Introduction
Last week’s column asserted that, logically, any serious critique of Guyana’s Natural Resource Fund, NRF, ought to be pursued at two hierarchical levels of abstraction. One would be “the interrogation of its operations and processes as fixed in its enabling legislation, regulation and practices” [Level 1]. And, the second should be focused on “its properties as a social construct, abstraction and theoretical idea/notion” [Level 2]. In today’s column l proceed with a critique of the NRF following the sequence indicated here. My recommendations will be intertwined with the critique.
Critique – Level 1
It is not my intention to re-visit in any detail the lengthy process-based interrogation of Sovereign Wealth Funds, SWF, which I had undertaken back in 2018, before Guyana’s First Oil in December 2019. Suffice it to note that the recently passed NRF Act 2021 has encountered criticisms in regard to lack of prior meaningful consultations, rushed implementation and ignoring internationally recognised best practices as enshrined notably in the Escazul Agreement 2018 and the Santiago Principles, 2008, [the latter is subscribed to by members of the international forum of SWFs; that is, good governance, accountability, prudent investment practices and open dialogue along with deeper understanding].
Such criticisms are directly linked to Guyana obtaining low scores on both the Natural Resources Governance Institute, NRGI, and Extractives Industries Transparency Initiative, EITI, ratings of petroleum governance in Guyana.
For the record a first withdrawal from the NRF was made in May this year. The amount was reported as US$200 million or approximately GY$417 billion.
Critique – Level 2
In this Section I consider those critiques that challenge the properties or essence of SWFs and NRFs considered as unique social constructs and their purpose or intent. To begin, I must recall for readers, benefit the raging controversies in developed economies surrounding the roles attributed to SWFs in the global financial collapse, known as the Great Recession of 2007/8. The focus on SWFs arose from their individual holdings of hundreds of billions of US dollars This became a principal focus of concern because it led critics in developed economies to raise alarm over “foreign nations” gaining too much control over domestic financial institutions, and that these nations could use that control for political purposes.
The developed economies raised concerns and quickly introduced foreign investment and national security regulations and legislation to govern SWF and other potentially disruptive financial/investment flows into their countries. This led to undoubted improvement in the global financial architecture right up to the COVID-19 pandemic.
Dilemma/Conundrum
When considered carefully, NRFs/SWFs constitute state-owned capital investing in private global financial/capital markets. This creates a dilemma in that, global markets operate in a universe where mostly private investors respond to risk-reward private market incentives. To avoid conflict, NRFs/SWFs have adopted the Santiago Principles. These seek to establish operational distance between the States that own these Funds and their private investor-oriented management of the Funds.
The compelling inference of this solution is that State influence over these financial accumulations means definitionally, inefficient usage; that is, distorting by definition, also, private risk-reward incentive behaviour. However, the evidence revealing the distorting effects of private risk-return driven behaviour is equally enormous; encompassing the experiences of the Great Depression of the 1930s and the Great Recession of 2007/08, along with at least six or seven major financial upheavals in-between these two periods (the 1930s and the 2000s),
Criticisms of Guyana’s NRF Act implicitly attribute the superiority of “private and non-state” management. However, I still remain skeptical of “unelected” experts/spokespersons, with no representative credentials, making and implementing decisions on behalf of the broad masses of Guyanese. Their revealed preference for pursuing their self-interests and/or hidden agendas is damning
This position I hold does not seek to give “elected officials” a free pass. On 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 elected representatives to commit to fiscal rules in the national interest. Guyanese cannot simply rely on “clean” private interests to deliver on their behalf.
Conclusion
Two final observations are warranted. Once an SWF/NRF is established, its operations are drastically improved if likely potential future governments express support for its embedded fiscal rules. Without such a forward-looking compact, SWFs /NRFs are likely to be short-lived and may not survive “Government-in-transition”.
Second, I don’t believe that Guyana’s NRF is likely to have financial holdings large enough to generate more than a marginal impact on global financial markets. My recommendations, however, is that Guyana’s SWF should treat Caricom’s financial, capital and investment space as a strategic component in a geographically balanced global assets portfolio. With the intimate knowledge the Fund managers (if well chosen) are likely to have of Caricom’s market, there is an opportunity to meet both the Fund’s objectives and contribute towards regional capital market integration.
In this regard, the SWF is not being recommended as a regional “safety net”. The recommendation is that it seeks to be an engine driving profitable investments in the Region. In this sense, I advance the view, therefore, that this might well be the lesson above all lessons which can be learnt from a review of global experiences. Here, concerns about Government-owned Fund holdings in regional private financial markets can learn from the experiences of the global realities in 2007-2008.
