Towards Grenada’s sovereign wealth fund

By Ambrose Phillip

During the recently concluded election campaign, the Prime Minister in his final campaign address to supporters at Pearls, St. Andrew, announced (for the first time) that there had been “significant discovery” of oil and natural gas in Grenada’s waters.

The NNP’s 2018 Manifesto, on page 49, says that it “Will ensure the equitable and social distribution of ALL income derived from the energy sector”. Exactly what is meant by “equitable and social” is yet to be determined or advised.

It is against this background that this position paper is tendered so as to contribute on the determination of the way forward were significant benefits to accrue from the reported discoveries.

First and foremost, it is necessary to learn from lessons of other countries that have enjoyed such windfalls in the past. Nearest to home has been the experience of Trinidad & Tobago, and, further afield, were the experiences of Nigeria, countries of the Middle East, Russia, and Norway, among others. These experiences range from prudence to profligacy together with even complacency being part of the continuum.

One of the earliest and most negative consequences, called “Dutch disease”, derived from the Dutch discovery of natural resources back in 1977. The sudden inflow of foreign currency led to imports becoming less expensive and a concomitant decline in domestic production as exports became more expensive through currency appreciation.

In Trinidad & Tobago a similar phenomenon was experienced and cocoa and citrus (orange) cultivation declined drastically in the face of increasing oil export earnings. In economics it is simply defined as “the apparent causal relationship between the increase in the economic development of a growing sector and a decline in other sectors” (Wikipedia).

Concretely therefore, there are two things that we must prepare for.

First, to be able to avoid Dutch disease; and secondly, it is to make prudent uses of the expected or realised windfall. Why use of the term “windfall”? This is because windfalls are not sustainable; they don’t last without proper and deliberate actions to ensure on-going or long future benefits. This article seeks to propose an approach for long term benefit of the expected or realised results of natural resources development.

In this regard therefore, the establishment of a Grenada Sovereign Wealth Fund is advocated.

SOVEREIGN WEALTH FUNDS

First, what is a Sovereign Wealth Fund (SWF)? It has been defined as “a state-owned investment fund investing in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds” (Wikipedia).

Additionally, SWFs are characterised by the global nature of their investments; in short, they are not home bound (as the NIS here once appeared to be).

Again, the lessons from the experiences of others are there to stand us in good stead. Perhaps the best is the example of Norway. Norway’s Sovereign Wealth Fund was established by an Act of Parliament in 1998.
Since then it has become the world’s largest sovereign fund reaching US$1trillion (1, followed by 12 zeros) a couple months ago (money.cnn.com).

The Fund’s value works out to be US$192,000 for each of Norway’s 5.2 million citizens; two-thirds of its funds are invested in 9,000 companies in 72 countries worldwide and include Apple, Nestle, Royal Dutch Shell, Microsoft, and Alphabet (owned by Google) (money.cnn.com).

Note the diversified nature in investments, from software to natural resources to food, although it may now seek to divest from oil companies (www.nytimes.com). Norway’s SWF is in fact two funds: a pension fund that was established in 1967 and an oil fund that began in 1990.

The other heavyweights where SFWs are concerned are the Funds of China, Kuwait, Saudi Arabia, South Korea, Hong Kong, The Netherlands, and Qatar (www.swfinstitute.org).

In 2007, Trinidad & Tobago established a ‘Heritage & Stabilisation Fund’. Sometimes it is better to be late than never. The Fund was worth US$5.6billion as of the end of June 2017.

TOWARDS GRENADA’S SOVEREIGN WEALTH FUND

The following provides an outline for consideration in the establishment of a Grenada Sovereign Fund:
Purposes:

(1) To principally provide for future generations

(2) To contribute no more than 20% of annual income to current debt obligations (with 2018 or some specified date as a base) including Government and NIS past pension obligations.)

Creation & Administration:

(1). A cross-party consensus expressed in a Memorandum of Understanding

(2). An Act of Parliament establishing the legal frame-work

(3). An entrenched provision such as two-thirds majority for consequential amendment

Fund Management & Supervision:

(1). Board Composition:

(2) Government: 2 nominees Opposition: 1 nominee

GG advised by Civil Society: 1 nominee

ECCB Governor: 2 nominees including the Chairman

(1). Day-to-day Management: Appointment of Chief Executive Officer and/or Investment committee members to have express approval of Governor of ECCB.

Fund Sources:




Inputs or contributions to the Fund may come from a range of sources including but not limited to the following:

(1). Royalties or fees from exploration and exploitation of natural resources:-

Aggregate – sand, gravel, rock

Oil and Gas

Geothermal

Solar

Wind

Tidal

Water

(1). A portion of licence or user fees for:

*Advertising projected to the public

*Use of cyber space

*Use of historic and natural sites

(1). Exports of Agricultural production:-

*Nutmeg

*Cocoa

*Minor Spices

*Large scale or plantation crops

*Forestry exploitation

Above limited to 0.5% – 1% of export value

(1). Exports of Fish and Fish Farming including aquaculture

*Rate of Export Taxes: 1% -2.5% of export value

*Removal of Customs Service Charge, if any,

(1). Gross Sales of State-Owned Enterprises: 2.5% – 3%

(2). Current Account Surplus of national accounts 5% – 10%

CONCLUSION

There will be a need to define what could be reasonable activities or projects for future generations.

While support for tertiary, vocational, and other types of education may qualify, should a nation-wide all-ages lunch programme be similarly regarded? Should Winty Frederick’s notion of a bridge to Carriacou be so regarded. These will require debate and a framework or set of guidelines to determine qualification.

Again, the operation of the Norwegian Fund may provide guidance as it appears that it has been only once in its creation that there has been a drawn-down from its resources.

Then too, there may be concerns about the start-up and initial amount of contributions to a SWF. It is submitted that the startup amount is not particularly important. Here the adage, “one-one dumpling fills the pot”, is applicable.

The importance is the fiscal and operational discipline to commence and continue the contributions from the identified sources, for the purpose.

Comments from Citizens on this matter may well help shape the outcome on this potentially very important matter.

(Ambrose Phillip is a former General Manager of the Grenada Ports Authority. He was also Grenada’s first Director of Maritime Affairs and, in that position, represented Grenada on the London-based Executive Committee of the International Oil Pollution Compensation Funds (IOPCF) 2012-2013. Mr Phillip is now Chairman of the Grenada Co-operative Bank.)

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