No provision exists to prevent managers from borrowing against Natural Resource Fund –NRGI highlights

Nov 14, 2018 News

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By Kiana Wilburg
Based on its examination of the coalition Government’s Green Paper on the Natural Resource Fund (NRF), international experts have found that there is no provision in place to prevent potential managers of the Fund from borrowing against it.
Making this observation, recently, was the Natural Resource Governance Institute (NRGI), an independent nonprofit organization dedicated to improving countries’ governance over their natural resources.
According to the Institute, it would be in Guyana’s best interest to ensure that this loophole is closed before the Fund is established. It noted that international best practices stipulate that managers of these Funds are to be prohibited from using leverage, meaning that they cannot use fund assets to borrow money to purchase additional assets.
It said, “While using leverage may increase financial returns, it also creates a risk that the additional investment will lose money, risking not only that asset but also additional fund principally required to pay off creditors.”
NRGI warned that restrictions against this essentially prevent managers from risking large losses on Natural Resource Funds.
NO SAFEGUARDS EXIST
The Natural Resource Governance Institute has also pointed out that the Government’s Green Paper has no safeguards in place to ensure proceeds from the NRF go towards education and productive infrastructure which would later benefit future generations to come.
Even if the government commits to spending oil money on certain priorities, the Institute said that there is also a risk that non-oil allocations on these items will decrease, implying no net change in spending on development priorities.
NRGI suggests that the government could report annually on total spending allocated towards developmental priorities and ensure that net spending on these projects increases over time.
Alternatively, it said that Guyana could impose a symbolic Malaysia-style “golden rule” whereby oil revenues must be spent on investments for future generations, including scholarships, schools and productive infrastructure.
TRIPLE CHALLENGE
Also endorsing the views expressed by the NRGI 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.
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
In addition to the aforementioned, the Natural Resource Governance Institute (NRGI) has noted 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.
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.”
It continued, “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.”
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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