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Sunday, February 28, 2021

The importance of transparency for Guyana’s petroleum management

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Bobby Gossai, Jr.
Bobby Gossai, Jr. is currently pursuing the Degree of Doctor of Philosophy in Economics at the University of Aberdeen with a research focus on Fiscal Policies and Regulations for an Emerging Petroleum Producing Country. He completed his MSc (Econ) in Petroleum, Energy Economics and Finance from the same institution, and also holds an MSC in Economics from the University of the West Indies. Mr. Gossai, Jr.’s professional experiences include being the head of the Guyana Oil and Gas Association and senior policy analyst and advisor at the Ministry of Natural Resources and Environment.

Institutional mechanisms that could be implemented through a Natural Resource Fund (NRF) covers those that aim to promote transparency and the dissemination of information. It bears emphasizing that the mechanisms that have been discussed for dividing power are also, as a side effect, transparency promoting. With a more balanced distribution of power, it can be expected that the demand and pressure for information – in particular by those who are to participate in the shared expenditure decisions – will increase. Moreover, if it also leads to outcomes considered better by everyone, as has been previously suggested it may, there is plausibly less reason to be secretive about the policies that are adopted.

In addition to these effects, however, a natural resource fund can be used to put in place mechanisms that directly improve the flow of information in the society. Transparency is likely to have salutary effects on the behaviour of politicians who depend on popular support, at least if voters are prepared to punish incumbents for inefficiencies. Of course, transparency should not be limited to revenues originating from the natural resource sector. Although in countries with low levels of transparency in general, the occasion of setting up an NRF may provide an opportunity to create a sphere with better practice than the rest of the public sector. Indeed, a successfully transparent NRF could have spillover effects both on the government’s technical capacity and on the pressure on it to increase transparency elsewhere.

Publication of Transactions

These considerations suggest that all information about the decisions and transactions of NRFs should be public. In particular, all payers of natural resource revenue should publish their payments in detail, so that it is possible to certify that the NRF is, in fact, receiving what it should. In addition, the NRF itself should be required to publish details of all its transactions. Both of these are more easily said than done. Institutional provisions can, however, facilitate both goals. The requirement that payers publish payments, for example, can be introduced into contracts with corporations and other parties. If nonpublication thus constituted a possible cause for contract annulment by host countries, companies would have an incentive to publish the required information. To routinize publication of receipts by governments, on the other hand, one possibility is to contract with the agency that houses the fund – for example, an international bank – to make information on holdings, deposits, and withdrawals available in real-time online, much as is the case for private accounts with commercial banks. Finally, information on the NRF’s transactions should be audited by competent and independent auditors.

These suggested mechanisms for greater transparency draw on the strength of international contractual relations. Other mechanisms emphasize domestic oversight. One approach is to create institutions specifically for information dissemination and oversight that operate independently of the executive. Such agencies should in all cases be sufficiently financed to do their job properly and independently of the executive and represent a diversity of political actors. To give teeth to such institutions, they could eventually be provided with the power to halt transfers out of the NRF in case of insufficient information (or the standing to request courts to do so, provided there is sufficient judicial independence).

In practice, there have been many recent developments around initiatives to improve transparency. Some countries have gone very far in the use of legal mechanisms, requiring all information relating to natural resource exploitation and related revenues to be made public, to the point of voiding contracts that do not comply with this. Others have relied on domestic institutions.

Unified Budgets

It is important to be aware that some of the other institutional devices that have been recommended considering – in particular dividing the authority to make different spending decisions – carry the risk of confusing and obfuscating the overall budget process. This is as serious a threat to transparency and efficient information flows as an imperfect publication. It is therefore essential that even as decisions are made by different entities, there is clarity as to what they are and how they affect each other. A minimum condition for this is that there be a single budget for public expenditures. To keep public finances orderly and transparent, it is vital that an NRF not have a separate budget for the spending of oil-derived revenues; instead, it should only transfer funds directly to the national budget. This is not to say that proceeds from the NRF may not be earmarked for such specified purposes as development spending or pension expenditures – on the contrary, it has been suggested that such rules can be useful if designed judiciously. However, such allocations should happen through the normal budget, rather than being kept off-budget. This will mean that there will be legal constraints on how the general government budget can allocate expenditures to different uses.

A unified budget facilitates transparency; it also helps address a core problem dogging the use of NRFs: that of “fungibility.” The fungibility of monetary resources means that even if an NRF reins in overspending of natural resource-generated revenues, the overspending can reappear in other parts of government expenditures. Fungibility is sometimes taken as a reason to be sceptical of the ability of NRFs to change policymakers’ incentives: Even if the NRF effectively limits overspending the resources it controls, the government may simply overspend in the part of the budget beyond the reach of the institutional constraints of the NRF. This argument is powerful; however, if an NRF can be made to work, fungibility is less of a problem precisely in those countries where overspending is more of a problem – that is, where accumulated natural resource revenues are very large relative to other government resources. This is because the larger the share of government resources that are subject to the types of constraints outlined, the less other resources are available to undo the overall restraining impact on spending. The more general implication of the fungibility problem is that ideally, the institutional solutions to the political economy problem (such as greater levels of transparency and oversight) should be applied to the entire system of government finances, and not just the part deriving from natural resource exploitation or that managed by an NRF. Insofar as the mechanisms that have been described; should be implemented across the public sector. Since in practice, local reform is often easier than general reform, the establishment of an NRF should be used as an opportunity to carve out a space within the public sector in which the appropriate mechanisms can be put to work in a highly visible manner (Humphreys and Sandhu 2007).

It should be noted that some of these transparency conditions could also be well handled by a global clearinghouse or by a financial institution that houses the NRF. An international agency may simply be better equipped for such information-intensive tasks in purely logistical terms, compared to some of the poorest natural resource-exporting countries. And as with the power-sharing mechanisms, the transparency mechanisms could be included in the contract setting up the account for the NRF such that banks, as a matter of contractual obligation, are required to publicly report all transactions related to the management of an NRF.

Policy Considerations

There is a simple reason why natural resource revenue funds do not on average contribute to better fiscal policy in countries heavily dependent on natural resource exports. The reason is that the economic considerations that are usually used to motivate funds support only a certain optimal fiscal policy, and are silent on what is the right institutional framework for implementing that policy. However, the political economy of power rivalry can create incentives for rapid overspending of natural resource revenues relative to the ideal levels of expenditure of any given government. That these adverse effects are strongest when political divisions are deep, when institutions are otherwise weak, where political power is concentrated, where transparency is limited, and where there are risks of rapid changes of government. This analysis is supported by the empirical evidence available on expenditure in resource-rich countries. The concerns highlighted, then, are very real.

An NRF is not a panacea for these problems and the incentives to spend too rapidly persist whether or not an NRF is established. The obvious difficulty is that NRFs are lease needed when institutions are strong, but they are least likely to work in precisely chose institutionally weak environments where they appear to be most needed. A fund that does not address the incentives of governments is subject to being abolished or ignored. In the worst cases, if funds are designed such that they are under the control of a small number of actors, non-transparent and poorly linked with budgetary processes, they may render the problems that are identified to be more severe (Davis et al. 2001).

The question then is whether NRFs can be used to realign incentives in a way that makes them self-enforcing. There appear to be a number of possibilities for this. There are three families of responses:

  • If the NRFs render discretionary uses of finances more difficult in the future this can reduce the incentives to spend too much now.
  • A broadening of decision-making authority may have a similar effect if it leads to greater predictability and moderation in future spending.
  • So too it must be expected that NRFs to have beneficial effects if they increase transparency by providing a simple summary to voters of the government’s overall success at managing resource wealth and alerting chem to misuses of revenue.

Which exact model is best for a given country will depend on the circumstances of that country. While the solutions propose are a priori promising, it has been argued that in various contexts, some of these might encourage more cooperative behaviour on the part of policymakers over time by dividing authority and increasing transparency and information.

In all cases, the core message here is that designers of natural resource revenue funds should look first to the political incentives in their country, and attempt to design fund rules that not only approximate the optimal fiscal policy but, more importantly, create political incentives (or at least mitigate political disincentives) for abiding by that policy. Unless they alter the incentives of political actors, resource funds will not help solve any of the economic problems facing a resource-rich country like Guyana. For cases in which the domestic institutional environment is too weak to overcome the problems identified in the short run, it is argued that policymakers in natural resource-rich countries can consider a series of creative ways to draw on the strength of external institutions. Such innovations could include provisions to invest assets in fixed-term investments, to require companies and banks to render information public or to provide it on request to multiple branches of government, or to freeze accounts under specified conditions such as in the event of an unconstitutional change of government. Engaged correctly, such innovations would not impinge on sovereignty but would rather help strengthen the state and its ability to engage in consistent long-term planning and protect it from abuse by small but powerful constituencies.

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