Latest update May 7th, 2024 12:59 AM
Nov 01, 2018 News
By Kiana Wilburg
Guyana’s Green Paper on the establishment of the Natural Resource Fund (NRF) presents a few good points on how oil moneys are to be used to invest in certain assets. But there is a gaping loophole that if left unaddressed, could result in significant risk for the Guyanese economy.
According to a report prepared by the Natural Resource Governance Institute (NRGI), Guyana’s draft paper lists what assets are eligible for the government to invest in. However, “it is not explicit about which assets the Fund may not (be used to) purchase. From an oversight and governance perspective, the decision of which assets are eligible and prohibited requires careful consideration of whether the Fund has the systems in place to adopt complex or risky investment practices.”
The authors of the report—economists Andrew Bauer, David Mihalyi and Fernando Patzy— said that if risky investment practices are “well understood” and monitored, then careful instruments and strategies, such as hedging, can help mitigate risks and enhance returns.
They noted however that very often, when governments push ahead with risky investments, they often introduce significant operational and default risk, incur high management fees, and become tools for excessive speculation. The economists said that while the Green Paper “implies” some restrictions, countries with NRFs often employ different types of detailed constraints on investments. They said that these mechanisms were not covered in Guyana’s Green Paper.
DISCLOSE ASSETS
Bauer is also of the firm belief that the Government must be made to disclose all the assets that were financed by the NRF.
Bauer said, “One of the things I am hoping the Ministry of Finance does, is put into legislation that every single asset it invests in, be made public. Meaning, everything that the government owns, every share it buys into, must be disclosed.
“That is how you are going to tell where the money is going; if it is going into their friend’s company or being invested properly. So, for me, this is more important than simply reporting monthly or quarterly.
Bauer said, too, that for any Natural Resource Fund to be successful, there must be a degree of consensus. Without it, countries risk being trapped in a cycle where rules governing the use of the Fund are constantly thrown out, or altered to suit the liking of any party in power.
The economist said, “You need to because what is going to end up happening is that you can put together the nicest laws with the most beautiful rules and if the new party comes into power (and they aren’t in agreement with it), they can throw it out. So it is not particularly useful to have something that can be thrown out every few years.”
Further to this, Bauer said that consensus building is critical to the success of any Natural Resource Fund as politicians and oversight bodies are unlikely to enforce rules unless they have a feeling of ownership over them.
He said that there are many models of consensus building. The NRGI consultant said that these include parliamentary debates, public surveys and political ententes.
In Norway, for example, Bauer pointed out that the political parties negotiated the fiscal rules so that each would abide by them once they entered government.
Pointing to another example, the economist said, “One of the most amazing stories is Ghana in West Africa. In Ghana, before they put the NRF in place and the fiscal rule, the Ministry of Finance ran around the country to almost every small town and village, and they asked people how much money they think the government should save, how much money they think the government should spend, and what it should be spent on.”
The economist added, “And when they got feedback, they fed it into the fiscal rule. The value of that showed up years later when the government tried to break the rules and locals were calling into the local radio stations saying, ‘Well this is crazy! The government is doing a horrible job…’ There was public outcry and the government stopped …So it is really important to have everyone on board.”
On that note, Bauer stressed that it is crucial that the coalition administration, follow suit and engage in cross-country consensus building exercises before the establishment of the Fund.
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