Should oil collateral loans be completely banned in Ghana - some comments and suggestions

Kwame Mfodwo, Melbourne Australia

There is currently a public debate as to whether Ghana's laws should allow the relevant public authorities to use the country's petroleum as collateral for loans to undertake infrastructure projects. I will call these loans, oil collateralized loans (OCLs). The debate is centred around whether the following clause should be removed from the statute/bill.

5. (1) The assets of the Petroleum Account shall not be used: (a) to provide credit to the government, public enterprises, private sector entities or any other person or entity, and (b) as collateral for debts, guarantees, commitments or other liabilities of any other entity. (2) In order to preserve revenue streams from petroleum and ensure the object of this Act, there shall not be any borrowing against the Petroleum Reserves.

Currently the debate is highly politicized and therefore important issues are being overlooked. This short piece draws attention to some of the issues which in the author's view are being overlooked.

The author's position

I begin by stating my position in a summary way. I essentially think that this financial instrument can be used by Ghana at some point in the future – say 5 years from now, when we understand petroleum revenue issues much better. They should therefore not be rules out completely. Using them now however may not be appropriate. The Petroleum Revenue Law should however be set out in such a way as to permit their limited and highly controlled use when the time is right. That time is probably not now as we lack the understanding of how the current revenue management framework will work.

The rest of my argument is as follows:

A. There are good and bad ways of structuring OCLs

A number of countries offer very bad examples of such loans. Angola and Nigeria are two good examples. Increasingly however much better approaches have been designed bu Brazil andf Mexico after very bad experiences in the 1980s. Should we adopt this approach, we should seek to understand and adapt these examples.

B. Oil collateralized loans pose a high risk and should not be adopted by a country which lacks a serious development plan

This next point is obvious. The country should only support the use of such loans in the context of a national plan framework which indicates clearly how, where and for what such loans would be used.

C. We need to better understand the types of risk posed by OCLs.

The principal risk posed by such loans has recently been set out by a Ghanaian economics expert based in Canada. He does not for these reasons support the use of such loans. He writes:

While a contract may not explicitly state that petroluem reserves will be used as collateral, these reserves will implicitly be factored into the size of the loan that a lender will be willing to offer and the size of the loan that a borrower can negotiate. Under "future flow securization", the lender must form expectations (projections) about the future flow of revenue which, inter alia, depends on the future prices of crude oil, the reserves of oil, and a discount factor…. the main problem is that without good checks and balances, we may find ourselves in situation where we have collateralized future streams of revenue from oil to the extent that X years from now, we will not have the revenue from oil available to us because it is being paid into an offshore account to meet our financial obligations. Therefore, by borrowing against future oil revenue, a government can enter into sufficiently long contracts that have the same effect as using our petroleum reserves as collateral.

This is the key danger with rushing into OCLs without thinking them through fully.

D. A small tightly defined window permitting collateralised loans can probably be fitted into Ghana's current petroleum revenue arrangement scheme

My comments move on now to set out an approach that we can use to manage OCLs in the future should we decide that we wish to use them to back accelerated industrialization principally through construction of infrastructure

1. As a purely technical legal and accounting/revenue tracking matter, the current Petroleum Revenue Management Bill is sound and demonstrates that high level efforts have been made to seriously clarify the future revenue streams associated with Ghana's petroleum – the current government and the relevant public servants are to be commended for this effort.

2. As a consequence, when the time is right, adding on another strand to the current law should be fairly straight forward provided the necessary technical policy work has been done.

3. That addition would state that petroleum receipts can be used as collateral for specific narrow categories of loans in selected high priority infrastructure areas - this can be a distinct and detailed section of the statute, backed by another detailed law.

4. A limit as to how much revenue can be used as collateral for specific narrow categories of loans should be specified - detailed and specific rules can be drafted in a separate statute with Constitutional protections attached.

4. There other limits/issues that are relevant- detailed and specific regulations to address these can be drafted, they need not be in the main statute itself.

E. Use of OCLs must be backed by a tight public accountability, sanctions and control regime.

This is a critical issue and can for the future integrity driven use of OCLs be addressed as follows:

1. The proposed petroleum revenue management legislation already provides a network of surveillance and accountability controls which with further tightening can police OCLs.

2. The heart of that regime is the Public Interest Accountability Committee under section 56 of the Bill/Statute and comprising the Trade Union Congress; National House of Chiefs; Association of Queen Mothers; Association of Ghana Industries and Chamber of Commerce; Ghana Journalists Association; Ghana Bar Association; Institute of Chartered Accountants; Ghana Extractive Industries Transparency Initiative, and Academia.

3. This Cttee should have clearly defined powers to provide oversight over Ghana's OCL portfolio and should meet every 2 months to get briefings – with the briefing report given to them made public - in the course of the year, 6 reports would therefore be made public providing information to the public (and to Ghana's debtors) of the volume of public debt attached to future petroleum flows. Also representatives of the organisations at these meetings wouldrequire training and/or can be qualifuied professionals apointed to that Ctte on behalf of the organisations.

4. The Cttee should have powers to block a specific OCL or any further OCLs where they see that problems with respect to the small portfolio of oil backed loans is about to occur.

5. The Ctte's reports, including those given to them by the Bank of Ghana, should be made public a certain number of days after the relevant meting of the Cttee or after the passage of a specified event

6. Failure to publish information can again be Constitutionalised, including that any one of the particular specified guardian organisations, can make a request in a specified format and that failure of the relevant authorities to release such report shall constitute contempt of court or shall trigger appointment of a special investigator or some other high level protection - there are a number of choices.

7. The kinds of information required to make a decision about danger can be written into each individual OCLwith the proviso that failure to provide the required information on the part of any of the actors in the chain will immediately trigger nullification of the agreement.

8. In the case of the Ghana officials associated with key points in the chain, imprisonment and forfeiture of assets can be made a penalty; for non-Ghanaian transactors other penalties can also be designed in such a way as to make them onerous and can involve participation of third party international actors in such a way that it has teeth.

9. Sanctions for breaching limits and other rules including imprisonment and forfeiture of assets of the relevant officials should also be specified.

10. Parliament should not approve any OCLs where there are clear red flags in these reports.

11. Approval of all OCLs should follow high level voting criteria for public contracts which get around the current system of party based voting so MPs can vote in the national interest.

12. Additionally,and finally, there should be a public contest period of two momths in which any proposed OCL can be taken to the Supreme Court on specified grounds - a special panel of the Court including the relevant economic experts can then rule as to whether such a contract is constitutional (in the national interest) or not.

Conclusion.

The proposal here has many deliberately designed hurdles and obstacles to make sure that the OCL is not just a commercial instrument. The checks and balances make the process cumbersome for the investor but protect the public interest. It is the only way we can guard against the dangers of Angola and Nigeria.