Last week, we began a discussion of the Santiago Principles and the extent to which the recently passed Natural Resource Fund Act 2021 is in conformity with those principles. Section 4 of the Act provides for the Fund to be managed in accordance with ‘the principles of good governance including transparency and accountability, and international best practices including the Santiago Principles’. So far, we have discussed the first five of the 24 principles. In today’s article, we look at Principles 6-12.
Principle 6: There should be a sound governance framework that establishes a clear and effective division of roles and responsibilities in order to facilitate accountability and operational independence in the management of the SWF.
The governance arrangements are detailed in Sections 5-14. The Board of Directors has overall responsibility for the management of the Fund, including preparing an Investment Mandate and monitoring the performance of the Fund. It comprises not less than three and not more than five persons appointed by the President who also appoints the chairperson. One representative each must be from the National Assembly and the private sector.
On the face of it, this arrangement is an improvement over the predecessor legislation since there was no provision for the establishment of a Board, and the Minister was responsible for the overall management of the Fund and for preparing the Investment Mandate. We had expressed that in that legislation there was an over-concentration of powers in the hands of the Minister. Our concern with the new legislation, however, relates to the composition of the Board and how its members are to be appointed. Since the private sector will be the main beneficiary from the withdrawal and utilization of the resources of the Fund, its representative should not be part of the Board as this may present a conflict of interest. There have also been credible allegations that some key members of the Private Sector Commission, the parent body, are so closely associated with the ruling party that this may pose some difficulty for the selected person to act independently and objectively. In addition, with the Government holding the majority in the Assembly, it is likely that the representative will be selected from among Government members. It would have been more comforting if the legislation had specified that the representative should be from the political Opposition.
Three members in our view would be woefully inadequate to execute the Board’s mandate. However, the Act gives the President flexibility to select up to five persons. We hope that he would appoint five members to ensure a good balance and to allow for more meaningful discussions before decisions are taken. It would have been a good idea if the membership of the Board could have comprised two representatives from the accounting profession, one from the legal profession and one from the academia, leaving the President to choose the other member. At least three members should constitute a quorum.
If the President decides to appoint a five-member Board, three members will be selected by him based on his own deliberate judgment, which is undesirable. While the President can follow in the footsteps of the late President Desmond Hoyte and rise to the occasion by selecting persons with the appropriate technical and professional backgrounds and who are considered politically independent in the eyes of the public, it would have been preferable if the legislation had limited the President’s selection to one member.
It is unclear what mechanism will be used to select the persons for membership to the Board. We would have preferred if such mechanism was embedded in the law, mandating the Public Accounts Committee to identify suitably qualified and trained persons after due consultations with the representative bodies and submit their names to the Assembly for approval, with the President making the appointment. We also believe that the President should not be responsible for selecting the chairperson, to allow Board members to elect their own chair. An imposed chairpersonship can create tensions within the Board. There is also no provision for limits to renewal of board members’ appointments. It would have been preferable if only one renewal is permitted to allow other persons desirous of serving on the Board to be considered.
The Bank of Guyana is responsible for the operational management of the Fund in accordance with the Investment Mandate and the Operational Agreement entered into with the Board. The Bank is required to: have risk management and internal management systems in place for the management of the Fund; maintain proper books of account; prepare monthly and quarterly reports to the Board and the Minister as well as annual financial statements for submission to the Auditor General. The internal audit of the Fund is to be performed by the Bank’s Internal Audit Division.
The Minister is required to appoint an Investment Committee to advise the Board on the Investment Mandate. The Committee is to comprise seven members, five of whom will be nominated by the Minister of Finance, the Attorney General, the Minister responsible for petroleum, the Leader of the Opposition and the private sector; and two ex officio non-voting members (one from the Bank of Guyana and the other the Senior Investment Advisor and Analyst attached to the Board).
It is unfortunate that the new legislation has dispensed with the requirement for establishment of a Macroeconomic Committee to advise on the maximum Economically Sustainable Amount (ESA) that can be withdrawn from the Fund, taking into account past spending from the Fund; potential impact of future spending on Guyana’s competitiveness Fund; economic growth especially in agriculture and manufacturing; and assessment of macroeconomic variables such as inflation, exchange rate, balance of payments and public debt. These factors will vary from time to time, which means that ESA will also change from time to time. Despite this, the First Schedule specifies that in the first year, the ceiling for withdrawal is the full balance on the Fund at the coming into operations of the Act. The balance on the Fund as of 1 January 2022, the date of commencement of the Act, was US$607,646,570.
For subsequent years, the ceiling is: 100 percent of the first US$500 million paid into the Fund in the preceding fiscal year, 75 percent of the second US$500 million, 50 percent of the third US$500 million; 25 percent of the fourth US$500 million; five percent of the fifth US$500 million; and three percent of any excess of the first US$2,500 million. Assuming that in 2022, amounts totalling US$2 billion are deposited into the Fund, withdrawals next year could be as much as US$1.250 billion, leaving a balance of US$750 million or 28.76 percent for future generations in the first two years of the receipt oil revenues. This does not include withdrawals for emergency financing for which there is no ceiling.
While there is provision for the Minister to cause to be reviewed periodically the implementation of the First Schedule, such a review will take place ‘not less than once every five years’, as provided for under Section 17(3). It therefore means that the first review will not be undertaken until after January 2027, by which time the damage would have been already done!
Sections 6-7 provide for the establishment, membership and functions of a nine-member Public Account-ability and Oversight Committee (PAOC) to provide a non-governmental oversight of the Fund. The PAOC representatives are to be appointed by the President, inclusive of the chairperson, from the following: one nominee of the Assembly, three from the religious community, two from organized labour, one from the professions and two from the private sector. The PAOC’s key functions under the predecessor legislation have been transferred to the Board, leaving only two peripheral responsibilities, that is, receiving quarterly reports from the Board and having quarterly briefings from that body, for which it is required to issue an annual report to the Assembly!
The predecessor legislation had provided for a 22-member PAOC, drawn from mainly civil society organisations, to monitor compliance with the Act as well as providing an independent assessment of the management of the Fund and the utilization of withdrawals. These representatives were as follows: three from civil society and community-based organisations; one each from the Guyana Bar Association, the Guyana Consumers Association, the Guyana Extractive Industries Transparency Initiative, the trade unions, Transparency Institute Guyana Inc., the Private Sector Commission, Guyana Press Association, Institute of Chartered Accountants of Guyana, and the academia; and one each from the ten Regional Democratic Councils. Considering that the PAOC is a non-governmental oversight body, the predecessor legislation had a more broad-based representation.
Principle 7: 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.
Already dealt with in last week’s article under Principle 2 as well under Principle 6 discussed above.
Principle 8: 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.
Already dealt with under Principle 6.
Principle 9: The operational management of the SWF should implement the SWF’s strategies in an independent manner and in accordance with clearly defined responsibilities.
Already dealt with under Principles 3 and 6. However, in view of the repealing of the predecessor legislation, and more so because it was not brought into operation by an Order from the Minister, there is need for a new Memorandum of Understanding to be entered into between the Bank of Guyana and the Board of Directors.
Principle 10: The accountability framework for the SWF’s operations should be clearly defined in the relevant legislation, charter, other constitutive documents, or management agreement.
Already dealt with under Principle 6. Additionally, Section 5(7) provides for the Board to report to the Minister in relation to the discharge of its functions, with the Minister providing general policy directives with respect to its functions, which directives must be complied with. The Board is also to prepare and submit an annual report along with the audited accounts of the Fund and the related report of the Auditor General within 30 days of the receipt of those audited accounts of the Fund. The Minister in turn is required to lay the report in the Assembly within another 30 days. The report is to be published on the Ministry’s website as soon as is practicable thereafter. Similar publications are to be made in respect of monthly and quarterly reports.
Sections 35-40 deal with offences and penalties. A person who knowingly gives materially false or misleading information commits an offence. The same applies to: the failure to publish information required by the Act; hindering the external auditor from performing his/her duties; and disclosing official information in contravention of the Act. On conviction, penalties range from fines of between $3 million to $10 million in addition to imprisonment of three to ten years. Concern has been expressed that there are no penalties for any abuse or misuse of the Fund. However, since the withdrawals are to be transferred to the Consolidated Fund to be used to finance the National Budget approved by Parliament via appropriations, the Fiscal Management and Accountability Act will be applicable. Section 85 provides for the following:
An official who – (a) falsifies any account, statement, receipt or other record issued or kept for the purposes of this Act, the Regulations, the Finance Circulars or any other instrument made under this Act; (b) conspires or colludes with any other person to defraud the State or make opportunity for any person to defraud the State; or (c) knowingly permits any other person to contravene any provision of this Act, is guilty of an indictable offence and liable on conviction to a fine of two million dollars and to imprisonment for three years.
The Act does not include a Minister since it defines “official” to mean ‘an individual who is in, or is part of, a budget agency as an employee of the Government on a full-time, part-time, or contracted basis’. However, there are other laws that deal with misconduct in public office, especially the Criminal Law (Offences) Act.
Principle 11: An annual report and accompanying financial statements on the SWF’s operations and performance should be prepared in a timely fashion and in accordance with recognized international or national accounting standards in a consistent manner.
Already dealt with under Principle 10. By Section 28, the books of account of the Fund as well as its financial reporting are to be undertaken in accordance with the International Financial Reporting Standards.
Principle 12: The SWF’s operations and financial statements should be audited annually in accordance with recognized international or national auditing standards in a consistent manner.
Already dealt with under Principle 10. The Auditor General uses the International Standards on Auditing in the conduct of his audits.
