US JOINS OIL WAR
By Emmanuel Akli
It was initially projected to rake in a whopping $1 billion annually, but after being reviewed, the figure was slashed down to $580 million, which is a drop in the ocean considering Ghana's revised Gross Domestic Product (GDP) of GH¢45.9 billion.
But before this meager income could even flow into our mainstream budget for development, it has already generated controversy. That, in brief, is the story of the oil find in Ghana.
Revering over new revenue that is going to accrue to the economy, the government, after the announcement of the oil find in Ghana in 2007, quickly set in motion a process to fully harness the resource. After wide consultations with stakeholders, Cabinet came out with a draft Petroleum Revenue Management Bill, which has currently been placed before Parliament for ratification. Clause 5 of the bill reads:
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.
5(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.
But, with the reported annual infrastructural deficit of $2 billion, and the desire by the Atta Mills administration to set up two universities in the Volta and Brong Ahafo regions, construct the much-talked about eastern corridor roads, and also extend the railway line from Kumasi to Yendi, through Tamale, which are all capital intensive, the government decided to have clause 5 of the bill amended, to enable her use future receivables from oil as collateral to source loans.
The decision has, however, generated heated debates, both in and outside Parliament, with some fearing that if the controversial clause in the bill is amended, it would lead to unbridled borrowing and expenditure, which would eventually lead to huge budget deficits. In 2008, Ghana recorded a budget deficit of 14%, which compelled the current Trade and Industry Minister, Hannah Tetteh, to state that the nation was broke. The Atta Mills government promised to bring down the figure to 7.4%, but has so far achieved a little over 8%.
Mohammed Amin Adam
With this experience, can Ghana manage the expected inflow of $10 billion into the economy, after the amendment of clause 5 of the Petroleum Management Bill, without recording another huge budget deficit, as happened during the Kufuor administration in 2008? That was the question this reporter posed to Mr. Mohammed Amin Adam, an oil expert.
Adam, however, thinks the government cannot manage such huge resources without creating room for another budget deficit. To him, with the re-basing of the economy, which has catapulted Ghana into a lower middle income country, the only way the government can contain the situation, without experiencing huge deficit in the budget, is to raise taxes between 40% and 50% within the next five years, to raise enough domestic revenue to match with the expected huge expenditures.
He, however, thinks the government cannot muster the courage to do that, and, therefore, any attempt to resort to huge borrowing, would throw the economy out of gear. He argues that already, 70% of the oil revenue would be spent through the budget, therefore, if the clause is amended, and proceeds from the oil are used as collateral to secure loans, which would also be spent through the same budget, it would mean the government will be doing double spending from the same petroleum revenue, which would not serve the best interests of the country, and that it could create huge fiscal deficits.
Amin advised the government to take a cue from Nigeria, which resorted to the same collaterisation of its oil revenue, and ended piling up debts to the tune of over $32 billion. According to him, prices of oil sometimes fluctuate on the international market, therefore, if revenue from the sector is used as collateral, re-payment of the debt would become problematic if the prices tumble. To him, therefore, the collaterisation agenda being propagated by the government should be discarded.
Kwamena Essilfie Adjaye
An Economic Consultant, Kwamena Essilfie Adjaye, disagrees with the argument, contending that projected revenue could be used as collateral, which has been the practice since time immemorial.
However, according to him, before a foreign creditor extends facility to a borrowing country, the authorities in the lending country first study the ability of the borrower to repay the loan. They also look at the borrower's ability to generate enough domestic revenue, as well as her foreign exchange portfolio.
He noted that future earnings from oil would definitely become foreign exchange earnings for the country, therefore, using it to secure loans should not be a problem.
Mr. Adjaye further told The Chronicle that every year the Ghana Cocoa Board (COCOBOD) goes to the international finance market to raise loans from syndicated banks to purchase cocoa. This, he contended, meant that COCOBOD has been using foreign exchange from cocoa to secure these loans.
To him if there is opposition to the amendment of clause 5 of the Petroleum Revenue Management Bill because the government would use the revenue unwisely, then conditions must be set for the use of revenue as collateral instead of objecting to the entire idea being propagated by the government.
He stated that if the use of these revenues had been proscribed, cocoa could not have been used in the past for the same purpose. 'The question is – why are we then proscribing against oil? It will amount to discrimination.
He, therefore, suggested that strict measures should define the type of credit, the duration, and other conditions that come with it, so that the financial viability of the Heritage Fund is not undermined.
In the draft Revenue Management Bill, 70% of all revenues (and this includes royalties, surface rentals, initial carried interest, corporate income tax payable from the National Oil Company, taxes in cash from upstream and midstream petroleum businesses, capital gains tax from sale of ownership of exploration, development and production rights, and more) form part of annual budget resources.
The 30% remainder is split between a Heritage Fund (30%) and a Stabilization Fund (70%). Therefore, of the total petroleum receipts, 9% is for the Heritage Fund, 21% for Stabilization Fund and 70% for budgetary support. All these receipts accumulate in the Petroleum Account. It is this account that is restricted by clause 5.
'Now, do we have the potential to identify and acquire enough knowledge and learn to manage projects ourselves? To complete mega projects, build railway lines from north to south, and build roads along the Eastern corridor, we need initial help.
'Once we have been helped, would we have built sufficient knowledge capacity to take on these projects ourselves in the future? Before we throw 100% of our GDP into the economy, we should have the absorptive capacity to become receptive to acquiring and assimilating external knowledge,' argues Mr. Sidney Casley-Hayford, another Economic Consultant, in Accra.
Expressing his views on the issue, Casley-Hayford said petroleum revenue would accrue on a gradual basis throughout the year. 'Rather than accelerated borrowing from day one, we should take the revenue as it comes, and feed that into the economy, allowing our capacity to grow and take on the challenges, as it learns from its mistakes. Gradually, we will become capable of doing the larger projects without external supervision.'
To him, Clause 5 of the bill must stand as the collective wisdom of Ghanaians, and politics must take a back seat to financial and development prudence. 'Ghanaians have said in clause 5 that they are not comfortable with handing unfettered control of the petroleum revenue to politicians.'
The ordinary man
Whilst government officials, the opposition parties, and financial experts battle on whether the controversial clause 5 should be amended or retained, most of the people for whose interest this debate is going on, appear not to know anything about the development.
Some of the people interviewed on the streets of Accra told The Chronicle that they were not aware of the subject. Those who claim to have heard the news also seem to have limited knowledge about the subject. To them, they have heard on radio that the government was trying to sell the oil, but could not explain how this was being done.
Enter US Congress
Meanwhile, the United States of America (USA) Congressional Report, headed: 'Ghana, An Emergent Oil Producer: Background and U.S. Relations,' authored by Nicolas Cook, a Specialist in African Affairs and dated December 1, 2010, has predicted that the Petroleum Revenue Management Bill Act 2010 might not pass as quickly as the government had projected.
In late 2010, the Ghanaian Parliament was considering the passage of two oil sector bills, entitled the Petroleum Revenue Management Act, 2010, and the Petroleum (Exploration and Production) Act 2010, both drafted by the executive branch, after public and private sector consultations.
The government has fast-tracked the passage of the bills, which are designed to govern the development of Ghana's new and rapidly growing oil and gas sector, and ensure public benefit and transparency, as well as the efficacy regarding the receipt and use of what is expected to be a large influx of energy revenues.
The revenue management bill, however, is the subject of internal Parliamentary disagreement, and may not pass as quickly as the government had projected,' the report stated.
Read details of the report in our subsequent editions.