Introduction
Today’s column concludes my overall assessment and evaluation of Guyana’s Green Paper on its proposed Natural Resources Fund (NRF). First, I shall offer a few specific comments on the proposed governance of the NRF. Following that, I wrap-up the column with several broad observations of the NRF and its proposed operations.
Governance
Generally, I accept the prevailing standard formulation/definition of governance, as applied to government-type institutions, like the NRF. I also accept the widely used eight standard elements or features of good governance. I therefore, subscribe to the view that: “in its purest form governance refers to the structure and decision-making process that allow (the NRF) to conduct its affairs”. This formulation applies to the NRF’s governing legislation; its regulations; the standards set; and, the ways in which these are implemented. “Governance therefore, is the process of decision making and the processes by which decisions are implemented (or not implemented)” -Wikipedia. This evaluation, however, is best determined during the course of the NRF’s actual operations. Statements of intent, that is, what the legislation and structure propose, are never sufficient, by themselves, to prove the quality of governance. This quality is an outcome. And, as such, it is dependent on practice.
Based on the indications given above, my approach to governance also subscribes to the eight elements, which the literature recognises as essential for “good governance.” These are: the rule of law; participation; transparency; responsiveness; consensus orientation; equity; effectiveness and efficiency; and, accountability. I believe most readers would either go along with this, or subscribe to a similar formulation in the case of governance of the NRF.
Proposed Management
As noted in previous columns, the Green Paper elaborates on the management of the NRF. Briefly, the National Assembly is responsible for passing the NRF Act; approving the National Budget (including withdrawals from the NRF); and, reviewing the NRF’s Annual Report. The Ministry of Finance (MoF) is “responsible for overall management of the NRF” (Green Paper Para 59); the Annual Budget Proposal; calculating the Fiscally Sustainable Amount (FSA); drafting the Investment Mandate; preparing the Annual Report; and, reporting on the NRF through the Annual Budget; as well as entering into an Operational Agreement. Additionally, the Seven-Member, Sovereign Investment Committee is “responsible for advising the (MoF) on the Investment Mandate.” And this committee is to be appointed by the Minister of Finance.
A Senior Investment Advisor and Analyst is to be recruited “via international open tender,” This Advisor is responsible for, among other duties:
– assisting the Minister of Finance to draft the Investment Mandate
– reporting and monitoring the framework and performance of the NRF
– supporting the Sovereign Investment Committee
– aid in monitoring the investment activities of the Fund, as set out in the Investment
Mandate.
The Bank of Guyana is the “Operational Manager of the Fund” and manages it in accordance with the Investment Mandate and Operational Agreement.
Critique
As I have repeatedly stressed, the NRF constitutes state-owned capital dedicated to investing in private global financial and capital markets. In this regard, it faces the fundamental conundrum that these markets constitute a universe of predominantly private investors, who respond to risk-reward private market incentives. To avoid conflict, SWFs through the 24 Santiago Principles, seek to establish operational distance between the owners of these Funds (States) and their private investor-oriented/motivated management working on their behalf.
The compelling inference is that State influence is inefficient. It distorts private risk-reward incentive behaviour. And, indeed, this can be true. However, the evidence against the distorting effects of private risk-return driven behaviour is also quite enormous. Encompassing the experiences of what are known as the “Great Depression of the 1930s” and the “Great Recession of 2007-2008”, along with at least six or seven major financial crises in-between these two periods (1930s and the 2000s), this is quite apparent.
Commentators on the Guyana NRF Green Paper take it for granted that the position declared in Oil Now Report (August 10, 2018) is supported by impeccable logic: “the proposed mechanism for the management of the Fund, which places significant authority in the Ministry of Finance is being criticized in the public domain.” These criticisms implicitly assume the superiority of “private and non-state” management. However, as I have persistently proclaimed, I am deeply skeptical of “unelected experts” and/or spokespersons, with no representative credentials, making and implementing decisions on behalf of the broad masses of Guyanese. I am deeply skeptical of their revealed preference for pursuing their self-interests and/or hidden agendas, first.
This principled position does not seek to give “elected officials” a free pass. To the contrary, it staunchly acknowledges that, there are greater “un-democratic challenges” arising from the “non-elected,” who are purporting to be acting on behalf of the masses!
Historical experiences reveal many instances indicating private corruption in global financial markets is endemic; and, indeed, beyond being rationally contained. This ranges from sleaze and nepotism to outright fraud and theft on a humongous scale. The easier fight for Guyanese to win is forcing their elective representatives to commit to fiscal rules in the national interest. Guyanese cannot simply rely on “clean” private interests to deliver on their behalf.
Conclusion
Some general observations are warranted in conclusion. First, no matter how good the fiscal rules are on paper, by themselves they may not suffice. Experience has shown that fiscal rules can be less clear and thereby complicate macroeconomic management of the nation’s affairs, making this less accountable. Second, almost any fiscal rule could be of benefit to a Fund. Funds that have no fiscal rules are very dangerous. Third, experience indicates the great benefit of relying on rules, which are designed to suit a country’s eco-environment. These are likely to be far more useful, than ones “taken-off-the-shelf” and built on “a one-size fits all template.” Fourth, some readers have noted Sovereign Wealth Funds are similar in some ways to Central Bank reserves, which are also state-owned foreign-held assets. However, the critical difference is that Central Bank holdings are there to protect the national currency in global foreign exchange markets and the domestic banking system. Sovereign Wealth Funds have the three purposes that I have identified earlier. These require making net returns on invested assets.
Finally, NRFs are improved to the extent potential future governments join in support of the fiscal rules. Without such a forward-looking compact, SWFs are likely to be short-lived, and certainly not survive “Governments-in-transition.”
Next week I assess the permanent income hypothesis as a fiscal rule.