Feature Article of Monday, 25 July 2011

Columnist: Adam, Mohammed Amin

Slippery Steps In Oil Revenue Management

– The Case Of Ghana’s Supplementary Budget
by
Mohammed Amin Adam
Coordinator
Civil Society Platform on Oil and Gas

INTRODUCTION
That good laws do not guarantee good application of the laws is a truism; and this is exactly the case in Ghana’s application of the Petroleum Revenue Management Law (Act 815), which has been described variously as one of the best laws in the world. The law defines a strong and transparent mechanism for monitoring oil receipts and more importantly for spending the revenues accrued to the state. So far, the government of Ghana has demonstrated significant degree of transparency judging from the detailed information provided in the supplementary budget of the Government of Ghana on expected inflows and out flows for the year 2011. But it is also true that transparency is not an end in itself, but a means to ensure public accountability and prudent management of public resources. The 2011 Supplementary Budget provides information which is very useful but which also exposes the slippery steps of a new oil producing country in the management of its oil revenues. This paper reviews aspects of the Supplementary budget which deals with oil revenues; and finds that there is both misapplication of the law and insufficient explanation for certain decisions.

THE SIGNIFICANCE OF OIL REVENUES TO THE BUDGET

Government has tried to play down the significance of oil revenues in the budget apparently to moderate expectations and that is very good. However, these revenues mean much more to the budget than presented. Oil revenues estimated at GHC1250.8 is 2.2% of GDP, a percentage more than the revised non-oil revenues of GHC698.8 in the Supplementary Budget. Also, with oil revenues, the revised budget revenues for the 2011 fiscal year increased by 39% over the 2010 out-turn compared to 21.6% of the increase from non-oil revenues. Revenues allocated for spending in the 2011 Supplementary Budget, the Annual Budget Funding Amount, also constitutes about 47% of total supplementary revenues due for spending. Thus the Supplementary Budget largely relies on the expected oil revenues.

In addition to oil revenues, the oil and gas sector contributes more to the estimated growth for the year as captured in the Supplementary Budget with oil induced growth rate put at 14.4% against a non-oil growth of 7.5%. Thus, the oil sector will continue to boost the economy both in revenue terms and in the growth of the productive sectors especially with increased production and rising crude oil prices. However, the quality and efficiency of the investments of oil revenues is a key determinant of the growth prospects in the economy. This is the reason public interest should be very high in the prudent management of the country’s oil wealth and off-course other non-oil public resources.

DETERMINING BENCHMARK REVENUE AND THE ANNUAL BUDGET FUNDING AMOUNT (ABFA)

In Section 110 of the Supplementary budget, the Government justifies the rationale behind the budget by stating that ‘developments in the domestic economy that have necessitated the revisions to the fiscal framework are as follows: passage and implementation of the Petroleum Revenue Management Act, 2011, Act 815, coupled with changes in world crude oil prices and revised oil production levels…..’.

However, in the case of petroleum revenues, government knew well the implications of such volatility and adequately addressed them in the law. The law provides for the Stabilization Fund which will be deployed into the budget when oil revenues fall arising from unanticipated fall in crude oil prices or production levels (Clauses 9 and 12 of ACT 815). Also, in the event of unanticipated rise in crude prices and production, excess revenues arising are to be transferred to the Ghana Petroleum Funds in a 70:30 proportion to the Stabilization Fund and the Heritage Fund respectively (Clauses 11 and 23 of ACT 815). There is no any other provision that allows government to treat unforeseen developments differently.

The Supplementary budget misapplied the provisions for dealing with unanticipated developments in the determination of the Annual Benchmark Revenues (BR), the Annual Budget Funding Amount (ABFA) and the transfers to the Petroleum Funds. In the Government’s original budget, the assumed reference crude oil price was US$70 per barrel with an average production level of 79,945 barrels per day, which amounted to a Benchmark Revenue of GH¢584.0 million (70% of GHC584 = GHC408.8 million = ABFA) . What the Government has done with the supplementary budget is to revise mid-year the reference crude oil price to $100 per barrel and production levels to 84,737 barrels per day and by these new assumptions determined a higher Benchmark Revenue of GH¢1,250.8million (70% of GHC1,250.8 million = GHC875.56 million = ABFA). This gives excess revenues of GHC466.76 million according to the provisions of the law, which is supposed to be transferred to the Petroleum Funds. Clause 2 of ACT 815 states ‘The Ghana Petroleum Funds shall both receive from Petroleum Holding Fund, petroleum revenue in excess of the Annual Budget Funding Amount’. Thus, in the language of the law, any revenues in excess of the first ABFA are classified as excess revenues, and therefore do not form part of ABFA. The allocation of excess revenues as part of benchmark revenues and the ABFA is therefore an open violation of the Act 815.

Further, the Supplementary Budget has created a second Benchmark Revenue and used it as the ‘foundation benchmark’, a practice inconsistent with the law. There cannot be two benchmark revenues simply because of unforeseen changes in crude oil prices and production volumes. This misapplication therefore equally affects the ABFA (which is GHC408.8 million and not GHC646 million provided by the Supplementary Budget) and the Transfers to the Petroleum Funds (supposed to be GHC175.2 million in line with the original ABFA and not GHC277 million in the Supplementary Budget).

Based on the revised assumed average crude price of $100 per barrel and average production volume of 84,737 barrels per day, the expected balance in the Petroleum Funds is supposed to be GHC641.96 million rather than GHC277 million as in the Supplementary Budget. Government has therefore allocated the expected balance in the Funds for spending, a clear violation of the law.

There are arguments that the first benchmark revenues were computed when Act 815 had not been passed and when oil production had not commenced. But this only means double standards as there was no need to allocate oil revenues for spending in the budget when oil production had not commenced. One wonders the legal basis for allocating oil revenues to the budget when the law was still pending in Parliament. Also, even if the arguments were valid, this would not have been the right time to determine benchmark revenues and ABFA for 2011 as the Supplementary Budget has done. Clause 17 of ACT 815 states ‘The Minister shall not later than September 1st of each year estimate and certify the Benchmark Revenue using the formula set out in the First Schedule’. Predictably, government allocated petroleum revenues to the original budget because the plan was to pass the law before the budget was presented to parliament, which did not materialize. Therefore, in line with the law, the logical timeframe for determining the benchmark revenue latest by the 1st September 2011, two clear months before the presentation of the annual budget, is only for the purpose of the following year’s budget and in this case, the 2012 budget. It is also unclear whether the new benchmark revenue has been certified and by whom as required by the law. Here, there is a technical problem that must be resolved.

As a matter of urgency, the issues of reference pricing and production forecasting must be clearly defined through appropriate regulations and in line with clause 60 of ACT 815. If this is not addressed, Government will always take advantage of changing crude oil prices to distort the computation of benchmark revenues, ABFA, and transfers to the Petroleum Funds, and thereby abuse the law.

ALLOCATION OF OIL REVENUES TO THE GNPC

The budget statement states that ‘the cash or equivalent in barrels of oil ceded to the National Oil Company should be 40 Percent of the net cash flow from carried and participation interests after deducting the equity financing cost of the National Oil Company’. The net receipts from carried and participating interests according to the budget are GHC445, 769, 014 and 40% of this amount is GHC178, 307,605.6. However Government allocated GHC327, 337,152 to the GNPC. This needs some clarification.

There is also a definitional problem in the determination of GNPC’s share of oil revenues and its relationship with Benchmark revenues. Benchmark revenue in Schedule 1 of ACT 815 is defined as ‘Expected current receipts from oil + Expected gas royalties + Expected dividends from national oil company’. It includes dividends from the National Oil Company (emphasis). However, in section 120 of the Supplementary Budget, ‘total revenue from oil including the National Oil Company's carried and participation interest is estimated at GH¢1,250.8 million. Of this amount the Benchmark revenue is estimated at GH¢923.4 million. The remaining is the amount due the Ghana National Petroleum Corporation as its as its equity and cash ceded to it’. This implies that GNPC’s share is neither from benchmark revenues nor the ABFA, which again varies from the provisions of the law. It is only GNPC’s equity financing costs which can be deducted from the gross oil revenues, but in the case of the Supplementary Budget, the GNPC’s share of the remaining dividends from its participation has also been deducted before the determination of benchmark revenues. It is supposed to be part of the Petroleum Holding Fund and through that part of the ABFA (clause 7(1) of ACT 815). What the budget has done is to under-estimate the benchmark revenue by GHC327.4 and therefore the ABFA to a large extent. This is not correct.

BUDGET PRIORITIZATION

Clause 21(5) of ACT 815 gives the Minister of Finance the discretion to prioritize not more than four areas for the use of the petroleum revenues. This provision has demonstrably been followed by the Minister who provided in Section 116 of the Supplementary Budget four ‘priorities – ‘expenditure and amortization of loans for oil and gas infrastructure, road infrastructure, agricultural modernization, and capacity building (including oil and gas)’.

The issue here is the basis for the prioritization. Particularly, although expenditure and amortization of loans for oil and gas infrastructure may be relevant to Ghana’s current circumstances, there is no provision in the law for using the oil revenues to pay back loans that do not fall under the provision for collateralization. And since we do not know if the ABFA has already been collateralized, it remains unclear why the ABFA is being used to finance non-oil-collateralized debts. In addition, the allocation for capacity building including oil and gas needs to be clarified because Government has already signed a loan of $38 million with the World Bank for oil and gas capacity building, which the budget is very silent on.

However, Government must be commended for allocating oil revenues to road infrastructure and agricultural modernization. These are clearly in line with the law and will help boost the productive sectors of the economy. What Ghanaians do not know is how much of the oil revenues have been allocated to each of the priority areas outlined above.

Another important requirement which the budget addresses is the percentage of ABFA which should be allocated for capital expenditure. The Supplementary Budget allocates 70% of the ABFA according to the requirement of ACT 815 for spending on the four prioritized areas. However, the silence on the disbursement of the remaining 30% is unhelpful. Even though the law is also silent on the use of the remaining balance of the ABFA, Government would have scored another mark for transparency by disclosing its planned disbursement.

CONCLUSION

Clearly, Ghana’s Supplementary Budget has once again exposed the obsession for spending by Governments of resource producing countries. They do not know ‘breaks’ even if it means violating the legal frameworks or interpreting them to suit their interests. The transparency demonstrated in the budget is commendable because it has brought to the fore the potential to abuse the rules of managing oil revenues and has therefore laid the foundation for public scrutiny in the management of expected large inflows of capital from oil and gas exploitation as Ghana becomes a major oil producer in the near future, founded on the reported geological promise for major hydrocarbon discoveries in the country. All Ghanaians and development partners must therefore begin to ask relevant questions of our government to prevent mismanagement and misapplication of the country’s oil wealth which we know is non-renewable. This is the only way budget transparency can bring about public accountability and sustainable development.