Oct 19, 2020 Letters
Unbelievably, Christmas came early to Guyana last week when several high-ranking Americans, representing various government departments, descended on these shores, bearing ‘gifts’ in the form of promises of massive Yankee dollars for investment in our troubled land.
Both the formal and social media were buzzing with excitement at this unexpected piece of good news. Stabroek News of October 14, 2020 ran the catchy headline, ‘Cheaper power, small business aid on the agenda of US development bank,’ echoing the disclosures of Adam Boehler, Head of the International Development Finance Corporation (IDFC), who led a team of officials representing six agencies, comprising the IDFC, Department of Treasury, Export-Import Bank, Department of State, Department of Homeland Security and Department of National Security.
Collectively, the sum of US$200 billion was dangled to the country’s policymakers and private sector representatives. With a country, whose Gross Domestic Product (GDP) is a mere US$5.2 billion, the offer would be enough to salivate about the possibilities and opportunities such investments can present, were they to materialise. However, should we beware of not only the Greeks but now the Americans bearing gifts?
No one should begrudge the administration’s attempt to widen the sources of financing for Guyana’s economic development. In spite of the bounties that oil will bring, it is important for Guyana to explore all avenues for additional resources – especially concessional resources – in view of the huge deficits that exist in the country’s social, physical and economic infrastructure. In this regard, the Coalition Government was successful in clearing the hurdles for Guyana to gain membership of the Islamic Development Bank (IsDB). This was achieved at the Bank’s Annual General Meeting, in Jakarta, Indonesia, in 2016 and added to our existing relationships with other multilaterals such as the International Monetary Fund (IMF), The World Bank, the Inter-American Development Bank (IDB) and the Caribbean Development Bank (CDB).
Soon after our accession, the IsDB made a resource envelope of US$900 million available to Guyana, of which only a tiny amount (less than 5%) has been utilised, in the energy sector, so far. We were also able to renew our relationship with the OPEC Fund for International Development (OFID), when the Government signed a Framework Agreement for the Protection of Investments with that entity, in 2017. The value of this renewed engagement was emphasised very recently when OFID approved a concessional loan (2.5% interest rate) of US$20 million to assist the Government in meeting COVID-related expenditure.
Our traditional donors have been playing their role, too. Just before demitting office, discussions were advanced with IDB for two loans, totalling US$51 million, to be used on COVID-related activities. And the World Bank, though dilatory on our request for financing for COVID, has made available highly concessional resources of nearly US$90 million, from the International Development Association (IDA), over the next programme cycle. Notwithstanding its classification as ‘upper middle income’, based purely on per capita income, Guyana needs highly concessional to near concessional resources to meet its burgeoning developmental needs.
This brings us back to the ‘gifts’ being borne by the Americans. The private sector could not contain itself. Chairman of the Private Sector Commission, Nicholas Boyer, is reported as saying that the US$200 billion would be in the form of loans at interest rates that are different to those available to local investors. I guess he meant more favourable. This and other statements give the impression as though the local private sector is starved of access to foreign funding.
This would be far from reality. The truth is that for the most part, the private sector has, for various reasons, shown a disinterest in using the available funding of the private sector window of the multilateral financial institutions, of which Guyana is a member. Yet, well-known institutions, such as the International Finance Corporation (IFC) of The World Bank; and the IDB Invest and the IDB Lab of the IDB have been at the forefront of financing bankable private sector projects in member countries.
A word of caution to the private sector and the policy makers: while we should not look a gift horse in the mouth, care and extreme caution should be exercised as you engage new sources of funding. I did some research on the IFDC and wish to give the readers the benefit of it as well as some observations.
The United States International Development Finance Corporation (IDFC) was founded in 2019 after the passage of the Better Utilisation of Investments leading to Development (BUILD) Act. This Act combines the capabilities of the Overseas Private Investment Corporation (OPIC) and the Development Credit Authority, which had been previously housed in the US Agency for International Development. Considered America’s development bank, the IDFC takes a triple aim approach: their investments focus on “impactful global development, advancing US foreign policy, and generating returns for US taxpayers. Its main sectors of lending include: energy, healthcare, critical infrastructure, and technology, in addition to financing for small businesses and women entrepreneurs.
Loans range between 5 and 25 years, depending on the type of project and its debt servicing capability. Grace periods are common at the beginning of the term, but are determined on a case-by-case basis. Most repayment schedules are quarterly or semi-annual.
Loan sizes range from US$1 million to US$1 billion. The IDFC also works with co-lenders to bring sufficient resources to larger projects. Interest and fees vary according to the project. However, the key costs are as follows:
% Upfront Retainer Fee – This fee covers due diligence costs such as travel to the project site;
% Facility/Organisation Fee – This is a one-time, flat fee usually paid at the time of loan agreement signing or first disbursement;
% Commitment Fee – an annual percentage charged on any undisbursed amount;
% Interest Rate – A negotiated spread over the base cost of funds;
% Maintenance Fee – an annual fee charged to cover the cost of monitoring the loan;
% Other Fees – These are fees related to the cost of the services of outside consultants or attorneys that may be required by IDFC, related funding costs, and any expenses related to registration or notarisation of documents.
A number of observations follow:
% The means by which financing is obtained from the IDFC is unclear, since it is stated on the entity’s website that the IDFC “complements, rather than competes, with private sector lenders and supports projects that have been unable to obtain sufficient support from private lenders”. Based on the nature of projects in Latin American countries like Brazil, Colombia and El Salvador that are highlighted on its website, it appears as though the IDFC either provides financing to US companies, which would then be used to undertake projects in developing countries; or, provides supplemental development financing to countries in cases where there is either a lack private sector capacity or inclination to provide financing.
% Once approved for financing, the IDFC will make a project-by-project determination of loan amount, usually not more than 80% of the total cost of the project
% Notably, the IDFC classifies Guyana as an upper middle-income country. This likely means that any financing provided would be on non-concessional terms characterised by high and potentially variable interest rates and relatively short repayment periods.
% It should also be noted that there is a preponderance of fees associated with financing obtained from the IDFC, which would result in elevated borrowing costs.
% Critically, the quantum of financing that the IDFC-led team indicated it was able to provide amounts to an astounding US$200 billion, or about 118 times Guyana’s debt stock at the end of 2019, and about 39 times the 2019 GDP of US$5.17 billion. The substantial utilization of this financing envelope will compromise the sustainability of Guyana’s debt.
These observations are neither exhaustive nor meant to puncture the aura of excitement created. Rather, they emphasise the need for prudence and probity in the conduct of our financial affairs, going forward, so as not to reverse the hard-won gains in this area. Both the Government and the private sector are advised to tread carefully.
Former Minister of Finance
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