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Sunday, December 23, 2007

Guyana Resources - A Christmas Blessing or Scrooge Curse

The “Roop” Column

Guyana Resources - A Christmas Blessing or Scrooge Curse

Peter R. Ramsaroop, MBA

One of my young advisors, JC Bollers, the grand nephew of the late Sir Harold Bollers, recently completed his academic paper on Guyana Resources . In our discussions I thought it was appropriate to share with the public his thoughts and our discussions on the issue of Guyana Resources. This is the season when we reflect on the year and why the average citizen has not progressed from last year and for some, they have gone backwards given the economic environment we are faced with. I would ask that you keep this column for future reference as we get closer to oil:

For as long as I can remember, I've always asked myself how our country can have so much natural wealth but still be poor? Guyana is suffering from what academics call the 'resource curse' . This happens when a country's economy becomes too dependent on primary exports like oil and sugar, sugar in our case. It's more likely to happen in a country with institutions that lack transparency and caring leadership for all.

A resource state's incentives are to keep the handful of export producers happy. In this situation, voters and the private sector commonly find themselves subject to a government that isn't as accountable to them as it is to the sugar or oil company. When commodity prices fall, the economy falters and lacks a private sector strong enough to pick up the slack. Normal economic growth needs a healthy private sector, which requires predictable enforcement of laws, contracts, property rights and an open economy. This is often absent in a resource state.

A functioning democracy requires that the government be dependent on the electorate for tax revenue . The government produces accountability in exchange for this. This accountability creates trust and legitimacy. It is absent, though, when a government gets enough of its funding from resource rents. In this situation, various groups fight for their 'fair share' of the resource rents at the government level. When the resource wealth gets distributed according to politics, that's when widespread ethnic conflict and political instability take place.

UK journalist Nicholas Shaxson says: " If citizens had the oil money in the first place, and the state had to bargain with them to get its cut, it seems likely that would change the game entirely."

Maclean's Magazine of Canada has said that Guyana may be able to eventually match Kuwait's annual oil production of 500 million Barrels . However , if only one tenth of that amount is produced and royalties are 55 percent, at US$100.00 per barrel, that means an average annual payment of roughly $US3600.00 per person or $US300.00 a month.

Do you want that HUGE AMOUNT to go to the government?

For the future, I STRONGLY recommend the following:

• Amend our constitution to state that ALL natural resources belong to Guyana 's citizens .

• Let each Guyanese choose at which bank to have their royalties deposited.

• Have CGX (or any extractor) publicly state each payment and pay it directly to the banks.

• Tax only withdrawals of principal to encourage saving and investment.

• Allow banks to issue credit to citizens based on all types of income.

• Enjoy an economy bursting with energy, life, HOPE and PROSPERITY for ALL.

“The people may get lazy,” you say. Is that worse than government using all the money to selectively bless others with laziness?

”Well people may waste the money,” you say again. Does the government have the monopoly on being wasteful? People spend according to their priorities. Governments spend money on what is politically expedient. We should be asking if people are more wasteful than the government.

“Well what about infrastructure?” The government will get REVENUES through taxation . That should be enough to build infrastructure and buy some accountability. That would be a very merry Christmas indeed for ALL.

Our Best Wishes for a Merry Christmas with a Healthy and Prosperous 2008.


Lapa said...
This comment has been removed by a blog administrator.
shell said...

Happy New Year from Portugal.
Literary Greetings

Kwesi said...

An interesting take on the oil issue, just let me add my two cents. Guyana’s most promising oil anomalies are Eagle and Wishbone both located close to the Surinamese border about 100 km offshore. Eagle is about two times as large as Wishbone and has twice the potential oil. In terms of comparisons to know oil wells, Eagle is larger, but probably contains the same amount of oil as the Hibernia field off Canada’s eastern coast. This field currently produces about 200.000 barrels a day. So lets do the math- as the Americans say- if Wishbone and Eagle combined are able to produce the same amount of oil as Hibernia (the initial seismic survey indicated the are likely to produce more), we will be producing 200,000 barrels of oil a day. At the current price of US$ 90 a barrels that gives us just over US$ 6.5 billion in sales. Now this doesn’t take into account production costs. Guyana’s current fiscal scheme in a nutshell means that the oil companies keeps 64% of the money and Guyana receives the other 36% as royalties. Thus, if Guyana was able to recover only 10% of the oil estimated to lie beneath or feet and waves of the muddy Atlantic we would be entitled to just over US$ 2 billion annually. To put this into perspective, Guyana last budget was gave us an annual expenditure of about US$ 390-420 million.

This brings me to the real issue -what to do with that money? I disagree with Mr. Ramsaroop’s suggestions for the bulk of the royalties to be given to the populace. A better use for the money would be to invest it in infrastructure. Rather than taxing withdrawals the priority of the government should be to use the wealth from the oil to stimulate other forms of industry in Guyana, which will in turn attract investment and create jobs. Guyana’s current rice output needs to be doubled to 600,000 tons annually, the bulk being exported to the Caribbean and Brazil. The government should use the windfall form the oil industry to set up rice farms along the entire watershed between the Canje Creek and Corentyne. The government need not own the farms but simply provide the region with the necessary infrastructure. Farmers could then lease the land with all the necessary infrastructure already present; repaying the government either in small monthly cash instalments or with produce. Or sugar sector could also benefit from a similar extension program in Demerara.

Finally the money could be used to build a Hydro-electric dam in Essequibo of about 200 MW. The energy would be used not only for household consumption, which stands at about 60 MW, but could also be used to quadruple of bauxite output to 4 million tonnes. With another 125 MW of electricity his bauxite could them be processed into 2 million tones of alumina which fetches about US$ 500 million on the international.

It is clear that the oil revenue would be a boon for Guyana –if it ever materialised- however what we do with it is also important, rather than squander it on short term projects the money needs to be invested in health, education, research centres, and perhaps more importantly in infrastructure. However at the moment all of this is a mere dream since or government has mortgaged away or potentially oil rich seas to a third tier oil company, with no means- let alone money- to explore for oil properly. Even their own president admits that they don’t have the necessary funding to undertake any drilling until 2009/2010. In the mean time us Guyanese wait and dream of better day fuelled by the promise of what may lies beneath our feet.

Kwesi Sansculotte-Greenidge