Closing comments on the Buxton Proposal
Part 13
Introduction
Today’s column [Part13] is the final in the present series centring on my re-visit of the Buxton Proposal. For this effort I have directed close attention to updating and tightening the original analysis along with clearing up residual ambiguities. This concluding column begins by directing brief attention to three additional macroeconomic challenges that space did not allow me to address last Sunday.
Overall, for this column series on Guyana’s emerging oil and gas industry, I have taken great pains to stress that the noise and nonsense fake news notion of a global crude oil production system dominated by big oil firms, ended more than half-a-century ago. Starting with the formation of OPEC more than six decades ago, today, state-owned oil firms dominate global crude oil production. And, among the several consequences of this spectacular growth in state-owned operations, one of them has been, as the World Bank[2016] observed, “a growing clamor for cash transfers to citizens/ households”
For sure, the World Bank has also indicated that, such transfer schemes have varied markedly. Thus, in terms of amount they have varied as shares of the applicable country’ s national minimum wage; per capita national income or GDP; income tax threshold; international, regional or national poverty lines. The modalities or mechanisms, which have been employed for this purpose have also varied. While the Buxton Proposal has targeted all Guyana households, others have been selective, including dependent on tax status. These schemes have varied by their frequency of transfers or periodicity [weekly, monthly, annually]. Clearly the conditionality criteria are subject to wide variation.
Common themes
Despite the high degree of differentiation noted across countries indicated in the above paragraph, the World Bank has also noted there are common themes to be observed as cash transfers mechanisms have unfolded. I strongly believe that these common themes can provide useful guidance for Guyana, if it were to adopt the Buxton Proposal. For me the pertinent question which arises is; what are these common themes? I list below the more consequential ones in terms of the macroeconomic challenges they pose.
One of these is, experience has shown that several of the direct cash transfer distribution schemes to citizens have suffered from poor institutional quality. The governance of several such schemes has been reportedly quite weak. Furthermore, case studies have also revealed an unusual number of instances where outright mis-management of the schemes has been observed
Secondly, on the darker side, poor institutional quality, weak governance and general mis-management create a fertile environment for a non-transparent operational culture and outright corruption. Obtaining and/ or seeking cash transfers or, as economists’ term it “rent capture and rent- seek[ng” behaviour thrives. Alongside this, at the crossroads of politics and administration of these schemes, clientelism and nepotism have also taken root.
Thirdly, there are overall risks that confront direct cash transfer schemes; for example, a growing feeling of entitlement to these benefits. This creates difficulties as petroleum windfall revenues fluctuate, thereby impacting the even flow of potential benefits. Another such risk is disincentivizing labour supply.
These are by no means inevitable outcomes. If they were, I would not continue to offer so stoutly the claim
Final Comments
To wrap-up this revisit of the Buxton Proposal I shall briefly reference three considerations that I believe will contextualize the Buxton Proposal going forward. First, in a previous column, reasoning from the Nobel prizewinning theory of incomplete contracts, I had posited that, Guyana’s oil revenues will increase substantially in the coming years, both as a consequence of rising crude oil exports and Government revenue share. Since First Oil, December 2019, there have been nine oil lifts of about one million barrels each yielding about US$534 million Added to this are 1] the 2 percent royalty payments and 2] the initial signature bonus. Total Government revenue is approximately US$0.65 Billion. As of today, more than two years after First Oil, this Fund is still effectively earning token interest, as it sits on deposit in the Fed, NY awaiting the finalization of the Natural Resource Fund. Given Guyana’s developmental imperatives, this is a scandal of no mean proportion!
Second, regulations governing local content requirements, LCRs, are crucial for Guyana. Indeed, this has occasioned serious local contention about their likely impacts. Presently, ExxonMobil and partners report, unverified 1] total local spending of US$540 mln 2] 800 local suppliers 3] 3,200 employees since 2015. Additionally, total foreign direct investment FDI in Guyana totals US$30bln. And that going forward they are on schedule to complete 10 major projects in the Stabroek block by 2025/6; with as many as four already in process.
I believe LCRs potentially constitute the leading area from which Guyana’s externally-dominated petroleum sector can contribute to job creation and poverty alleviation. I therefore intend to re-visit this topic later in the new year. I remind readers here that, my previous columns had cautioned there was a self- destructive line between LCR benefits and the resource curse of disguised protectionism and economic rent capture
Third, while the projected crude oil schedule indicates petroleum exports could grow at a rapid rate going forward and GoG revenue share from the on-going operations under the ruling PSA also increase, an upward displacement of the supply curve can also occur as exploration shifts to new Blocks. Block C is the remaining unlicensed deep-water block. The Natural Resources Ministry has indicated great interest by Big Oil firms in the Block; and that Government proposes a major shift away from bilateral negotiations to public auction of the Block.
Conclusion
This concludes my revisit of the Buxton Proposal., Next week I open a different area of discussion. I plan to focus, among other issues on ExxonMobil as the lead company in the post-Big Oil era, and the dilemmas this circumstance poses for Guyana’s development going forward.