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Opinions of Friday, 1 January 2010

Columnist: Adam, Mohammed Amin

Ghana’s Oil Revenue Management - Transparency Or Prudence?

by Mohammed Amin Adam

(Lecturer in Petroleum Economics – Kings University College Postgraduate School) tabat15@yahoo.com

THE SEARCH FOR A REVENUE MANAGEMENT MODEL

Ghana has been in the news for some time now regarding her commercial discovery of oil expected to flow by the end of 2010. Already, several uninformed statements have poured in since the discovery, which have succeeded in only increasing the expectations of the people.

However natural resources have been linked to socio-economic and developmental challenges particularly in Africa, where resource-rich countries have been associated with lower economic growth, high debts, ethnic conflicts, resource tensions and environmental degradation. This phenomenon has been described variously as ‘resource curse’ or ‘resource trap’. In order to escape from this ‘curse’ or ‘trap’, several workshops and lectures have been organized in the country to identify the most sustainable model of managing Ghana’s oil resources especially the revenues expected to be generated. There seem to be no consensus however in respect of not only the revenue management model to adopt but also on whether prudence comes before transparency.

SAVINGS VERSUS STABILIZATION FUNDS

Two models of revenue management which have dominated the debate and consultations are – the Savings Model and Stabilization Model. In fact several resource rich countries have either models or both. Whiles the former advocates an intergenerational equity or what Friedman referred to as ‘Permanent Income Hypothesis’, the latter favours sound macroeconomic management. Stabilization Funds accommodate the effects of oil price volatility as well as avoid pro-cyclical spending usually associated with macroeconomic instability.

However, it appears the debate and consultations so far have weighed on the side of prudent management of oil revenues with little attention paid to transparency and broad governance concerns. But how can resources be managed prudently without transparency?

So far, the country is suffering from the non-transparent process of selecting an FPSO as the production model to be used at Jubilee. The model certainly shortchanges the country’s expectations of job-creations at the mid and downstream sectors and the resultant promotion of petrochemical industrialization envisaged by government in its 2010 budget and policy statement. What this prompts the country about is that the choice of a revenue management model should not be divorced from our developmental priorities and economic viability within a transparent process. It must be noted that both Savings and Stabilization Funds do not by themselves ensure prudent management. They are usually operated through institutions whose operations must be governed transparently so as to avoid mismanagement, misapplication, diversions and inadequate disclosures. Thus, transparency as a governance tool goes beyond transparent processes of choosing a model of revenue management. Indeed, all aspects of the oil sector – from policy, legislation, upstream to downstream operations, payments and revenues collection and administration; and revenue utilization require transparent processes if the country is to escape the ‘resource trap’ syndrome.

DOES TRANSPARENCY REALLY MATTER?

The government announced its intentions in early 2009 to disclose petroleum agreements publicly. This assurance was timely as there were fears as to whether Ghana would be transparent in its petroleum operations. However, the recent complaints by the Chairman of the Parliamentary Select Committee on Energy at an Oil Forum about lack of access to petroleum agreements and contracts have raised more questions than answers regarding transparency in the oil sector.

The truth is that most resource-rich countries that have not shown transparency in revenue management have performed poorly on the Corruption Perception Index. Some of these countries in Africa such as Guinea, Nigeria, Congo D.R., Zambia and Ghana are at the bottom of the World Bank Human Development ranking. Thus, there exist strong negative relationship between transparency and levels of corruption and human development. The less transparent a country, the more corrupt and underdeveloped it is.

IS DIRECT DISTRIBUTION OF REVENUE THE ANSWER?

A proposal for direct distribution of oil revenues to the citizens has been touted as the most transparent model of revenue management and which also ensures citizens’ accountability. This practise is quite successful in Alaska in the United States and the Canadian City of Alberta. But the feasibility of the model owing to poor data and poor institutional structures in Ghana makes this model far from reality.

There are also economic reasons likely to affect the use of this model. First, as a result of oil price volatility, annual receipts are likely to vary which may create cyclical problems and thereby distort macroeconomic fundamentals. Second, such transfers may be expended on non-productive ventures or on imports and thereby adversely affect domestic productivity and the growth of the local economy. Therefore, while this model may be very transparent according to its design and operations, the Ghanaian economy and governance structures may not yet be ready for it.

ARE GLOBAL TRANSPARENCY INITIATIVES THE ANSWER?

There have been global efforts at ensuring transparent management of oil revenues including Publish What You Pay (PWYP), Extractive Industries Transparency Initiative (EITI), IMF Guide on Resource Revenue Transparency, Follow the Money, Drilling Down, etc.

Ghana endorsed EITI in June 2003 in its mining operations. However, the country like many others is not yet compliant. The EITI by far is most popular and most applied even though subscription is voluntary. In spite of this, it constitutes a giant step towards comprehensive transparent management of oil revenues. Civil society has however raised serious concern about the voluntary approach of EITI which is likely to let worst offenders escape from scrutiny and has therefore called for mandatory compliance. Also, the refusal by the World Bank and IMF to use it as conditionality for lending has been very disappointing. But whether such conditional borrowing has not outlived its usefulness is another question to answer since some oil-rich countries in the developing world have resorted to borrowing from China who usually turns a blind eye to the governance record of borrowers. Also, the current form of disclosure is at aggregate level which does not expose discrepancies by sectors and type of payment. The need for disaggregated disclosures has been strongly recommended.

Thus, these global initiatives have introduced important benchmarks on which to assess a country’s performance in the management of its natural resources. They are however not biting enough and do not prescribe punitive actions against offenders.

OBSERVATIONS AND THE WAY FORWARD

As observed earlier, Ghana has been on the EITI process in mining for about six years now and yet still not compliant. It has also been very difficult to visibly see the benefits of mining operations even though its negative effects such as environmental degradation and underdevelopment of mining communities are quite prominent. We need to review the lessons from mining and apply them to the emerging petroleum sector.

As a good sign, the country must extend its EITI endorsement to the oil and gas sector. There have been issues of transparency in the oil sector of the country which require prompt review. Petroleum agreements are not known to the public and licensing has not been opened to public scrutiny. There are also worrying signals regarding the delay in passing a new Petroleum Revenue Bill, the passage of the Freedom of Information Bill and the choice of FPSO as a production model.

What the country needs to do now to prepare itself for transparent and prudent management of the oil resources include; strengthening of parliamentary oversight especially the role of the Parliamentary Select Committee on Energy, giving legislative backing to the EITI along countries like East Timor and quite recently Nigeria, strengthening community oversight, expanding the capacity of revenue collection agencies especially with regards to tanker metering design and operations.

Another area worth looking into is the role of GNPC, the state oil company - whether it will be commercialized in line with its mandate provided for under PNDCL 64 of 1983 or restructured to be a regulator or passive state representative in petroleum operations; retains its revenues or pay part to the government, whether it will pay taxes on its take to the government or will be tax-exempt to build its Reserve Fund for promoting explorations, and how transparent will be the relationship between it and the government. This is important because experience has shown that National Oil Companies (NOCs) are the most non-transparent in the oil sector, which it is believed has accounted for the insignificant number of NOCs that are publicly listed on Stock Exchanges around the world.

Ghana has already chalked a giant record in its democratic journey which has attracted the attention of the whole world. The achievements are not only due to transparent and free elections but also because of the mechanisms put in place to promote transparency and accountability in public life such as the Procurement Act, the Financial Administration Act, the Whistle Blowers Act, etc. The oil sector has once again presented Ghana another platform to deepen its democratic ethos through transparent management of its oil resources and revenues. We should therefore not be cited after 20 years as another candidate of ‘resource trap’.