Guyana's governance gap
The oil-rich country is the world's biggest new deep-water play. But can the government develop a transparent energy policy?
Guyana's offshore seems like the gift that keeps on giving for ExxonMobil and its partners—estimated resources from nine deep-water exploration finds there have added roughly 4bn bl of oil equivalent (oe) in reserves, with the recent Hammerhead find yet to be accounted.
The discoveries are expected to generate an estimated $15bn in annual revenues in the country, according to consultancy Rystad Energy, but the government's ability to manage the coming tidal wave of funds is worrying energy investors whose interests were piqued by ExxonMobil's success.
The country has many examples from which to draw in avoiding the so-called "resource curse"—notably the economic collapse of its western neighbour, Venezuela. In preparation the government is developing the Natural Resources Fund (NRF), an initial proposal released in a government green paper.
But doubts over the NRF's structure are increasing concern over the country's future energy policy. Critics of the plan point to the disproportionate control of the fund given to the finance ministry in its role as ultimate fund manager, even though the Bank of Guyana will act as operational manager.
"The David Granger government is looking to follow international best practice in setting up the NRF—but the country's institutions are weak and heavily politicised, and so the control assigned to the finance ministry is cause for some concern," Christian Wagner, a Latin American analyst at global risk consultancy Verisk Maplecroft tells Petroleum Economist.
"There has been concern already about Guyana's oil sector policies, such as the lack of transparency around contracts. This has done the government political damage at home, and unnerved oil and gas investors looking at the country."
Previous efforts by developing nations to develop sovereign wealth funds (SWFs) have been stymied by weak institutions, corruption and a lack of expertise in drafting energy policy.
"The current government is aware of the risks, but its efforts to date to come up with a clear and watertight fiscal framework do not give rise to immediate confidence", says Wagner.
Guyana only recently transferred administration of the oil and gas sector to the Department of Energy, and still doesn't have its own ministry responsible for hydrocarbons. Critics have raised questions over how the fiscally sustainable amount (FSA)—the maximum withdrawal allowed from the NRF in a fiscal year that could potentially be withdrawn by the finance minister—would be agreed.
Trinidad and Tobago created its own SWF in 2007 called the heritage and stabilisation fund, which was worth $5.9bn by the end of 2017, to provide a source of savings. Under law, a minimum of 60pc of excess oil revenues over budgeted levels are deposited into the fund. However, because the budget is forecast by the government, this leaves the administration able to manipulate the budget to ensure marginal or even negative gains. Fears have already been raised that Guyana's finance minister will have comparable budgetary and fiscal priorities.
Ghana experienced similar major hydrocarbon discoveries in 2007 and 2010, and, despite establishing its Petroleum Revenue Management Act, reckless borrowing saw the country add just $500mn to its fund while borrowing $4.5bn. An SWF alone will not necessarily safeguard oil revenues, without being accompanied by a mix of limited borrowing, responsible spending policies and economic diversification.
No quick fix
Robert Persaud, former minister of natural resources and the environment, maintains that the government is aware of these potential problems. "At the end of the day, the government of Guyana is taking policies and action which are best suited for our national social and economic conditions," he says.
But Persaud acknowledges that the country needs more specific policies and strategies that can "accelerate economic growth, continue to reinforce viable traditional sectors, and promote economic diversification from both current and future revenues". He points out that while the proposed green paper has already been subject to much review and comments, it is yet to be finalised and could still be redrafted.
In broader economic terms, the country has struggled to sustain fiscal buffers against commodity price fluctuations. According to the Inter-American Development Bank, between 2003-17 Guyana's fiscal performance averaged -3% while the rest of the Caribbean averaged 0.3%.
Currently, the ruling Partnership for National Unity (APNU) and Alliance for Change (AFC) coalition has a slim parliamentary majority but has been slow to pass legislation, with the opposition taking an obstructionist stance. This could change following national elections in 2020.
"There has been concern already about Guyana's oil sector policies, such as the lack of transparency around contracts"—Wagner, Maplecroft
Parliament will act, in theory, as the initial check on oil revenues management, as it must approve the country's annual budget and review annual reports. But the effectiveness of parliamentary oversight may vary dependent on the size of any future administration's majority. And, under the current green paper proposals, members of the sovereign investment committee will be appointed by the finance minister, potentially limiting the body's autonomy.
The intersection of ethnicity and politics is another enduring problem that afflicts Guyanese society. After independence, Guyana was governed by two parties along ethnic lines: the Progressive People's Party (PPP), a mostly Indian movement, and the People's National Congress (PNC), made up of those of African descent. Violence and political protests affected the country frequently prior to the coalition government's formation in 2015, and exclusion from state resources was often based on ethnicity, reports the United States Agency for International Development (USAID).
Such issues highlight the challenges of governing an ethnically charged society and the burden placed on the state to ensure equity and fairness. So far, debate around the SWF has excluded much of the opposition, civil society and business community.
Clock ticks down
The opposition has, though, questioned the role of the finance minister as the fund's ultimate arbiter. "Ideally, the management of a fund for future generations should not be controlled at the ministerial level," concedes Persaud. "At the same time, the role of the minister of finance cannot be irrelevant. It is [about] finding the right balance."
Persaud says that the SWF need not be the only solution. While the SWF is one approach, Guyana could choose to establish two funds, one for investment and infrastructural developmental decisions and a heritage fund for savings. Whichever approach the country chooses to adopt, clearly the opportunities are enormous. Greater transparency will only help boost confidence and potential investment.