In view of the unsatisfactory performance in the execution of the budget in the first half of the year, especially in respect of infrastructure development works where only 25.4 percent achievement was recorded, we cautioned against any undue haste to incur expenditure in the last quarter of the year in order to exhaust budgetary allocations.
The Fiscal Management and Accountability (FMA) Act specifically requires all unspent balances at the end of the year to be surrendered to the Treasury, and any unfulfilled programme or activity must be re-budgeted for in the next fiscal year, assuming its continuing relevance. The Act also prohibits contracts from being entered into unless there are available funds in the budget to meet the related costs.
In the past, the acceleration of expenditure in the last quarter of the year and close to the end of the year has been a regular occurrence in the belief that ‘if you don’t spend it, you lose it’. This practice resulted in significant breaches and violations of the FMA Act and the Procurement Act. Because of these and other violations, all sorts of irregularities occurred, including breaches in the tendering procedures relating to the procurement of goods/services and the execution of works; defective work performed; overpayments to suppliers/contractors; and goods/services not delivered/performed for which payments have been made.
Additionally, contracts were executed close to the end of the year (and in some cases, on the last day of the year); cash books were kept open well into the new year; and cheques were drawn and backdated to 31 December although value was not received as of this date. For example, in his 2023 report, the Auditor General stated that there were 3,134 cheques valued at $2.463 billion still on hand as of September 2024. In all probability, these cheques were drawn close to year-end, or early in the new year and backdated to 31 December 2023. Despite this, there was no evidence of any follow-up action taken by the Audit Office to ensure that no irregularities have occurred in respect of these payments. Indeed, the Audit Office needs to place greater emphasis on year-end transactions and probe them meticulously to ensure that there are no irregularities. There are auditing standards that deal with “cut-off” procedures to be followed to ensure that there is no manipulation in financial reporting.
As regards the Public Procurement Commission and the National Procurement and Tender Administration Board, we made it clear that these bodies should be allowed to function independently and professionally, without political intervention and/or intervention. In order to ensure that this is so, we need to first revisit the way the officials of these two bodies are appointed. We also touched on the need to have in place a politically neutral Public Service staffed by professionally and technically competent persons. In this regard, we urged the Authorities to implement the recommendations of the 2015 Commission of Inquiry into the Public Service.
In today’s article, we continue our summary of the significant issues raised in our Accountability Watch column.
Natural resource management 2021 Guyana EITI report
In October 2017, Guyana was admitted to the membership of Extractive Industries Transparency Initiative (EITI), headquartered in Oslo, Norway. One of the requirements of EITI Standard is the publication of an annual report showing, among others: (i) how licences are allocated; (ii) how much tax and social contributions are being paid and where they end up in the government; and (iii) how much revenue is being generated, where it ends up and who it benefits. The first three Guyana EITI annual reports, i.e. 2017, 2018 and 2019, highlighted significant deficiencies and instances of non-compliance with the EITI Standard.
These have led the Independent Administrator, appointed to conduct an independent review, to conclude that he was unable to determine that all significant contributions made by extractive entities to the revenues of Guyana were included in the reports.
The 2019 report made it clear that continued inaction on some of the recommendations previously made: (i) stymies progress in meeting the requirements of the EITI Standard; (ii) impedes preventative actions to correct and address discrepancies between declarations by government agencies and the extractive entities; (iii) adversely affects the data quality and comprehensiveness of the disclosures, which may reduce the public’s confidence in the report’s data; and (iv) compromises the fundamental purpose of EITI open data as a tool for government to improve policy making and sector management.
In his 2020 report, the Independent Administrator stated that the report covered all significant revenues made by extractive entities to the revenues of Guyana and that ‘the significant revenues declared by reporting entities and included in this report were subject to independent audits that have been performed in accordance with international standards’. This is notwithstanding that the findings were similar to those contained in his 2019 report, in particular, the Independent Administrator’s inability to determine that the financial data submitted by reporting entities and included in the report were subject to audits that have been performed in accordance with international standards.
In April 2022, the EITI Secretariat assessed Guyana’s progress in meeting the EITI Standard and in promoting dialogue and learning at the country level. However, Guyana scored poorly in the three broad areas considered – stakeholder engagement, transparency, and outcomes and impact – with scores of 60.0, 53.5, and 42.0, respectively. The EITI Board expressed concern, especially over the low score on the outcomes and impact component. It attributed this to ‘an ad hoc approach to outreach and dissemination, failure to follow-up on EITI recommendations to deliver reforms and insufficient attention to the annual review of outcomes and impact’. The Board warned that the failure to take the necessary corrective actions in the 20 areas identified might result in temporary suspension. The next assessment was due in April 2024. However, it is not clear whether the exercise was undertaken, and the related report issued.
It will be recalled that the EITI Secretariat suspended Guyana from its membership because of the delay in compiling and publishing the 2020 annual report. The delay was attributed to a disagreement between the National Coordinator and certain members of the Multi-Stakeholder Group (MSG) over the terms of reference for the Independent Administrator. The report was eventually published in July 2023. As a result, Guyana’s membership to that body was restored.
On 23 December 2023, the Indepen-dent Administrator issued the 2021 Guyana EITI in which he highlighted the following:
(a) Total revenues received from the extractive sector amounted to G$127.66 billion, compared with G$93.78 billion in 2020, an increase of $33.88 billion, or 36.1 percent. This increase was mainly due to the receipt from the oil and gas industry of $112.43 billion, compared with $65.83 billion in 2020.
(b) There was an unreconciled difference of G$2.23 billion between the amounts received by government agencies and the amounts the extractive entities paid to these agencies. A similar observation was made in relation to the mining industry where the unreconciled difference was G$1.05 billion.
(c) The Guyana Revenue Authority was last audited to 2018 while the Guyana Geology and Mines Commission (GGMC), a key agency in the oil and industry, was over ten years in financial reporting and audit, the last set of account being for 2012. A similar observation was made with respect to several other government agencies, most notably the National Industrial and Commercial Investments Ltd., which had not been audited since 2013.
(d) The GGMC is required to pay 20 percent of the royalties collected from mining on Amerindian Village lands to the Amerindian Development Fund. However, no payment was made in 2021.
(e) The Guyana Gold Board was insolvent at the end of 2021 with a net deficit of G$1.09 billion. Net assets accounted for G$9.02 billion, while current liabilities amounted to G$10.11 billion. There was also a long-term liability to the Ministry of Finance of G$8.732 billion in respect of advances given prior to 2012 to purchase gold.
The Independent Administrator made several recommendations to the MSG to remedy the deficiencies identified, including approaching the Auditor General and the concerned entities to bring the financial reporting and audit of the delinquent entities up to date. Of the seven sets of recommendations made in the previous years’ EITI reports, four still remained unimplemented while the remaining three were reported as on-going.
The 2022 Guyana EITI report has since been issued and will be the subject of a later column.
Audit report on pre-contract recoverable costs: 1999-2017
Annex C of the 2016 Petroleum Sharing Agreement (PSA) between ExxonMobil’s subsidiaries and the Government of Guyana states that the amount of US$460,237,918 refers to costs incurred in petroleum operations pursuant to the 1999 Agreement up to 31 December 2015. The Agreement defines pre-contract costs as contract costs, exploration costs, operating costs, service costs, general and administrative costs, and overhead charges as defined in the 1999 Agreement. The Annex further states that Exxon is to be reimbursed ‘such costs as are incurred under the 1999 Agreement between January 1, 2016, and the effective date which shall be provided to the Minister on or before 31 October 2016 and such number agreed on or before 30 April 2017’.
In September 2019, the then Administration awarded a contract to UK firm, IHS Markit, to conduct an audit of the pre-contract costs covering the period 1999 to 2017. The auditors issued their final report in March 2021 in which they stated that the actual amount claimed as recoverable costs was US$1.678 billion, of which amounts totalling US$214.4 million, or 12.8 percent, were considered in disputed costs due mainly to either their ineligibility of expenditure in the context of the PSA, or lack of adequate supporting documentation.
If these charges are removed from the cost recovery statement, Guyana’s share of profit oil will increase by US$107.2 million.
This is a minimum position since the auditors were unable to quantify certain transactions for which they had serious reservations about their completeness, accuracy and validity as recoverable costs. For example, supporting documents for expenditure incurred during the period 1999 to 2004 were not available as they were purged in accordance with Exxon’s internal policies.
The disputed costs were reportedly reduced to US$3 million through what the Authorities claimed to be an unauthorized negotiation between an officer of the Ministry of Natural Resources and ExxonMobil.
It appears unreasonable, however, to consider that the said officer would have acted on his own accord, that is, without the full knowledge and consent of the Authorities; and that after more than three years since the issuance of the final report, the status of the disputed costs remains unclear.
Audit report on post-contract audit costs: 2018-2020
The IMF had stated that: (i) there are too many loopholes in the PSA, including the absence of ring-fencing provisions; (ii) if these are not plugged, Guyana could lose significant amounts of revenue; and (iii) strong leadership in government is needed to ensure that the interest of the State is properly safeguarded. A ring-fencing arrangement ensures that only costs attributable to a particular field are taken into account in the computation of profit oil for that field. Although the Agreement provides for the sharing of profit oil on a field-by-field basis, it also allows Exxon to allocate cost oil to any field within the contract area, thereby defeating the main purpose of ring-fencing.
Considering these and other concerns, a comprehensive audit of the post-contract recoverable costs is of utmost importance, requiring the knowledge, skills and competence of experienced auditors. The audit is necessary to provide the reasonable assurance that expenditures incurred are legitimate recoverable costs in the context of the Agreement; and the amounts involved are reasonable and represent good value for money. This especially so, considering the higher the recoverable costs, the less will be the amount of Guyana’s share of profit that will accrue to it.
As of December 2020 November 2021, the deadline for undertaking the recoverable costs for 2018 had expired, with no auditors appointed.
Eleven months later in November 2021, the Government had stated that it was unable to identify a strong group of local auditors to undertake the assignment. Faced with criticisms from various quarters, it eventually got its act together and selected a consortium of local auditors to undertake the assignment. The contract was entered into on 25 May 2022 covering the period 2018 to 2020. The total recoverable costs were estimated at US$7.3 billion.
The auditors issued a preliminary report on 5 September 2022. After several rounds of discussions, they issued their final report one year later on 11 September 2023 in which they concluded that in their opinion the amount shown as recoverable costs were in accordance with the PSA, except for items discussed in the report. However, in our review of the report, we are of the view that not enough work was done to enable the auditors to draw such a conclusion.
The exceptions referred to relate mainly to queries amounting to US$65.194 million, representing a mere 0.88 percent of the total expenditure of US$7.435 billion, compared with US$214.4 million identified by HIS Markit and representing 12.7 percent of the total recoverable costs of US$1.678 billion which is approximately one-fifth of the recoverable costs for the period 2018 to 2020.
The auditors have since been re-appointed to review Exxon’s post-audit contract costs covering the period 2021 to 2023.
To be continued