Govt. faces triple challenge in preparing for Natural Resource Fund

Govt. faces triple challenge in preparing for Natural Resource Fund – IDB

Oct 08, 2018 News

Guyana faces a triple challenge in attempting to establish its Natural Resource Fund (NRF). The Government has to decipher how to rapidly build stronger institutions; how to save for future generations and smooth consumption; and how to assure that the oil revenue spent in the short term, is planned and spent well to boost productivity and improve living standards.
This was noted by the Inter-American Development Bank (IDB) in one of its reports on Guyana’s readiness for the oil sector.
Given the nation’s weak institutions and poor capacity to execute projects well, the IDB said it would be recommended that Guyana saves as much as possible until the quality and capacity of institutions improve.
Further to this, the IDB sought to highlight that simply establishing a Natural Resource Fund is not a guarantee for fiscal stability.
The Bank said, “In the first instance, the appropriate mechanisms to manage the Fund, clear and simple rules for withdrawals and deposits, and issues related to governance and transparency, will be important to ensure that the Fund achieves its objectives.”
In this regard, the IDB said that the Santiago Principles, a list of 24 generally accepted principles and practices voluntarily endorsed by the International Forum of Sovereign Wealth Funds provides some general guidance for countries. More substantially, the Fund needs to be supported by a strong fiscal framework.
SET STRICT STANDARDS
The IDB is not the only international body, which has cautioned Guyana’s authorities on the importance of having a robust Natural Resource Fund.
The Natural Resource Governance Institute (NRGI) for example, believes that there are several key factors emerging oil producers like Guyana must consider as it moves to establish a Natural Resource Fund.
According to the Fund, the Government of Guyana must set clear fund objective(s) (e.g., saving for future generations; stabilizing the budget; earmarking natural resource revenue for development priorities). It said that the government must establish fiscal rules—for deposit and withdrawal—that align with the objective(s); establish investment rules (e.g., a maximum of 20 percent can be invested in equities) that align with the objective(s); clarify a division of responsibilities between the ultimate authority over the fund; the fund manager, the day-to-day operational manager, and the different offices within the operational manager, and set and enforce strict ethical and conflict of interest standards.
Further to this, it said that the oversight bodies for the Fund must require regular and extensive disclosures of key information (e.g., a list of specific investments; names of fund managers) and audits. It said, too, that oversight bodies must be allowed to do their work without a shred of political interference.
The Fund said, “We wish to stress that the government should establish these and other rules and institutions governing natural resource funds through a process that generates broad political consensus. Governments may not comply with even the best rules unless key stakeholders and the broader citizenry have bought into the need for government savings and constantly apply pressure to follow the rules.”
“This has become apparent not just in natural resource-rich economies, but also in places like Europe where, from time to time, most member states breached the fiscal rules outlined in the EU’s Stability and Growth Pact even prior to the 2007-08 global financial crisis. We would also call on international institutions and advisors to carefully consider the implications of recommending the establishment of funds where public financial management systems are opaque and poorly functioning.”
In this regard, NRGI said that international advisors should recognize that the establishment of a Fund by itself will not improve resource governance. The Governance Institute stressed that Natural Resource Funds ought to be products of fiscal rules or macroeconomic frameworks that call for savings of oil, gas or mineral revenues.
It said that the minimum conditions, such as clear objectives, operational rules, investment risk limitations, effective oversight, and transparency, must be present in order to improve natural resource governance.

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