Latest update April 4th, 2025 6:13 AM
Guyana must be cautious in spending oil money on infrastructure-Chatham House …Case studies show most projects become victims of cost overruns
By Kiana Wilburg
The government has already signaled its intention to use part of the oil money in boosting infrastructure. But some international organizations are advising that Guyana’s authorities approach with caution in this regard.
Chatham House, for example, has said that emerging producers such as Guyana should consider carefully, the capacity of their economy to absorb public spending. The London-based organization said that many countries expect to use petroleum revenues to increase infrastructure spending and the productive potential of the economy.
Although infrastructure spending can contribute to economic growth, the organization said that emerging producers have faced several problems when they have tried to scale it up. It said that these include limited capacity to operate and maintain new infrastructure and conflation of short-term demand growth with long-term supply growth.
Chatham House said that an effective approach would therefore be to increase such spending slowly, reviewing and evaluating projects as well as building public investment management capacity over time.
Research at the Natural Resource Governance Institute (NRGI) shows that countries with giant discoveries tend to disappoint on economic growth forecasts. It also notes that many infrastructure projects that it reviewed were delayed or faced cost overruns.
The Institute said, “Out of 308 projects, no less than 55 percent were late and 45 percent had cost over-runs averaging 58 percent over budget. Some with early production faced a 60 percent drop in revenues as oil prices fell in 2014.
“Common to the cases studied was the expectation of transformative economic impact from oil and gas as well as excessive borrowing, which led several countries in the study to be bailed out by the International Monetary Fund (IMF).
“The biggest discoveries and countries with poor institutional governance had the most significant economic disappointment.”
On that note, NRGI and Chatham House note that Guyana will need to manage expectations about spending levels, be cautious on accruing debt and work to build strong institutions.
NEED FOR SYSTEMS/POLICIES
According to Chatham House, if Guyana intends to be successful with the governance of its oil sector then there are several guidelines it must follow. It must ensure that there are clear oil related policies and systems to ensure accountability of the oil wealth to come.
The London-based body recommended that policies for the oil and gas sector be guided by a clear vision for the development of the country and a strategic view of how the petroleum sector will deliver that vision.
Speaking to other guidelines, Chatham House warned that the rush to adopt international best practices may not always be appropriate in the case of emerging producers in the oil and gas sector.
Instead, Chatham House said that the government should aim for more appropriate practices, taking account of the national context.
Chatham House said, “In order to attract the most qualified oil company to a country with an unproven resource base, the host government can invest in geological data, strengthen its prequalification criteria and ensure transparency.
“It should also plan for success and anticipate the implications of hydrocarbon discoveries in its tax code, and be robust through declining oil and gas prices.”
As for the aspect of licensing, Chatham House said that this is a key mechanism whereby Government can reap early revenues and maximize long-term national benefits. It said that government must ensure that it simplifies both negotiations and tax structures to mitigate knowledge asymmetries with oil companies.
It said, too, that the government and industry must engage and share information with communities to manage local expectations regarding the petroleum sector and build trust.
It said, “In emerging producers, budgets for local content may be small and timelines for building capacity short. In this context, the focus should be on the potential for repeat use of any local capacity developed. Additionally, meaningful participation of national organizations in resource development is a central objective of many emerging producers.”
The international body said that once the aforementioned are followed, Guyana would be well on its way to laying a strong foundation for the protection of the oil sector.
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