Natural Resource Fund at risk for political gain – Int’l Analysts

Oct 10, 2018 News

---

By Kiana Wilburg
In spite of the potential economic benefits that would flow from the introduction of a Natural Resource Fund (NRF) (also known as a Sovereign Wealth Fund), there remains the substantial risk that future Guyanese governments will use resources of the fund for short-term, political gain.
This is according to NRF Analysts, Asim Ali and Patrick J. Schena.
In its special report titled, “Harnessing Oil Wealth in Guyana via a Sovereign Wealth Fund: Look Before You Leap,” the duo notes that while a NRF would provide a useful framework for capture and management of resource wealth, its impact is fully dependent on the commitment of future Governments to elevate the fund and its mission above short-term political expediencies.
It stressed, too, that the quiescent, but long-standing, territorial dispute between Guyana and Venezuela certainly increases the challenges of introducing an NRF to Guyana.
They contended that while flare-ups may have as much to do with Venezuelan domestic politics as with the oil exploration issue, a political-cum-economic framework between Guyana and Venezuela is necessary – perhaps with the support of regional partners – for long-term realization of oil windfalls.
TRIPLE CHALLENGE
Also endorsing the views expressed by the analysts is the Inter-American Development Bank (IDB). The financial institution recently noted that Guyana faces a triple challenge in attempting to establish its Natural Resource Fund.
It said that 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.
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, 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.”
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, provide 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 they move 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.
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 advisers to carefully consider the implications of recommending the establishment of funds where public financial management systems are opaque and poorly functioning.”
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.

---

---