Guyana’s keys to success: Diversification of the economy and much-needed transparency

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Arthur Deakin is an Analyst at AMI and AfMI where he conducts political, economic and other risk analysis activities for the mining, energy and infrastructure sectors in both Latin America and Africa.

By Arthur Deakin

As ExxonMobil announces its 18th discovery off the coast of Guyana, the amount of recoverable oil in the small South American nation keeps on rising. With new discoveries, both the government and its citizens will naturally demand more revenue from the Stabroek consortium. Guyana should receive fair compensation for its newfound resources, but it should arise from a collaborative negotiation between the relevant parties. A unilateral decision by the government will spook investors and hurt the legitimacy of the new administration.

A first step forward would be the approval of the Payara field, the third project in the Consortium’s oil production pipeline. At peak capacity, it is projected to produce 220,000 barrels per day. For the review of Payara’s Field Development Plan (FDP), the administration hired Canadian Allison Redford, the 14th premier of the Province of Alberta. The former politician has had a tumultuous past, which culminated when she resigned from her position over reckless spending of taxpayer monies. Another caveat is that Redford is being paid by the government and her suggestions may be skewed accordingly. Despite this, as an independent consultant, her recommendations should be valued in the negotiations.

Guyana’s vice-president, Bharrat Jagdeo, has recently expressed that the government does not see the Payara approval as a “make or break” decision for Guyana’s oil development. Others have minimized Exxon’s presence by saying that “Guyana is Exxon’s gold.” Despite Guyana being one of Exxon’s most profitable short-term prospects, the butchering of the Payara FDP could propel them to reevaluate their investments in the country.

Back in 2007, in Qatar, Exxon abandoned a gas-to-liquids plant as it anticipated rising costs for the project. Although Jagdeo has publicly said that Exxon and the government are not seeing eye to eye, internally, he knows that a quick, but studied approval of Payara, will reinforce Exxon’s trust in Guyana. It will also placate the concerns of frightened investors, who are hesitant to enter the country after observing a five-month-long political impasse.

Outside of oil and gas, the Ali administration must continue to pay attention to other economic sectors in Guyana. Gold mining, an essential part of Guyana’s livelihood prior to its oil discoveries, has been in the news with the recent acquisition of Guyana Goldfields by the Chinese mining firm Zijin. Zijin has operations in 11 different countries, and like Exxon, will look to ensure a safe, mutually beneficial and profitable business in Guyana. The new administration must guarantee that Guyana’s ministry of home affairs, which controls the police force, has enough resources and personnel to adequately protect its citizens and businesses.

The brutal murders of the West Berbice teens are not an encouraging sign. Lack of security can cause the wealthy to flee and propel foreign investors to look elsewhere to deploy capital.

The development of Guyana’s energy sector is also fundamental for the growth of the country’s manufacturing base and industrial capabilities. In 2014, Petroleum imports accounted for 21 percent of Guyana’s GDP. With the fall in oil prices, imports have become cheaper, but the reliance on heavy fuel oil for power generation still remains. In order to reduce and eventually eliminate this dependency, Guyana needs to diversify its energy grid by investing in renewables and liquified natural gas (LNG). The proposed 400 MW gas-to-power energy project, using associated natural gas from the oil wells, would be fundamental in lowering energy costs.

The government understands the value of the project and is looking to include it in the Payara contract negotiations. Any significant regulatory delays, however, could hamper Guyana’s attractiveness and growth.

Both energy and mining, in addition to agriculture, forestry and manufacturing, also need supporting infrastructure to fuel exponential growth. Traditional infrastructure such as roads, ports and bridges are important to reduce logistic costs and bottlenecks. But, even more fundamental, is the development of health and educational structures. Good schools would provide training to local Guyanese citizens and encourage the diaspora to come back. Without those proper systems in place, these growing sectors won’t have enough skilled personnel to properly run their operations.

The Ali administration’s tax-relief measures in the 2020 budget should also help encourage the growth of other sectors to help diversify the economy beyond natural resources. The administration seeks to exempt certain equipment from VAT and remove corporate taxes on private education and healthcare. Despite a promising initiative, a comprehensive tax reform may be at hand to allow for a thorough deliberation between all members of parliament.

Measures could include a reduction of the corporate tax rate and incentives to reduce energy costs. Guyana would also benefit if its informal workers, which account for 48 percent of its labor force, were encouraged to transition into the formal economy. This would improve tax collection rates and widen the tax base, increasing the revenues entering the country’s coffers.

Diversification of the economy, development of infrastructure and the improvement of the business environment will be pointless without proper accountability over the government’s finances. The National Resource Fund (NRF) which is used to manage the oil revenues, must have well-established independent committees to ensure that it doesn’t become a slush fund. As it stands, none of the three oversight committees outlined in the NRF act appear to be up-and-running. Although the administration has vouched to change the NRF Act to make it more transparent, it is unclear if and when they’ll follow through.

As seen in the multi-billion-dollar 1MDB scandal in Malaysia, countries with newfound wealth from oil are more likely to spend without restraint. Allowing for a few executives to control vast amounts of funds, while simultaneously having no oversight, is a recipe for disaster. The Ali administration must begin to implement certain accountability measures to assure investors, and more importantly its people, that these funds will not be squandered.

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