Correcting inaccuracies about the Natural Resource Fund

Sep 07, 2019 Letters

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DEAR EDITOR,

My attention was drawn to a letter written by Robin Singh and published in Kaieteur News, September 04, 2019 under the caption, “As ‘first oil’ rapidly approaches, we don’t have an acceptable SWF to manage our revenues”. Mr. Singh appears to be one of a number of prolific letter writers who seem to be able to easily access precious column inches of your and two of the three other daily newspapers. Without fail, all of his letters regurgitate the falsehoods of the Opposition. While he is entitled to his opinions, he is not entitled to his own facts.
His letter under reference was riddled with several inaccuracies in relation to Guyana’s Sovereign Wealth Fund, whose correct name is Natural Resource Fund. In the interest of educating and informing your readers, in the process correcting the falsehoods peddled by Mr. Singh, I offer the following.
On January 23, 2019 (not February 2019, as stated in Singh’s letter), His Excellency President David Granger assented to the Natural Resource Fund (NRF) Bill, which was first presented to the National Assembly on November 16, 2018. The Natural Resource Fund Act No. 12 of 2019 is the legislation that establishes Guyana’s Sovereign Wealth Fund (SWF) “to manage the natural resource wealth of Guyana for the present and future benefit of the people and for the sustainable development of the country.” In recognising the importance of establishing a SWF to manage windfall revenues from our natural resources, especially petroleum, thereby reducing the risk of the resource curse, His Excellency requested that a green paper be prepared to allow for meaningful consultation on the SWF ahead of the presentation of a Bill to the National Assembly. This policy paper, titled “Managing future petroleum revenues and establishment of a fiscal rule and a sovereign wealth fund,” was published on August 8, 2018 after which the Government met with, and received feedback from, stakeholders.
It should be noted that, in preparing the legislation for the NRF, the Government considered best practices, which included ensuring that the NRF would comply with the Santiago Principles. These 24 Principles promote transparency, good governance, accountability and prudent investment practices, whilst also encouraging a more open dialogue and deeper understanding of SWF activities. The NRF Act directly complies with 21 of these principles, with the remaining 3 being met, once the Fund is fully operationalised. Substantial details of how the NRF Act complies with the Santiago Principles are provided in Annex Three of the Green Paper. I would like to note, also, that the Government is pursuing membership of the International Forum of Sovereign Wealth Funds, in 2019, and will be attending its upcoming Annual Meeting in Alaska, USA, in October. These actions send strong signals of our commitment to ensure that we hold ourselves to the highest internationally recognised standards for SWFs.
It is important, too, to note that, in crafting the NRF Act, we carefully examined the approaches taken by many other countries that have successfully established SWFs. This analysis (summarised in Annex Four of the Green Paper) revealed that there was no ‘one size fits all’ approach. However, many of the most highly regarded SWFs, including those of Chile and Norway, follow a “Manager Model,” whereby the Ministry of Finance is responsible for overall management, and the Central Bank is responsible for the operational management, of the SWF. These are the examples to which we aspired. The Government has been praised widely, including from the World Bank, International Monetary Fund, and the Inter-American Development Bank, for this landmark piece of legislation and for having it in place in advance of first oil.
I would like to assure the public that we have worked assiduously to accommodate all views and opinions on the NRF, recognising that there is no single approach that will please every individual or organisation. However, we have legislated significant measures to ensure transparency and accountability in the management of Guyana’s petroleum revenues. Paramount among these is the inclusion of a Public Accountability and Oversight Committee, which comprises representatives from a broad cross-section of society and is responsible for: (1) monitoring and evaluating the compliance of the Government and other relevant persons with the provisions of this Act; (2) monitoring and evaluating whether the Fund has been managed in accordance with the principles of transparency, good governance and international best practices including the Santiago Principles; (3) providing independent assessment of the management of the Fund and utilisation of withdrawals from the Fund; and (4) facilitating public consultations on the management of the Fund and utilisation of withdrawals from the Fund.
To ensure that this Committee is functional before first oil, the Government expects to host a seminar with all relevant stakeholders in a few weeks. Editor, there are few other countries in the world that have legislated for such a Committee, highlighting this Government’s commitment to transparency and accountability. I urge every Guyanese to read the Green Paper and the NRF Act (both of which are available at finance.gov.gy) and not rely solely on the opinions of others, which may be misinformed or biased.
The letter writer notes that the NRF puts ultimate control in the hands of the Minister of Finance, including how much money enters the NRF and how much is allocated to the annual budget. Nothing could be further from the truth. Part V of the NRF Act sets out the framework for deposits and withdrawals. With respect to withdrawals, Section 21 states that, “Petroleum revenues shall be directly paid into a bank account denominated in United States of America Dollars and held by the Bank as part of the Fund.” This approach is superior to the one being advocated by the Opposition Leader, who wants the money to be first deposited into the Consolidated Fund (CF), then some unknown person or entity will decide how much is taken from the CF and placed into the NRF. The remainder of this section clearly defines what can be classified as petroleum revenues. A simple perusal of the Act would have revealed to the writer that the Minister of Finance has no say over how much petroleum revenues are deposited in the NRF. However, the Act is forward looking and does give the Minister the right to deposit excess mining and forestry revenues into the NRF, if commodity prices or production are above their long-term average.
Turning to withdrawals from the NRF, Section 28 of the NRF Act states that the National Assembly, and not the Minister of Finance, shall be responsible for approving the withdrawal from the NRF that shall be included in the annual budget. It should be noted that the Minister is responsible for putting forward a request for withdrawal from the NRF to the National Assembly, and the mechanism for determining the size of this withdrawal is enshrined in Part VI of the NRF Act.
The maximum withdrawal is known as the Economically and Fiscally Sustainable Amount, which is bound by the smaller of an Economically Sustainable Amount (ESA) and a Fiscally Sustainable Amount (FSA). A Macroeconomic Committee, comprising representatives of the Government, Bank of Guyana, Private Sector Commission and Opposition, is responsible for providing the Minister with a recommendation on the ESA, taking into account the effects of additional spending on Guyana’s economic competitiveness.
The Committee’s recommendation must be included in the annual budget proposal and annual report of the NRF, allowing the public to scrutinise any deviations from this advice. Further, the FSA is a mathematical formula that is delineated in the First Schedule of the NRF Act, and effectively acts as a limit on any upward deviation from the advice of the Committee on the ESA. The maximum amount that can be withdrawn from the NRF is the amount determined by the mathematical formula. The Minister does not have discretionary power over the amount that can be withdrawn from the NRF.
Mr. Editor, it is evident that the writer relied heavily upon the opinion offered on the Green Paper by the Natural Resource Governance Institute (NRGI). However, the NRGI report was limited to the information contained in the Green Paper. It should be noted that the Government did meet with NRGI towards the end of October 2018 and discussed the inadequacies of their draft report, many of which were due simply to them not having seen the draft NRF Bill. We urged them to be guided by the contents of the NRF Bill in drafting their report as it would allow for more clarity on many of the issues raised. Unfortunately, they did not heed our advice, resulting in their deficient report.
One such comment that would have not been included in the NRGI report, had they reviewed the draft NRF Bill, relates to investments of the NRF. Section 31 of the NRF Act clearly identifies eligible asset classes in which funds can be invested. Funds cannot be invested in asset classes outside of this list. Additionally, the only commodity that can be invested in is gold, and the amount that can be invested in this commodity is limited to 10 percent of the NRF. Similarly, the only derivatives that can be invested in are those that reduce the risk of losses associated with assets held by the NRF.
Editor, the only assertion by the writer that is factual is the exclusion of a limit on borrowing in the NRF Act. In this regard, as noted in the Mid-Year Report 2019, we are currently finalising the draft of a Public Debt Management Bill (PDMB), which, when passed, will complement the NRF Act and other pieces of fiscal legislation, and ensure that debt is managed in a manner that is fiscally sustainable. It was our intent to introduce the PDMB in the National Assembly before year-end, but the disruption of our legislative agenda has precluded this from happening. This notwithstanding, the record clearly shows that this Government has done very well to avoid excessive borrowing against future oil revenues, thereby avoiding the pre-source curse, that is, spending based on projected revenues before actual revenues from petroleum are realised.
Editor, I intend to deal with the other part of his letter dealing with NICIL in a subsequent letter. Suffice it to say now, that we intend to debunk every falsehood peddled by Robin Singh and his ilk. The public deserves better.

Yours faithfully
Winston Jordan, MP
Minister of Finance

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