Sovereign Wealth Fund Green Paper

On Wednesday, the government published its Green Paper on the Sovereign Wealth Fund (SWF) which will guide how oil revenues from 2020 and onwards are managed.

By definition one expects that the Green Paper will be subject to extensive discussions inside and outside of Parliament and in all parts of the country. While the Green Paper should be viewed as just the starting point, it is unclear why the government’s thinking had to be immediately retrogressive on the management of the SWF, particularly since three years have elapsed since oil was discovered and best practices are well known. Commonsense would have told anyone ensconced in the Ministry of the Presidency and the Ministry of Finance that having the Ministry of Finance be responsible for the overall management of the Fund is completely unacceptable. In its explication of the Green Paper the Ministry of Finance listed an impressive series of advisors: the Commonwealth Secretariat, the International Monetary Fund, the World Bank and the InterAmerican Development Bank and others unnamed. One can only assume that the Guyana Government soundly rejected the advice of these advisors on who should be in charge of what will be styled the Natural Resource Fund (NRF) or that these institutions cancelled out each other in the advice department.

No best practice model for SWFs can be grafted on perfectly to a country. Adaptations would undoubtedly have to be made considering the conditions in each country. The deep political and ethnic polarisation that Guyana has been steeped for its post-Independence history, the lack of trust in governments, the undermining of independent minds and institutions by the political directorate, the pall of mismanagement and corruption that has characterised government, the risk of party paramountcy and the tendency for pork barrel spending all make the Ministry of Finance of this or any other government unsuited to the task of overall management of the NRF. The model presented in the Green Paper must be banished from the outset.

The process has at least now begun. The three principal objectives of the fund outlined in the green paper are stabilisation, inter-generational savings and domestic investment. No surprise here though one presumes that a range of experts will pore over the calculation of the fiscal rule, the maximum withdrawal from the NRF on an annual basis and the apportioning among the three objectives.

According to the Green Paper, the Ministry of Finance would be responsible for overall management of the NRF including “requested withdrawal in the Annual Budget Proposal; calculating the Fiscally Sustainable Amount; drafting the Investment Mandate; entering into the Operational Agreement with the Bank of Guyana…” This essentially puts the Ministry of Finance in total command of the process.

The proposed Macroeconomic Committee which will determine the Economically Sustainable Amount will also be dominated by the Ministry of Finance. The ministry’s representative will be the chairperson of the committee while the other four members will comprise a member nominated by the Institute of Chartered Accountants of Guyana, a representative of the Bank of Guyana nominated by the Governor of the Bank of Guyana, a member nominated by the Leader of the Opposition in Parliament and “a leading expert in macroeconomics” appointed by the Minister of Finance with the approval of Cabinet. This committee will clearly be dominated by the Ministry of Finance.

A Sovereign Investment Committee would be responsible for advising the Minister of Finance on the Investment Mandate and is to comprise seven members appointed by the minister. These persons are a representative of the Minister of Finance, an ex-officio representative nominated by the Minister of Natural Resources (though no longer responsible for oil and gas), an ex-officio representative nominated by the Governor of the Bank of Guyana, a representative nominated by the Institute of Chartered Accountants of Guyana, a representative nominated by the Guyana Association of Bankers, a representative nominated by the Leader of the Opposition and a Senior Investment Adviser and Analyst who is to be recruited via international open tender.

Strangely, in neither of these committees, or the organizing of the NRF is there any mention of the government’s much-vaunted Department of Energy. If it is taking the lead role in policy and other aspects of oil and gas why has it been excluded and the dominant role assigned to the Ministry of Finance?

The Green Paper also proposes that the Bank of Guyana (BOG) would be the Operational Manager of the Fund and manage it in accordance with the Operational Agreement and Investment Mandate. The BOG would draft quarterly reports and annual accounts, procure private managers and draft management agreements and investment instructions. A footnote in the Green Paper says that “The Government fully intends to supplement the capacity of the Bank of Guyana, in its role as operational manager, to support the effective management of the Fund, as needed”. Historically, central banks in this country have been directed and dictated to by the government. For this arrangement to even be considered, the Central Bank would have to given greater autonomy and those in charge would have to be aware that they have independence of action based on legislative underpinnings. The manner in which the APNU+AFC government conspired to hide the ExxonMobil signing bonus in a Bank of Guyana account is precisely why arrangements will not work as presently constituted.

The Generally Accepted Principles and Practices (GAPP) of the International Working Group of Sovereign Wealth Funds, known as the Santiago Principles have been accepted as a best practices benchmark and were referred to by the Ministry of Finance as having guided the Green Paper.

The governance arrangements in the Green Paper for the NRF do not meet the highest standards set by the following principles:

GAPP 6. Principle The governance framework for the SWF should be sound and establish a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF to pursue its objectives.

GAPP 7. Principle The owner should set the objectives of the SWF, appoint the members of its governing body(ies) in accordance with clearly defined procedures, and exercise oversight over the SWF’s operations.

GAPP 8. Principle The governing body(ies) should act in the best interests of the SWF, and have a clear mandate and adequate authority and competency to carry out its functions.

GAPP 9. Principle The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.

GAPP 10. Principle The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.

The government should immediately set out the process for discussion on the Green Paper and the issuing of draft legislation. A lot of work lies ahead.