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Be cautious of investors and banks interested in managing Guyana’s oil fund – Expert warns

Nov 03, 2018 News

By Kiana Wilburg
If Guyana wants to avoid being becoming just another “horror story” in the oil industry, then it will conduct thorough due diligence tests on all investors and banks with an interest to partake in the investment decisions of Guyana’s Natural Resource Fund (NRF).
This was noted by Andrew Bauer, an expert on the subject of how NRFs are to be managed successfully. He is also a consultant with the Natural Resource Governance Institute (NRGI), an independent nonprofit organization dedicated to improving countries’ governance over their natural resources.
During an engagement with the media last month at Moray House, Bauer shared that many countries have paid dearly for their naivety.
He said, “There are several horror stories I can tell you about when it comes to these Funds. In Libya for example, they had US$67B that was put into their oil fund and they had investment firms coming from every angle…The Fund was ‘informally’ managed by the President’s son and he (the son) met with the officials for an investment firm.”
The NRF Expert added, “The officials told the inexperienced son that they have derivatives to sell but the President’s son didn’t even know what this is… But, they went ahead and guess what? The Fund lost US$1.58B in six months…The government did not do its due diligence.”
Citing the case of Angola, Bauer said that the Government went ahead an investment firm that was able to persuade the administration into investing in hotels. Bauer said, “I suppose hotels make money…but guess what they later found out? The country’s money was used to invest which hotels happened to be on the land that was owned by the investment manager…”
The NRGI Consultant said that these are just two of the many stories which emphasize the need for Guyana’s authorities to do due diligence on all investment managers and banks which are interested in Guyana.
Bauer said that the citizenry should also push for there to be rules to guide the interactions between the authorities and investors/banks.
The economist said, “I don’t know the full history of Guyana, but what I would say is that there needs to be strict rules on how you interact with these banks and even all investors. When you become oil-rich and they see you have a Fund, every bank or investor will be here knocking on your door offering amazing deals, but you are going to have to be careful.”
Bauer concluded, “I would set rules on how government should interact with these persons or assign any contract to these persons.”
SHORT TERM,
POLITICAL GAINS
In spite of the potential economic benefits that would flow from the introduction of a Natural Resource Fund, there remains the substantial risk that future Guyanese governments will use resources of the fund for short-term, political gain.
This was noted by NRF Analysts, Asim Ali and Patrick J. Schena. In a 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 that too, that the quiescent, but long-standing, territorial dispute between Guyana and Venezuela certainly increases the challenges of introducing a 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.

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