By Kiana Wilburg
If the Government of Guyana intends to promote a culture of ethical awareness and integrity for the use of the Natural Resource Fund (NRF) then it will establish a Code of Conduct for the Fund’s Board, internal and external managers, as well as staff associated with the Fund.
This is according to the Natural Resource Governance Institute (NRGI). This transparency body made this clear in one of its recent reports on how Guyana would be able to manage a Fund that is free from corruption.
According to the Institute, persons involved in the day to day operations of the Fund must be subjected to a code of conduct and conflict management guidelines. It stressed that other well-governed funds such as those in Abu Dhabi (ADIA), Alaska (U.S.), Alberta (Canada), Botswana, Chile, Kuwait, Norway, Texas (U.S.) and Trinidad & Tobago, have such policies and guidelines in place.
The Institute said that the code and guidelines should include, at a minimum: professional conduct and duty of employees; legal compliance; confidential information; conflicts of interest; personal disclosures; insider trading; financial interest; political activities; travel, hospitality and gifts; bribes and corruption; money laundering and terrorist financing; duty to report wrongdoings; and self-assessments.
NRGI said that there should also be clear consequences for malfeasance. The transparency body said that Governments sometimes include codes of conduct such as these in legislation, however they often leave the details to regulation.
International energy experts have also called on the local authorities to put in place, an External Management Policy. Specifically making this point recently were economists and energy experts: Andrew Bauer, David Mihalyi and Fernando Patzy. They stressed that such a policy will be essential in Guyana’s quest to prevent malfeasance and protect the integrity of the Natural Resource Fund which will be established soon.
The consultants, who are attached to the Natural Resource Governance Institute (NRGI), noted that the Policy is one that would provide an overarching menu of guidelines on how external managers of the fund are to be selected, monitored and managed. It will set out strict rules on how external managers are to manage risks, and what are they allowed to do and what they are not. There would also be accompanying penalties for any breach that is found.
The economists stressed that excessive risk-taking by external investment managers can create challenges if they have no policy that guides their actions. They said, “Since much of their compensation comes from management fees and they can charge higher fees for trading more complex, higher-risk financial products, external managers have an incentive to push Natural Resource Funds to invest in risky assets.”
“While high-risk/high return investments may have a place within even a very conservative private institutional investor’s overall portfolio, as custodians of public funds, Natural Resource Fund managers have a responsibility to safeguard assets and prevent waste or excessive risk taking. Therefore, detailed investment rules such as those limiting purchases of high risk assets can help address excessive risk taking. It is in this in vein that the External Management Policy is essential.”
Further to this, the NRGI consultants said that Guyana’s legislation on the NRF could go a step further than the policy and include elements on the types of assets it will manage internally versus externally, the maximum size or percentage of portfolio to be managed by a single asset manager and the qualifications fund managers must have.
The NRGI officials said that these are internationally accepted best practices which are found in places like Timor-Leste for example. In addition to this, the consultants said that it would be in Guyana’s interest to arm itself with model contracts for external asset managers, compensation framework for these persons, a reporting framework they must follow and termination criteria.
GREEN PAPER LOOPHOLE
Guyana’s Green Paper on the establishment of the Natural Resource Fund 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, 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.
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 consensus, 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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