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Opinions of Monday, 3 May 2010

Columnist: Adam, Mohammed Amin

Ghana Petroleum Revenue Management

– Are The Government Proposals Feasible For Sustainalbe Management Of The Oil Funds?

Mohammed Amin Adam


National Oil Coordinator - Publish What You Pay Ghana
tabat15@yahoo.com

INTRODUCTION
The Ghanaian government has posted its proposals for petroleum revenue management as Ghana prepares to receive revenues following the beginning of oil production in the last quarter of this year. Government has also conducted nationwide consultations on how to manage expected petroleum revenues. Whiles most of the issues raised during these consultations depicted the emotional attachment of most Ghanaians to issues of equitable resource allocation both across regions and sectors, there have been others which centred on how the country as a whole could maximize the benefits of its petroleum resources. Both the IMF and the World Bank predicts that annual revenues from the petroleum sector could stand around US$1 billion and would continue for the next 20 years from the Jubilee field phase 1 production. This will be a very significant inflow by Ghana’s standards considering that all the loans and grants received by the country in 2007 stood at US$1.3 billion. It is therefore appropriate that the government provided some proposals for managing expected revenues towards the enactment of a petroleum revenue law. But whether these proposals are feasible in helping manage its petroleum revenues sustainably is another question. This paper attempts an analysis of the government proposals and to point out where there could be problems as well as propose some suggestions to further enrich the on-going debate.
THE ACCOUNTS
The proposals provide for the opening of the Ghana Petroleum Reserves Accounts. This will consist of the Ghana Petroleum Accounts to which all revenues collected by the Ghana Revenue Authority on behalf of the government will be transferred. The Other Account, is the Ghana Petroleum Funds which comprises the Ghana Stabilization Fund and the Ghana Heritage Fund.
Petroleum revenues as defined by the proposals include: gross revenue, royalties, additional oil entitlements, initial carried interest, revenues from government participation in petroleum operations, corporate income taxes from upstream and downstream petroleum companies, returns on investments of petroleum funds and capital gain tax from sale of ownership of any petroleum rights.
It must also be noted that the petroleum contracts between government and Exploration and Production companies make provisions for additional paid interest. The GNPC, the national oil company, is expected to make a financing arrangement for any additional paid interest in order to increase its stake. This could be done either through a contractor or joint ventureship. Therefore, receipts from such additional paid interests in all petroleum operations are to go to GNPC as operating revenue. This is important to maintain the liquidity of the national oil company for purposes of explorations and commercial production of petroleum. The GNPC Law (PNDCL 64) provides for a reserve fund for the national oil company for its explorations which is expected to be boosted with receipts from additional paid interests. Further GNPC is expected to pay its financiers depending on the financing arrangement for additional paid interests.
THE GHANA PETROLEUM FUNDS
The Ghana Stabilization Fund: is aimed at mitigating the effects of unexpected revenue shocks so as to restore macroeconomic stability and sustaining public expenditure during revenue shocks.
The Ghana Heritage Fund: is also aimed at ensuring intergenerational equity and to maintain the value of oil capital since the oil resources are depletable and non-renewable. This raises another dimension of resource management. That is whether the resources should be mined at all. In line with the Hotteling theory, it may be feasible to leave the resources in ground in order to increase its value in future. This is a decision that has been very difficult for most resource rich countries with acute or low capital base. Therefore, the establishment of intergenerational equity funds ensures that resources are mined and at the same time, its future value is maintained through appropriate investments in high-yielding but less risky financial assets.
Both the Stabilization Fund and the Heritage Fund will further generate alternative income stream for public expenditure. Petroleum revenues are not supposed to be treated as another source of income. The use of such revenues should be seen as consumption of capital. Therefore it is important to convert these resources into financial capital and the interest generated could then be consumed as income.
However, whiles Stabilization Funds have proved useful in smoothing public expenditure, it is purely a stabilization measure and does not necessarily lead to economic growth and poverty reduction, two important objectives of the Government policy objectives. It is therefore appropriate to examine other measures such as economic stimulation which may require reprioritization of government planned spending based on growth potential. Thus, rather than use Stabilization Funds to restore liquidity for planned spending, growth and not stabilization should be the priority since revenue shocks interrupt the growth path.
REVENUE ALLOCATION OPTIONS
Allocation Mechanism
Proposals for allocating revenues from the Ghana Petroleum Accounts are based on how much is required for budget support and how much should be allocated to build up the Petroleum Funds.
It has been proposed for instance that the Annual Budget Funding Amount (ABFA) should be a predetermined percentage of Benchmark Revenue whiles the remaining will be allocated to the Petroleum Funds.
Benchmark revenue is the sum of expected current receipts from oil, royalty from gas, real investment returns from the Ghana Petroleum Funds and dividends from the national oil company in respect of government stake in petroleum operations.
Allocation to the budget will also be based on Estimated Sustainable Income which is defined as the product of the country’s petroleum wealth and the difference between real rate of return and population growth. This is to ensure that future consumption levels adjusted to inflation and population growth are maintained.
Allocation of Excess Revenues
The following allocation rules have also been proposed for the Petroleum Funds and between the Stabilization and Heritage Funds.
i. When government receipts exceed one-quarter of Annual Budget Funding Amount of the financial year by more than 5%, the excess revenues shall be allocated to the Petroleum Funds.
ii. When government receipts exceed one-quarter of Annual Budget Funding Amount by less than 5%, the Minister of Finance may direct such excess revenues to be allocated to the Petroleum Funds.
iii. In allocating excess revenues to the Petroleum Funds, it shall be done on 75:25 basis to the Heritage and Stabilization Funds respectively.
It is important to observe that the proposed revenue allocations to the Petroleum Funds are both mandatory and discretionary. The non-mandatory allocation is at the discretion of the Minister of Finance as in (ii) above which may affect the build up of the Petroleum Funds especially when the provisions in (ii) becomes regular. This may also be abused as well as lead to increased spending at the expense of capital formation through savings. In this case, the purpose for stabilization and heritage funds are severely defeated.
Another challenge in these proposals is how to determine the Annual Budget Funding Amount which is supposed to be a predetermined percentage of Benchmark Revenue. This proposal might have been influenced by the unpredictability of petroleum revenues as against fiscal requirement. Such flexibility is good for efficient economic management. Moreover, legislating fixed percentages for annual budget support in the face of dynamic economic circumstances may hurt the economy during difficult times. However, such flexibility could also be abused when there is no fiscal discipline. Since Ghana does not have a Fiscal Responsibility Law, it may be appropriate to put in the Petroleum Revenue Management Law a range rather than a fixed percentage of Benchmark Revenue for determining the Annual Budget Funding Amount based on best practices.
Transfers from the Petroleum Funds
In transferring revenues from the Petroleum Funds to support the budget, the following proposals have been made.
i. Stabilization Fund: When there is a shortfall in national revenues, i.e. when collections in the first two quarters of the financial year fall below one-half of estimated ABFA by at least 10%, transfers will be made from the Stabilization Fund by either:
a. 75% of estimated amount of the shortfall of petroleum revenues or
b. 25% of balance standing to the credit of the Stabilization Fund at the beginning of the year
ii. Heritage Fund: The Annual Budget Funding Amount to be transferred from the Heritage Fund should be equal to the Estimated Sustainable Income.
iii. When the Annual Budget Funding Amount exceeds Estimated Sustainable Income, no transfers shall be made unless government provides to Parliament the following reports:
a. Report of estimates of the amount by which the Estimated Sustainable Income for the fiscal year following the current transfer year will be reduced due to the transfers.
b. Report of an Independent Auditor certifying the estimates by which the Estimated Sustainable Income will be reduced.
c. Report explaining the long-term national interest of such transfers.
It must be noted that the Estimated Sustainable Income is a measure of sustainable management. This does not only provide permanent income for the population after petroleum resources are depleted but also shows in per capita terms how citizens are benefiting from the petroleum resources. The provision to ensure that annual budget transfers from the Heritage Fund are always equivalent to the Estimated Sustainable Income is most appropriate for achieving inter-generational equity. Government must therefore be restricted to this. When transfers exceed the Estimated Sustainable Income as proposed in (iii) above, the purpose for sustainable management is thus defeated because of the future reduction in per capita benefits of citizens. The possibility of abuse is also high.
SPENDING OPTIONS
Spending Types
The proposals for spending petroleum revenues can be grouped into three:
1. Direct public expenditure
This covers domestic spending by government in economic sectors as well as for public consumption. This will be the largest spending area of government from petroleum revenues under the current proposals and will be spent through budget support (Annual Budget Funding Amount).

2. Public investments
There are proposals to invest large proportions of the Stabilization and Heritage Funds in financial instruments abroad. This is to maintain the value of oil capital and generate additional income stream for government expenditure.

3. Public lending
There is also the proposal to invest not more than 20% of the amount in the Heritage Fund locally in strategic sectors of the economy on commercial basis. This is usually done by government lending to the private sector through Investment Banks at commercial rate. This will help built absorbtive capacity in the country and through that increase future local investments. In addition, local businesses in most resource rich countries are not able to effectively participate in the petroleum industry in line with local content and local participation policy due to capital and capacity constraints. Public lending of part of the petroleum revenues can therefore increase the capital base of local businesses to participate and add value along the petroleum value chain for the benefit of the country.
Policy Guidelines and Priority Areas
The policy objectives of the government underpinning the spending of petroleum revenues as proposed in the draft policy are: fair and equitable distribution of national wealth to all citizens, long term national development plan, growth and poverty reduction strategy, overall government development strategy.
Therefore any expenditure made from petroleum revenues will be based on these guidelines. It is further proposed that where there is no national development strategy, the following spending areas shall be the priority areas: Institutional capacity building, law and order and public safety, Agriculture and agro-business, Human resource development, Infrastructure, Rural development, Alternative energy sources, Forestry management and protection of water bodies.
Ghana has gone through several development programmes under which the national development strategy was clearly defined. The latest development strategy was the Ghana Poverty Reduction Strategy which has ended. The Government has accordingly renewed the Vision 2020 Development Strategy but this is yet to be debated and adopted as a national strategy. The Ghanaian constitution mandates the President of the country to develop a national development strategy plan two years after assuming office. This constitutional provision is also in line with the Directive Principles of State Policy which outlines the priority areas such development strategy should focus on. The constitution also enjoins the President to give a State of the Nation in an address through Parliament. The address is also to cover thematic areas of the national development strategy. Indeed, the priority spending areas stated above are in line with the Ghanaian constitution.
Thus, the use of petroleum revenues to meet the development needs of the country as proposed by the government will ensure the integration of the petroleum sector with the rest of the economy and to build other sectors with petroleum revenues. Particularly, the provision for spending in institutional capacity, alternative energy sources, agriculture, infrastructure and human resource development will ensure good governance, job creation and income redistribution. It will also ensure the expansion of the local absorbtive capacity and reduce the environmental effects of petroleum extraction in favour of less harmful energy sources for the protection of the environment. Climate change is therefore an important component of the proposals.
However, it is not enough to propose priority spending areas without analysing the likely impact of such spending on the economy. An analysis of the economy-wide effect through simulation of alternative scenarios needs to be conducted before deciding on priority areas. Some spending areas are more productive than others. Therefore, challenged by depletable revenues, the country must choose areas that have good and higher socioeconomic impact.
It may therefore be appropriate to add to the Petroleum Revenue Management Law a clause which makes it mandatory for any spending decision to be backed by such analysis rather than open up spending decisions to speculations.
Another proposal which is quite positive is the prohibition of special consideration for spending in some parts of the country. This is expected to prevent certain groups from asking for special attention. However, the proposals also recognize that petroleum operations have social and environmental effects which heavily adversely affect oil communities and districts. Such considerations may be considered on needs basis but which is also time bound. This proposal will help manage expectations in the country generally and the oil communities in particular but at the same time, the fears of oil communities are also being allayed as a result of the provisions for mitigation when necessary.
Also oil-backed loans are prohibited under the proposals which will ensure Ghana does not increase its indebtedness on the basis of expected volatile petroleum revenues. This will ensure Ghana manages her debt sustainability level well especially following the global crisis which has increased the debt vulnerability of most developing countries.
However, it appears the drafters of these proposals have not studied the Kosmos Agreement with Government on the Jubilee field which clearly allows oil backed loans. For instance, the agreement indicates in part that when the contractor supplies oil to the domestic economy in case the government oil share is insufficient for the local economy, and the government fails to pay for it at the prescribed market price of crude oil, the contractor will ensure recovery of the default amount from future government oil share. This is clearly an oil-backed loan. Such contradictions must be solved because we may be confronted as to whether the petroleum revenue law or the Kosmos/Government agreement takes precedence.
Investment Rules for Petroleum Funds
The proposals for investing the Stabilization and Heritage Funds are indicated as follows:
i. Not less than 90% of the amount in Stabilization Fund shall be invested in qualifying instruments such as debt instruments, convertible currency deposits, or securities issued or guaranteed by the World Bank, International Bank for Settlement, The European Central Bank and the Central Banks of other sovereign countries with graded security.
ii. Not less than 80% of the amount in Heritage Fund shall be invested in qualifying instruments
iii. Not more than 20% of the Heritage Fund shall be invested locally in strategic sectors on commercial needs.
Whiles these percentages reflect international best practices, that is, investing greater proportion of petroleum funds abroad and retaining lesser percentages for administrative and liquidity purposes, it is equally important to know the assumptions behind the proposed benchmarks especially, the 20% of the Heritage Fund that will be invested locally in relation to the current level of absorbtive capacity and the effect on exchange rates.
INSTITUTIONS
There are eight institutions identified for the functioning of the proposed Petroleum Revenue Management law. The President, The Minister of Finance, Parliament, The Central Bank, The Investment Advisory Board, Public Oversight Committee, The Auditor General and The Ghana Revenue Authority. Of these, only two are new institutions proposed for creation under the Revenue Management Bill – The Investment Advisory Board and Public Oversight Committee.
The Investment Advisory Board will be a five member Board to be appointed by the President. The Board is to oversee the management of the Fund and advise the Minister of Finance on investment decisions.
However, the appointing authority of the Public Oversight Committee expected to be eleven members is not stated under the current proposals. Its role is also oversight and advisory regarding investment decisions based on wide consultations among citizens.
Appointments to the Oversight Committee unlike the Board are not based on technical requirements. It is like a citizen’s watchdog committee composed of Members of Parliament, Traditional Rulers, Civil Society, Academic institutions, and Politicians. The proposals noted the capacity gap by making provisions for the appointment of an Advisor based on Parliamentary approval.
The inclusion of three members of parliament and politicians on the proposed Public Oversight Committee is likely to undermine its independence and the sanctity of its advice since as in the case of the parliamentarians, they could exercise their oversight through the appropriate parliamentary committees of Finance, Public Accounts and Mines and Energy..
It is also on the proposals that the Minister of Finance is empowered to make investment decisions when the Investment Advisory Board has not provided advice within fifteen (15) days after requests. This may be abused by Ministers taking political decisions for short term objectives. It is not also known what role the Public Oversight Committee will play under these circumstances.
TRANSPARENCY AND ACCOUNTABILITY
The proposals recognize the importance of transparency and accountability in the management of petroleum revenues. It has accordingly provided for institutions and regulations towards enforcing transparency and accountability in line with the Extractive Industry Transparency Initiative (EITI). Some of the rules and institutions proposed are outlined.
The rules and institutions provided in the proposals for ensuring transparency include; publications of all reports, publications of receipts and payments, reports to Parliament, parliamentary oversight, Public Oversight Committee and the role of the Auditor General reports.
There are also confidentiality clauses such as the following:
Section 37(2): ‘Information on data whose disclosure to the public could, in particular: (a) prejudice significantly the performance of the Ghana Petroleum Funds; (b) be misleading, as it relates to: incomplete analysis, research or statistics; frankness and candour of internal discussion; the exchange of views for the purposes of deliberation; or the provision of confidential advice; (c) significantly affect the functioning of the Government; (d) amount to the disclosure of confidential communications; (e) substantially prejudice the management of the economy; (f) substantially prejudice the conduct of official market operations; or (g) result in or lead to improper gains or advantages; may be declared as confidential’.
Section 37(3): ‘The declaration of confidentially shall, taking into account the principles of transparency and the right of the public as regards access to information, provide a clear reasoning on the motives for treating such information or data as classified’
Section 37(4): ‘Any information that is classified at the time at which it could have been published, as well as the reasoning for it being treated as classified, shall be made available to the public, upon request, when the reasons for it being classified are no longer valid, and in any case no longer than five (5) years from the date on which it could have been published’
Section 31 (2): ‘The Minister shall ensure that in releasing, or allowing access to the advices (of the Investment Advisory Board), measures are taken to prevent the disclosure of confidential information’
Section 28(9)c: The President may terminate the appointment of a member (of the Investment Advisory Board) where the member ‘discloses information contrary to Article 37.......’
Confidentiality clauses may be important in specific strategic cases of investment. But these proposals are too broad and are likely to be interpreted differently depending on the interest of the government. The clauses will therefore likely restrict the frontiers of transparency as they will prevent important disclosures to the public on how the petroleum revenues will be managed. There is no reason why management of public funds should be covered in confidentiality especially at the time the country is about to pass a Freedom of Information Bill.

CONCLUSIONS
It is important that Ghanaians seek analysis of the petroleum revenues management proposals to help us take the right decisions on how we want to protect our resources and manage them for the long-term interest of the state. We should avoid emotionalism around the on-going discussions and put the interest of the nation above all. It is my expectations that this paper will contribute to the current debate and help different stakeholders to understand the repercussions of a producing a petroleum revenue management law which will not serve the national interest.