With Government facing harsh criticisms over its oil deal with US-owned ExxonMobil, moves are underway to prevent a replay.
The Inter-American Development Bank (IDB) is taking a leading role in helping Guyana transform its governance approach when it comes to the energy sector.
According to the IDB, Guyana has been approved for a loan of US$11.6M which will, among other things, pay for drafting a model contract for future Production Sharing Agreements (PSAs).
Under the 2016 agreement with ExxonMobil, the Coalition Government signed for a two percent royalty and questionable 50/50 share on every barrel of oil. However, Guyana’s share of the 50/50 is dependent on ExxonMobil recovering it expenses first. Commentators say that based on ExxonMobil’s track record, Guyana will be left with little.
The Government of Guyana says that it will be strengthening its newly established Department of Energy to handle these and other issues.
The IDB says that the loan will prepare Guyana for its transition towards becoming a major oil and gas producing state.
“Relying upon a $11.64M policy-based loan from the Inter-American Development Bank (IDB), this project is designed to support the strengthening and the sustainability of the energy sector in Guyana by contributing to the institutional development of oil and gas governance and the development of cleaner energy sources for electricity generation,” IDB explained yesterday.
The specific objectives of this loan programme are first, to develop a management and planning framework for Guyana’s oil and gas sector; and second, to contribute towards the development of a policy framework so that Guyana may diversify its electricity generation matrix using cleaner or renewable sources.
According to the bank, Guyana’s new energy scenario, which will likely yield significant revenues for the government, represents a transformative shift in Guyana’s development trajectory.
“It embodies a crucial and unprecedented opportunity for economic growth and sustainable development. The conversion of short-term oil wealth into long-term well-being, hinges on the capacity of the Guyanese Government to adequately manage this new sector and enact productivity-enhancing reforms.”
The bank stressed that if handled well, it can boost the overall standard of living for the country. However, there is considerable work to be done so that Guyana can enjoy the benefits of its recent – and potential – oil and gas wealth.
“Too often resource-rich countries have become or remained poor as a result of inadequate resource management. Hence, there is an urgent need to improve the governance of Guyana’s oil and gas sector ahead of the start of production in 2020.”
Under the first tranche of the programme, the monies are being earmarked for the creation of the Department of Energy (DE) within the Ministry of the Presidency to take over responsibilities related to the governance and development of Guyana’s oil and gas sector.
It will also be used for approval by the DE of a draft roadmap to develop Guyana’s oil and gas institutional framework, and to design of a model contract for future Production Sharing Agreements by the DE and presented to Guyana’s Ministry of the Presidency.
Under the second tranche, some of the monies will be used to prepare a DE functions manual establishing its organizational structure, budget and staff allocation, approved by the Ministry of the Presidency, and a PSA set of protocols and mechanisms for contract management.
Also to be prepared will be an oil and gas depletion policy designed by the DE and presented for approval to the Ministry of the Presidency.
“Finally, the programme will aid Guyana’s Government with the development of a policy framework to diversify and promote the sustainability of Guyana’s electricity generation matrix.”
The loan is funded in two components totalling US$11.64M. The first component will be US$5.82 million from the IDB’s Ordinary Capital, disbursed within two years, with a grace period of 5.5 years, and an interest rate based on LIBOR (London Inter-bank Offered Rate). The second component will total US$5.82 million from the IDB’s Concessional Ordinary Capital, disbursed within two years, with a grace period of 40 years, and 0.25% interest rate.
The executing agency will be Guyana’s Ministry of Finance.
Several local and international organizations have lamented over the need for Guyana to improve many of its institutional and financial systems before 2020. In fact, the Natural Resource Governance Institute (NRGI) has urged emerging oil producers like Guyana for example, to improve its Public Financial Management System.
NRGI notes that strong public financial management (PFM) systems are essential for effective and sustainable economic management and public service delivery. To cement the importance of strong PFMs, NRGI noted the cases of Chad and Nigeria.
The Institute said, “Much cash has flowed into Chad’s government treasury from resource extraction. In fact, 70 percent of government revenues come from oil. However, rather than translating this into human development, money has instead been spent on security services totalling 18 percent of the budget. The result is a growing stock of debt and 184th in the ranking of countries in the Human Development Index.”
With regard to Nigeria, NRGI said that this African state reformed its public procurement process in 1999. Previously, on average, US$300 million was lost each year in corrupt practices. Since reform and strengthening of its PFM, the Nigerian government has saved an estimated US$1.5 billion between 2001 and 2007.
With the foregoing in mind, NRGI said that improvement in public spending management is necessary and can take the form of both an increase in the capacity to choose appropriate spending plans, and incentives for institutions to make decisions without political interference.
In countries with low institutional capacity, the Institute said that it may be politically easier to introduce improved, stricter management rules for new spending projects than to reform existing spending. It said that governments should aim for several things their public financial management systems.
It said that this would involve public, multi-year plans that allow coordination of spending projects, and greater certainty for the private sector; competitive, public and transparent procurement; oversight and internal controls; pre-approval measurement of the costs of major expenditures against their likely social and economic benefits; and public, independent audits of spending projects, for both oversight and to help government improve its spending processes.
NRGI said that it would be in the interest of countries for the authorities to invest in public investment processes and in eliminating supply bottlenecks in the economy to reduce the cost of investment projects.
Guyana has been carrying out several assessments in an effort to achieve a strong PFM. While there were some improvements over the years, the International Monetary Fund (IMF) recently noted that there is still more which needs to be done. During one of its recent assessments, the Fund noted that the limited capacity at all levels of the Ministry of Finance and even in various line agencies will pose significant constraints when the time comes for the implementation of needed reforms for Public Financial Management.
To ensure success going forward, the IMF said that reform measures will need to be carefully prioritized and sequenced so as not to overload the limited capacity.
The Fund said that the extent and wide-ranging nature of future PFM reforms perhaps requires a more coordinated approach to reform implementation. It said that many countries faced with an extensive body of work have formed a dedicated reform team to organize, coordinate, and facilitate the required reforms in many PFM areas.
It said that the reform unit/team will provide oversight, guidance and monitoring to the PFM reform plan and act as a coordinator of the overall PFM reform programme. The Fund said that a substantial part of their work should be directed to upgrading the skills of staff in the Ministry of Finance and line agencies by developing a core PFM training programme.
The Fund also stressed that capacity building in the Ministry of Finance and in line agencies is an important prerequisite for sustainable PFM reform.
It said, “A comprehensive assessment of required skills is essential for successful implementation. It could be considered to appoint a small group to analyze the long-term capacity building needs, and to develop an overall plan for PFM capacity development, to be managed and coordinated within the reform unit in the Ministry of Finance.”
The Fund added, “The results of the assessment could summarize the skills required in every function. For example, for budget office skills in preparing baseline expenditure are crucial or for macro-fiscal division the analysis of fiscal risks.”
The Fund further stated that capacity-building efforts could be coordinated with local training institutions. In this regard, the Fund said that the Ministry should explore further, the options to cooperate with local training institutions (e.g. recently-opened Bertram Collins College of the Public Service; University of Guyana) and other partners to deliver necessary training programmes on a continuous basis.
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