Maximising Guyana’s potential as an emerging resource-driven economy

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As an emerging resource-driven economy and one with a particularly low average income, Guyana must use its resources sectors as a platform for broader economic development, which could transform its growth prospects. However, as with other similar countries, Guyana must be cautious as to not fall into a state of one that is failing to convert its resource endowments into long-term prosperity. Almost 80 percent of resource-driven countries have per capita income below the global average, and since 1995, more than half of these countries have failed to match the average growth rate of all countries (McKinsey Global Institute 2013). Even fewer have translated growth into broad-based prosperity.

Resource-driven countries need a new growth model to transform the potential resource windfall into long-term prosperity. Extractive companies also need a new approach to the changing resource landscape. Their relationships with governments in the countries where they operate have often been coloured by tension. Governments are under pressure from citizens to reap a greater share of the rewards of developing their natural resources; extractive companies are often uncertain whether governments might withdraw their licenses or renegotiate their contracts. As exploration and production increasingly shift to Guyana’s new frontier markets, companies that can reframe their mission from simple extraction to ongoing partnership with the host government in economic development are likely to secure a real competitive advantage.

The increasing number of economies that rely on natural resources underlines how important it is for their governments to manage their resources wisely and to cultivate sound and productive relationships with extractive companies. There is, of course, no certainty about the future direction resource prices will take and how these trends will affect growth in resource-driven economies. However, the following factors should be considered:

  • The unprecedented scale of new demand.
  • The need for new sources of supply.

High levels of new investment will be needed to meet demand for resources and replace existing sources of supply. An economy like Guyana could benefit significantly from new investments in all of its resource sectors. Historically, almost 90 percent of that investment has been in high-income and upper-middle-income countries. Nevertheless, in the future, the share of resource investment outside these two groups—to low-income and lower-middle-income countries—could almost double. Almost half of the world’s known mineral and oil and gas reserves are in countries that are not members of the Organisation for Economic Cooperation and Development (OECD) or the Organization of the Petroleum Exporting Countries (OPEC). This undoubtedly understates the true potential for resource production in the Guyanese economy, given that relatively little exploration has taken place, given the overall extractive industries potential. If Guyana uses its endowments wisely and develop effective collaboration with extraction companies, it can potentially transform the economy and the lives of the citizens.

The windfall from natural resources represents a large opportunity for economies in transition, but there is no guarantee they will be able to seize it and achieve sustainable, broad-based prosperity using resources as a platform. Even when resource-driven economies manage to sustain above average economic growth over the long term, they do not necessarily enhance prosperity in the broader sense. There are three broad reasons for this:

  • The first is that many countries have struggled to develop sufficiently competitive resources sectors and ensure that production and investment are somewhat shielded from volatility in resource prices. Some countries have failed to create a supportive business environment (for example, they have not dealt with infrastructure bottlenecks), have created political risk that deters investors, or have put in place inappropriate fiscal regimes. In some cases, resentment within government and among citizens about what they perceive to have been a failure to capture a “fair share” of resource rents has led to nationalization, which in turn has frequently precipitated a fall in foreign investment and a severe economic downturn.
  • Second, countries have often failed to spend their resource windfalls wisely. They have been unable to manage macroeconomic instability and corruption and have struggled to use resource rents for productive long-term investment that creates clear benefits for a large share of the population. Since 2000, the average annual volatility of metals prices has been twice as high as in the 1990s. Such volatility can result in overspending during booms and excessive borrowing during busts. Too often, governments flush with resources revenue have spent it wastefully, often losing funds through corruption or spending them on increasing public sector salaries.
  • Finally, countries have struggled to develop non‑resources sectors, and this has left their economies even more susceptible to volatility in resource prices. Resource-led export booms have often led to exchange-rate appreciation that has made other sectors, including manufacturing, less competitive in world markets and has led to domestic cost inflation. Such effects have been dubbed “Dutch disease”. These effects are often compounded by weak institutional development in these countries because the flood of money can encourage conflict and make governments complacent about putting in place the building blocks of long-term development.

Although there are many pitfalls facing resource-driven countries, some have managed successful transformations, establishing best practice that other nations can emulate. Therefore, for an economy such as Guyana, there are three areas to get right:

  • The first is the effective development of resources, where there are issues related to the role of the state in developing effective institutions and governance of the resources sector and to ensuring that the right infrastructure is in place.
  • The second is capturing value from resources. Here, it is important to examine not only fiscal policy – the exclusive focus of many governments striving to make their resources sectors competitive and attractive for investors – but also broader issues affecting competitiveness, such as production costs, political risk, and the provision of local content.
  • Third, successful resource-driven countries have managed to use the value they receive from resources to build long-term prosperity. On this third imperative, a country must look at issues around spending resource windfalls wisely and how best to pursue effective economic development.

Governments in resource-driven economies are being tested, but so are extractive companies operating in these environments. They face three factors that put value at risk in these economies.

  • The first of these is that high and volatile resource prices have led to significant choppiness in resource rents and increased the likelihood that governments feel “cheated” and seek to renegotiate terms (Bernice Lee et al 2012).
  • Second, exploration and production are increasingly moving toward lower-income, less-developed markets that are often environmentally and logistically challenging and geologically complex. This is driving up project costs and increasing the risk of delays.
  • Finally, extractive projects represent a disproportionate share of these economies.

Extractive companies engaged in large projects such as these have a very visible role in the economies in which they operate. They are subject to greater scrutiny in the media and among citizens, who have elevated expectations of the jobs these companies create and the tax revenue they provide.

Managing this evolving and risky landscape requires extractive companies to shift from an “extraction” mindset to a “development” one. It would help them to navigate the journey if they were to take a more strategic approach to their local development activities. They need to ensure that their chosen development priorities reflect a detailed understanding of the country in which they are operating and that these same development priorities create lasting value to their businesses. They also need to embed the actions they take in a relationship with host governments that creates strong incentives for both parties to adhere to agreements throughout the lifetime of the project.

In developing an understanding of the host country, companies need to start with the geographical, social, economic, institutional, and other factors directly related to resources. Then they need to go beyond a basic analysis of political, institutional, and economic trends in the country to consider fundamental questions such as the history of the country and its resources sector. They should also assess how dependent government finances are on resource endowments, as well as competitiveness factors such as the country’s position on the global cost curve for a particular resource and its importance to global supply.

Second, companies need to be rigorous in assessing their own contribution to broader economic development and compare their performance with stakeholders’ expectations.

Finally, any package of initiatives needs to be part of a relationship with host governments that will endure for the lifetime of the project, which can stretch for decades. The specific ways in which companies make an effective contribution will depend on the context, but for Guyana, some core guiding principles can be acknowledged. These include being careful about signing agreements that optimize for the short term, but that could later be regarded as unfair and grounds for renegotiation; making it clear to all parties what is at stake by being transparent about the short- and medium-term contribution of the resources sector to jobs, exports, and fiscal revenue; ensuring that the company is seen as indispensable to the country’s broader agenda through, for example, the technological know-how it brings, the international capital it can mobilise, and its contribution to the country’s economic development; and being willing to play tough in the case of reneging on agreements (using all available legal remedies).

There will always be circumstances that an extractive company will find difficult or even impossible to manage. Nonetheless, taking such a strategic approach to local development issues can help avoid time-consuming efforts on a range of “nice to-do” economic development contributions and enable extractive companies to spend more time and effort on helping host governments to create a genuine new source of enduring competitive advantage.