public financial management with the European Union, the WB and IDB; and (ii) private sector development with the WB/IFC and the IDB for the public offerings program. (i) Public sector management and supervision: Historically, the Bank has maintained a
strong presence in fiduciary issues over the years, by providing advice to Government on the modernization of public procurement, and coordinating with the EU‟s diagnostic
work on two PEFAs. In 2010, the IDB approved the Public Capital Expenditure Management Program. This comprehensive policy based framework helped leverage a significant disbursement of the EU's budget support. The Bank also coordinated with CARTAC on the multiannual macroeconomic framework, which feeds into the annual budget process With respect to the Public Offerings Program of State Owned Companies, the MOF requested the IDB to lead the conceptual design of the public offerings program, for the WB/IFC and the IDB to undertake diagnostics in sectors of specific expertise, and to collaborate on potential NSG transactions. With respect to Integrated Project Management, the IDB and UNDP have coordinated efforts to build capacity building in line ministries to enhance the implementation of public investment projects.
(ii) Education. The Bank has maintained a long term dialogue and financial engagement in this sector. The EU is the only significant donor providing policy based budget support (grants) for tertiary education, and has engaged the Bank for information sharing about its initiatives in Technical and Vocational Training and the National Training Agency. The Bank has also coordinated with the CDB a Regional Policy Dialogue on literacy and numeracy. UNICEF has support education and youth initiatives, particularly in the area of monitoring and evaluation and the ILO has an intervention on entrepreneurship, so coordination efforts are likely to focus on the transition from school to work.
(iii) Social protection. The Bank has participated in regular UN meetings to monitor the Millennium Development Goals.
(iv) Climate change. The Bank has coordinated with the EU and UN agencies providing TA in this area, and also on regional and international initiatives.
(v) Energy. The Bank had coordinated with the WB on the Extractive Industries Transparency Initiative, and with the US' Energy and Climate Partnership of the Americas (ECPA) for the establishment of the Renewable Energy Center in T&T.
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To strengthen donor coordination in Trinidad and Tobago, the Bank is expecting to provide technical assistance to the Ministry of Finance for the implementation of its strategic realignment process, which among other activities will help establish capacity in the Ministry to effectively utilize and coordinate Official Development Assistance.
DONOR COORDINATION MATRIX
Area IM
F
WB
IFC
EU
UN
ICE
F
OA
S
CE
PA
L
ILO
PA
HO
CA
RT
AC
US
/ A
ID
UN
DP
Education X X X X Social Protection Private Sector
