In Energy

In late January, the Guyanese PPP administration introduced a U$2.6 billion budget for 2022 where it will consume 100% of the funds stored in its Sovereign Wealth Fund (SWF). By year’s end, the SWF will be replenished with U$975MN in new oil revenues, a 70% increase compared to its 2021 balance. Critics, however, claim that the government is focused on a short-term gain at the expense of sustainable savings and inter-generational wealth.

A front-loaded spending structure for a SWF is not unusual, especially for a country that has been historically underdeveloped. The percentage of annual withdrawals from the fund will gradually decline as the economy matures, being limited to 3% of total deposits made in the previous year. Although the amount spent should not be overlooked, it is fundamental to implement better accountability mechanisms to guarantee transparent spending.

It is even more important to ensure that oil funds are used to create a diversified, free-market economy that is not dependent on oil and gas. To learn how to do this, Guyana should look no further than the United Arab Emirates (UAE).

The UAE is a federation composed of seven different emirates, including the capital city of Abu Dhabi and the famous commercial hub of Dubai. Located in the Persian Gulf, the Middle East “nation” has 9.8 million inhabitants and produces nearly 4 million barrels of crude oil per day (bpd). The UAE is the 7th largest oil producer in the world, and it has enough crude reserves to last more than 100 years.

Comparably, Guyana is a South American country located near the Atlantic Ocean which is expected to produce over 1 MN bpd by 2027, about 25% of UAE’s total output. With a population of 800,000 people, over 10 times smaller than the UAE, the per capita output of oil in Guyana will be the largest in the world—by a wide margin. This will transform its economy into a major regional powerhouse.

The UAE’s first commercial discovery of oil was in 1958, with first exports starting in 1962. In 1967, the same year it joined OPEC, the capital city of Abu Dhabi was described as a “‘developing village’ that had ‘no road, no electricity’ and ‘only one school.’” Five decades later, the UAE grew its GDP from $14 to $411 billion, becoming a symbol of a prosperous oil society that astutely managed its resources and diversified its oil-based economy.

The Road to Success: Expanding beyond a resource-based economy

The deliberate diversification of the UAE’s economy began as early as 1976, when it created the Abu Dhabi Investment Authority (ADIA) to “sustain the long-term prosperity of the country.” It is now the second largest sovereign wealth fund in the world, with over $800 billion in estimated public assets. It is supplemented by a second sovereign wealth fund, Mubadala, which was founded in the ‘80s with an objective of investing in both local and foreign companies. Together, they have more than $1 trillion in assets under management.

To unbiased observers comparing the two countries, Guyana has a relative head start when it comes to the management of its oil resources. It created its first sovereign wealth fund just six years after its first commercial discovery (in 2015), and it is already investing in growing non-oil sectors such as manufacturing, trade, and agriculture. Nonetheless, these sectors will only thrive if they can be competitive on a global scale.

Most of Guyana’s electricity comes from heavy fuel oil, making it one of the costliest and dirtiest electricity in the region.  For its non-oil sectors to prosper, the government will need to move forward with the development of a 300 MW gas-to-power plant, which will use associated gas from its recent oil discoveries to lower the cost of electricity by up to 90%. This gas project will be fundamental in improving the overall competitiveness of the country.

The government should also work with the private sector to develop a logistics hub, better road infrastructure and free trade zones, while simultaneously providing qualifying companies with subsidies, tax credits and government-backed loans. The Abu Dhabi government, for example, guarantees up to 75% of SME bank loans, has a $4bn R & D fund to help private firms come up with innovative ideas, and provides a 40% electricity discount for industrial businesses. It is also ironclad with its contracts, providing stability for large foreign investors. To ensure a prosperous future, Guyana should adapt these policies for its own development.  

Guyana could also start developing a formal economic diversification roadmap, using Abu Dhabi’s 2030 Economic Vision as a model. By diversifying its revenue base among different sectors, upgrading the skilled capacity of its labor force, and creating more private sector jobs (especially for women), Abu Dhabi’s non-oil exports grew from 13% in 2010 to 57% in 2018. More than 60% of its GDP is now connected to sectors outside of oil and gas, including manufacturing, financial services, and trade. Cheap electricity has been a key underlying component of this growth.

Although the UAE’s path has been good, it has not been flawless. Like most other Gulf Coast States, the public sector is overinflated and overpaid, while the private sector depends on a system of clientelism and connections. Contracts, both large and small, are controlled by the government, which benefit the politically connected elite at the expense of entrepreneurial SMEs.  Guyana has similar traits of patronage, but it can nip rent-seeking at its foundation by promoting a high-paying private sector that is based on a free-market, knowledge-based economy. This begins with heavy investment in education, as well as the creation of a stable, investor-friendly regulatory framework for businesses.

Regional integration, which the UAE pursued via the Gulf Cooperation Council, is also important to create economies of scale and trade efficiencies. Guyana’s access to the Atlantic Ocean and its newfound energy resources will be attractive for northern Brazilian states struggling to overcome energy insecurities and complicated maritime routes. Brazil’s expected presidential winner in October, Luiz Ignacio da Silva (Lula), has a great affinity for Brazil’s Northern states where he enjoys mass public support. During Lula’s Presidency, it is likely that he will make the Guyana-Suriname “energy corridor” a priority.

Regional integration will have to be accompanied by a competitive private-sector, cheaper electricity, free trade zones, better infrastructure, and the transparent use of its oil revenues. As Guyana’s economy grows 500% by 2030, it will look back to these “early” days of first oil to see what it did right and what could have been improved. An economic diversification plan, in which it follows the roadmap set out by the UAE, is a path that it will be glad it embarked on.

Next Steps

Contact us to find out more about how our market research and due diligence can help your company invest wisely, select the best local partners and minimize risk in Guyana. To obtain an even greater sense of our expertise in Guyana’s energy market, we invite you to review one of our webinar presentations and its video, as well as our articles.

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