On New Year’s Day, the authoritarian government of the oil-rich nation of Kazakhstan removed the subsidy on fuel prices, sparking countrywide protests not only because of the resulting higher gas prices but also over issues relating to inequality, poverty and corruption. So far, 26 persons have been killed, as the state security sought to quell the protest after a shoot to-kill-order from the President was given. The country was ruled for three decades by Nursultan Nazarbayev who in 2019 handed over the presidency to Qasym-Jomart Tokayev. Nazarbayev, however, remained in the background as “leader of the nation”, a title that grants him and his family immunity from prosecution.
Two Wednesdays ago, the National Assembly passed the Natural Resource Fund (NRF) Bill 2021 without debate, after a chaotic scene erupted in the Assembly as Opposition Members of Parliament vehemently opposed the Bill being considered. The following day, the President assented to the Bill while the Minister of Finance signed the commencement Order the next day to bring the Act into operation. The main issue of contention is the repealing of the predecessor legislation of 2019 and replacing it with what they believe to be a lesser form of legislation that removes several safeguards against the abuse of the oil revenues accruing to the nation. Several civil society organisations and individuals have expressed similar concerns.
Section 4 of the NRF Act 2021 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’. The Act defines the “Santiago Principles” as the generally accepted principles and practices for Sovereign Wealth Funds (SWFs) voluntarily endorsed by the International Forum of Sovereign Wealth Fund (IFSWF) members.
In today’s article, we discuss the nature and purpose of SWFs, outline the first five of the 24 statements of principles contained in the Santiago Principles, and assess the extent to which the Act is in compliance with those principles. These principles were developed in 2008 by a Working Group of the IFSWF at a meeting in Santiago, Chile.
Nature and purpose of Sovereign Wealth Funds
SWFs are special purpose investment funds or arrangements that are owned by the general government mainly for macroeconomic purposes. They are usually in the form of investments in foreign financial assets and include funds relating to fiscal stabilization, savings, reserves, development and pension liabilities. SWFs help to improve the management of public finances, and facilitate macroeconomic stability and high-quality growth. They are financed out of balance of payment surpluses, official foreign currency operations, proceeds from privatization, and commodity exports, among others. SWFs are funds set aside to meet future financial commitments as well as for the “rainy day”; and for the benefit of the present and future generations in a fair and equitable sharing arrangement. Extreme care should therefore be exercised to ensure that not only wise investment decisions are made but also clearly defined and prudent withdrawal policies are followed to safeguard against any depletion.
The natural resources of a country belong to its citizens, both present and future. The revenue derived from their exploitation represents the replacement of a physical asset with a financial one. In principle, only the return on investment, that is, the revenue portion, should be withdrawn and utilized to meet operational needs, otherwise the country’s capital base will be eroded. Withdrawals from the capital portion should only be permissible as a last resort and to the extent they are to be used for developmental purposes that are of the highest national priority while at the same time ensuring the right of future generations to such revenue is safeguarded. In a diversified economy, there is hardly any need to access the SWF for capital expenditure purposes since internally generated revenue from taxation and other means ought to be enough to meet such expenditure. Where this is not so, recourse is usually to borrowings which will eventually be included in the public debt of the country to be serviced out of such revenue once the public debt to GDP ratio is within manageable limits.
A key objective of SWFs is having in place a transparent and sound governance structure that provides for adequate operational controls, risk management, and accountability. A sound governance structure that ‘separates the functions of the owner, governing body(ies), and management facilitates operational independence in the management of the SWF to pursue investment decisions and investment operations free of political influence’. A clear investment policy demonstrates a commitment to a disciplined investment plan and practices while a reliable risk management framework promotes the soundness of its investment operations and accountability.
Santiago Principles and the NRF Act
We now turn to the first five sets of statements contained in the Santiago Principles and assess how the NRF Act addresses these principles.
Principle 1: There should be a sound legal framework for the SWF that supports effective operation and achievement of its stated objective(s). The framework should ensure legal soundness of the SWF and its transactions. The legal relationship between the SWF and other state bodies should also be publicly disclosed.
The NRF Act 2021 replaces the predecessor legislation that was passed two weeks after the 21 December 2018 vote of no confidence in the Government. The Opposition had boycotted the sitting of the Assembly when the related Bill was debated and voted on, on the ground that the sitting of the Assembly was illegal in view of the no confidence vote that would have necessitated the dissolution of Parliament and holding of elections within three months.
Considering the importance of the Act as well as its complexity, it is most unfortunate that after the second reading of the NRF Bill 2021, it was not referred to a Special Select Committee for detailed consideration. Had this been done, it would have benefitted from the views of a wide cross-section of the population, and appropriate amendments made before the Bill was presented to the Assembly for its third reading and approval. However, the speed at which all aspects of Act were executed is clear evidence that the authorities were determined not to entertain any amendments to it. In Canada, at its second reading, a Bill is debated and voted on to determine whether it should be referred to a legislative committee for detailed study. After due deliberation, the committee would recommend that the Bill proceeds as is, as amended, or is dropped altogether. (https://libguides.tru.ca/c.php?g=193921&p=1276338).
The Act contains 47 sections and is organized in nine parts, supported by two schedules. The main parts are: governance and management of the Fund; deposits and withdrawals; eligible investments; accounting, reporting and auditing; confidentiality; and penalties and offences. The First Schedule shows the calculation of the ceiling for annual withdrawals while the Second Schedule deals with ceilings and floors for long-term savings. The structure of the Act is same as that of its predecessor legislation but is somewhat re-organised, and in some cases the contents were modified.
Regrettably, the requirement for a Macroeconomic Committee to advise the Minister on the amount to be withdrawn from the Fund, has been dispensed with; and the withdrawal rules have changed. There is now a Board of Directors responsible for the overall management of the Fund, which responsibility was vested in the Minister under the predecessor legislation. Most of the functions of the Public Accountability and Oversight Committee (PAOC) have also been transferred to the Board, and POAC’s membership has been reduced from 22 to nine. These matters will be considered in greater detail under Principle 6 dealing with the governance framework.
Section 7 provides for the Bank of Guyana to be the operational manager of the Fund in accordance with the Investment Mandate and the Operational Agreement. The Investment Mandate is to be prepared by the Board of Directors, while the Bank is required to have risk management systems and internal management in place.
Principle 2: The policy purpose of the SWF should be clearly defined and publicly disclosed.
In accordance with Section 3(2), the purpose of the Fund is to manage the natural resource wealth of Guyana for the benefit of present and future generations in an effective and efficient manner. This is achieved by: (i) ensuring that volatility in natural resource revenues does not lead to volatile public spending and that such revenues do not lead to loss of economic competitiveness; (ii) fairly transferring natural resource wealth across generations so that future generations benefit from the wealth; and (iii) using the natural resource wealth to finance national development priorities, including initiatives aimed at realizing an inclusive green economy.
Principle 3: Where the SWF’s activities have significant direct domestic macroeconomic implications, those activities should be closely coordinated with the domestic fiscal and monetary authorities so as to ensure consistency with the overall macroeconomic policies.
In December 2019, the Ministry of Finance and the Bank of Guyana signed a Memorandum of Understanding outlining the responsibilities of the Bank in relation to the NRF. These include: (i) receiving and accounting for all deposits into the NRF; (ii) investing the NRF in eligible asset classes; (iii) appointing private managers and custodians; (iv) reporting on the performance of the NRF on a monthly, quarterly and annual basis; (v) implementing management systems, procedures and risk management arrangements in accordance with international standards; and (vi) providing the public with information on the NRF, as required by law. 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 agreement to be put in place.
Principle 4: There should be clear and publicly disclosed policies, rules, procedures, or arrangements in relation to the SWF’s general approach to funding, withdrawal, and spending operations. The source of funding should also be publicly disclosed.
These requirements are dealt with in detail in the in the Act. The predecessor legislation had contained two very important concepts – Economically Sustainable Amount (ESA) and Fiscally Sustainable Amount (FSA). The ESA is the maximum amount, in the opinion of the Minister and taking into account the recommendation of the Macroeconomic Committee, that can be withdrawn from the Fund in a fiscal year without diminishing Guyana’s competitiveness. The FSA is the maximum amount that can be withdrawn from the Fund in a fiscal year while ensuring its long-term financial sustainability, a fair inter-generational distribution of natural resource wealth, and maintaining stability in the annual withdrawals from the Fund. The lesser of the two amounts was to be used as a basis of withdrawal from the Fund. The First Schedule had provided for the ceiling for the FSA to be the greater of: 25 percent of the average of five years of non-petroleum revenue (current fiscal year, the two preceding years and projections for the two succeeding year); and three percent of the projected balance of the NRF for the current fiscal year.
The Act removes the above withdrawal requirements and replaces them with the following. In the first year, ceiling for withdrawal is the full balance on the NRF at the coming into operations of the Act. 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. These withdrawal rules do not include withdrawals for emergency funding.
The new legislation has also dispensed with the requirement for a Macroeconomic Committee responsible to advise the Minister on the Economically Sustain-able Amount, 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.
Principle 5: The relevant statistical data pertaining to the SWF should be reported on a timely basis for inclusion where appropriate in macroeconomic data sets.
By Section 29, the Bank of Guyana is to submit to the Board and the Minister monthly and quarterly reports on the performance of the Fund, including financial statements, within 12 working days of the end of the month and 30 working days of the end of the quarter, respectively. Internal audit of the Fund is to be performed by the Bank’s Internal Audit Division at least once annually, while the external audit is to be undertaken by the Auditor General who may engage the services of an internationally recognized auditing firm to assist him.
The Bank is then required to submit the audited financial statements of the Fund along with the report of the Auditor General to the Board and the Minister within four months of the close of the fiscal year. Within 30 days of the receipt of the audited accounts, the Board is to submit an annual report of the Fund to the Minister who shall cause the report to be laid in the Assembly not later than 30 days of its receipt. The report is to be made available to the public within three days thereafter.
