As Ghana gears towards ‘first oil,’ 15 December to be exact, its law and policy-makers scramble to create legal regimes designed to stand the test of time and set Ghana (unlike its African counter-parts) towards the non-resource curse path. To achieve this end, the government and its policy advisors over the past year have intrigued the populace with an array of policy options, some designed to provoke public debate, others clearly not, but all with the hope of pointing the country towards a prudent and well-managed natural resource sector. Included in this list of policy alternatives is the design of a revenue management regime for the country’s nascent petroleum sector. As well as a thoughtful and well conceived licensing regime and contractual basis, the management of natural resources like Greek columns should ideally be supported by concrete revenue provisions.
It is on this background that the Petroleum Revenues Management Bill (PRMB) was recently put before the Ghanaian Parliament’s Select Committee on Mines and Energy. Unlike its sister, the Petroleum (Exploration and Production) Bill 2010, the PRMB has sparked tremendous controversy and public opinion, not least because at the heart of the PRMB lies its core aim, that is how revenues accruing from the petroleum rents would be managed and allocated. So far buzz words are determining the agenda; “no to collateral,” “yes to Collateral,” “public accountability,” “transparency.” Buzz words, it seems, that have left the general populace mystified by the whole process. A general note to a friend recently ended with “so what is the situation on ground like in Ghana at the moment?” His reply, “Oh, cloud-cuckoo land mostly!” Cloud cuckoo land indeed!
To bring us all back from the brink of cloud-cuckoo land, it would perhaps be prudent to take a detailed glance at the Bill section by section to ascertain some major areas that might be of concern, and where a close scrutiny, it is presumed, might offer a discerning and more informed public discourse. As one author posited in the renowned publication by Joseph Stiglitz and co, in Escaping the Resource Curse, a “resource dependent economy, the magnitude of [resource] receipts, and the difficulties of control suggest the need for [a] special legislation directed to the particular problems posed by such revenues.” The publication is designed to offer a comprehensive analysis of essential aspects needed in any forward looking revenues management law, a sort of best practices manual so to speak. The authors’ focal point is to ascertain how governments can structure their laws so as to build effective revenue management institutions. In comparing the recommendations from various such publications and looking at particular country specific case studies, this note is intended to share with the reader international best practice models in relations to analysing the strength and deficiencies in the current PRMB. My findings therefore are as follows:
First glance of the PRMB makes a good read. Overall the "PRMB" makes a fair attempt at covering all the necessary provisions needed for a nascent oil and gas industry, while at the same time attempting (though in some cases not succeeding) to pay attention to a Country specific design, that is, not being viewed as a copy-paste publication. However novel this attempt is, the novelty wears out when one discovers a seemingly novel Bill that lacks in some parts Greek columns to hold them up. That is, there were certain best practice provisions that, without having to employ the copy-paste design, were either missing or frankly vague at best. So let’s take a step by step approach in analysing the provisions of the Bill as it stands.
1. Given the central importance of Oil Revenues, the management, transparency, the protection of oil funds may be enhanced by the establishment of separate segregated accounts: SECTION 2(1) of the Bill does so by first establishing the Petroleum Account, a general account to be designated at the Bank of Ghana which receives and disburses Petroleum Revenues due to the Country (including royalties, profit oil share, income taxes, participation funds and any other amounts related). Best practice stipulates that such a fund should be generally utilised predominantly for development funding. For a developing country (or as some would prefer, emerging economy) such projects would include the improvement of healthcare, infrastructure development, access to education, investment in non-resource based sectors and so on.
SECTION 10 (1) (2) establishes the Ghana Petroleum Funds, a general fund serving two purposes. First, it provides for a Stabilisation Fund, revenues from which are used only to restore budgetary imbalances, during times of fluctuating or low oil prices and or crises. Essentially when prices are high often times spending increases due to increased rents; when prices are low, however, such high spending cannot be sustained. This results in a stop-go form of development, the resulting effect being increased pressures to borrow, providing evidence as to why majority of resource rich countries become heavily indebted. Such a fund, thus, with its annual spending limits, is designed to avoid this problem since the formulas act to smooth expenditures even during periods of significant price fluctuations. Second, it provides for a Heritage Fund, a generational fund so to speak. Due to the non-renewable status of Petroleum resources, the Heritage Fund is designed for future generations as a revenue source when oil resources ran out. Without having to spell it out clearly, these provisions provide the back-backbone for a strong Bill.
2. In general one would expect the definition of revenue to be as comprehensive as possible. SECTION 6 makes such provisions. The definition of revenues in the section encompasses oil receipts, rents, government participation and so on. Another strong provision in the sense that, items not included in the general definition of the term would ideally be left out, creating avenues for revenue haemorrhaging, the first tell tale signs of corruption.
3. So far the bells of transparency have been ringing, another buzz word thrown around for public sentiment, but rarely ever explained. Transparency? Where? Are we discussing contract transparency? or is transparency a general term, thrown in because it sounds great and complies with international best practice? The Bill approaches transparency in several manners, mostly not clothed in the language of transparency but essentially achieving the same end. The first is designed to tackle the issue of transparency at the terminalling point, that is, at the point where funds are received to the account. To enhance transparency and to avoid possible diversion or delay, payments to the general account which receives the Petroleum revenues are stipulated to be made by transfer directly into the account by the entity bearing the payment obligation. SECTION 3 to that effect stipulates that the Petroleum Revenue assessed as due in each month shall be paid by DIRECT TRANSFERS into the Petroleum Account... Now considering the need for high levels of accountability and transparency a stronger provision would envisage payments to the account only by means of ELECTRONIC transfer so as to avoid cash-in-hand situation, yet another avenue for corruption. Electronic transfers enhance transparency as no physical monies passes through the bureaucratic arms of government or individual players. NOTE: The PRMB does not make provision for transfer by ELECTRONIC means, merely that it should be by DIRECT TRANSFER...Clearly this provision must be strengthened to state specifically ELECTRONIC.
4. While ordinary accounts may be subject to electronic transfer orders simply from the Central Bank, an oil account requires a more formal structure to provide protection where institutions are not strongly and deeply entrenched (such is the case in Ghana). In the Sao Tome and Principe case, for example, (which provides an excellent backdrop since in part the PRMB was modelled after Sao Tome’s), signatures of four officials from different government departments are required on withdrawal orders. Additionally in the Sao Tome example, it is even possible to delay the time between the withdrawal requests to actual receipt of funds outside the designated account. The present PRMB makes no such provisions, as such whereas strong transparency language may have provided a backdrop, the so called tooth needed to back up the seemingly strong animal is essentially missing.
5. It is also vital that any such revenue management regime provides mechanisms that deal with payments of the expenses relating to the funds as they are. These would include Custodial Charges, Payments of Investments Advisors, Transaction Charges and Possible Refunds (for instance, where over-payments have been made). In principle and practically, these are essential for a number of reasons. As the old saying goes, a job well paid is a job well done. This mantra is even more relevant in the Petroleum sector. A comprehensive detail of a compensation mechanism and the treatment of expenses for those to whom the country entrust its resource revenues seem only too natural. SECTION 9 addresses the expenses of the Bank of Ghana, who according to the PRMB is charged with the day-to-day management of the Petroleum Funds.
Now another buzz item in the news recently has been whether Ghana should vest such funds in-house or direct them to a Custodial institution outside the country. Though the author has opinions on this matter it seems an issue that deserves to be treated in much greater detail and therefore beyond the scope of this piece. However, in our present case, unless the Bank of Ghana has been known in the past or currently to have been mismanaged and or be corrupt, the author sees no reason, in this regard, to simply copy and paste international best practices.
6. A further control which might or might not be included in the instructions to the Custodial institution is the limit to which funds are to be transferred from the general account to the budget. International best practice would suggest a single annual withdrawal. Though this is one of the cases in which Country specific circumstances might stipulate different treatment. In Norway for example, there is no cap as such, withdrawals from the Oil Fund are set equal to the deficit in the budget, and the build-up of the permanent fund depends solely on annual discretionary decisions regarding the budget. The Saotomean Law establishes a limit by setting a single annual withdrawal to a certain percentage. The appropriate choice for Ghana would require country specific determinants. Setting a cap or limit to on annual withdrawals ensures over-spending is avoided; though another justification might be made for the Norwegian path and would suggest that for a developing country like Ghana where often budgetary deficits are common, flexibility should be the ultimate goal, a more flexible regime might be required to meet changes in annual spending patterns. Once again a very careful analysis keeping abreast of the situation on ground is ideal to drawing the best conclusions. As it currently stands the PRMB.
SECTION 19, attempt at addressing these concerns in sub-sections 1 and 2 which stipulate that “Beginning the year 2011, the Annual Budget Funding Amount from petroleum revenues shall be set within the range of fifty to seventy percent of the Benchmark Revenue…. The exact percentage of the Benchmark Revenue which shall be adopted as the Annual Budget Funding Amount shall vary from year to year guided by a medium-term development strategy aligned with a long-term development framework, the economy’s absorptive capacity and the need for prudent macroeconomic management.” It seems in this case the framers of the Bill attempted a middle-ground solution, where, though for the year 2011 the funding from the petroleum revenues accrued to the budget is limited to a range of 50 – 70% benchmark revenue, the Bill attempts flexibility for the determination of annual revenues to the budget from the petroleum account in the subsequent years: a fusion it seems of the Norwegian and Sao-Tome examples. A stronger provision would however attempt at creating flexibility even with the limits for the succeeding years.
7. Additionally a PRM Law must specify restrictions as to areas of use. Again, this follows the trend of international best practice. SECTION 22 makes such provisions, spending from the Petroleum Revenues are restricted to certain areas, including: agriculture, human resource development, infrastructure, and so on. Ideally, the trend should follow a national development plan, and or poverty reduction strategy, such as the case in Sao Tome, though the Sao Tome provisions are broad and make no specific arrangement for sectoral allocations. On the other hand, the Alaskan model of direct distribution to citizens should be avoided. A direct distribution plan “would work only if it were managed in ways that are uncharacteristic of most-rich developing country governments,” a main characteristic of which is the rent-seeking behaviour, which in the case of direct distribution would be shifted from government to citizens. One consequence of such a model would be to encourage large-scale migration, where new immigrants try to enter to benefit from such rents. The Alaskan model works in a sense because harsh weather conditions and the cost of moving has shielded Alaska and prevented large-scale migration from other U.S States. Therefore in the Alaska case, direct distribution is justifiable since on an annual basis there exists high predictability in population trends.
8. A PRM Law must also provide a clear governance structure covering the main oil fund asset management functions: that is, an Investment Policy, Selection and Oversight of Investment Managers, Selection of Custodial Institution. Coupled with lucid mandates these management functions should include a compensation policy and governance rules for oversight committees. SECTION 31 - 38, of the PRMB addresses rules governing the investment committee and its functions. SECTION 42 addresses the oversight and reporting of the Committee.
9. The Minister of Finance in particular plays a key role in the management of the Petroleum revenues. This includes his role in advising or approving investment decisions with the operational management of revenues delegated to the Central Bank, pursuant to a Management Agreement. The Minister of Finance’s duties will amount to general overseer of petroleum revenues, and his functions should amount to no less than a co-trustee. SECTION 26-27 makes provisions for these functions.
10. Furthermore, an oil revenue Law should limit an oil funds investment to certain secure and non-speculative instruments. SECTION 29 of the BILL deals with such provisions. Note, however, that the Ghana BILL does not stipulate the prohibition of investment within the country. Doing so would help limit political influence in the funds choice of investment. SECTION 5 does, however, prohibit borrowing against Oil revenues, a provision which is currently vulnerable. Basic understanding of the issue is being clouded by emotional sentiment and not necessarily prudent assessment. Simply put, by collateralising Oil revenues, the country will be setting itself up for vulnerability during hard times. For instance, in times of high oil prices it might seem agreeable to borrow heavily and vest much of that against the countries oil revenues, save for the fact that oil prices are highly volatile, this essentially means when prices drop as they have done time and time again, our spending patterns change, hence, the need for a stabilization fund (discussed above) during such times to balance the budget during the shortfall. Collateralising vests future revenues in the hands of lenders meaning that in times of hardship there will be no alternate avenue for fall-back, such that to give credibility to continued developmental projects which have the consequence of annual budget increases, the country would continue to borrow until borrowing can no longer be sustainable. Now this is a cycle can be avoid. A clear prohibition on borrowing against oil revenues is the surest way to avoid such a mishap.
11. Given the significance of oil revenues and the limitations on existing institutions, it may also be desirable to consider the establishment of additional oversight groups, especially groups that encompass the ideal of public participation, including civil society and other stakeholders, elements not represented in government. SECTION 53-59 authorises the establishment of the "Public Interest and Accountability Committee" (another provision currently under parliamentary attack). This section has come a long way from its infancy to its current state, the committee has shifted from being envisioned as a simple advisory body to an entity tasked with oversight duties, providing yet another avenue for custodial oversight. To be more effective, however, the Committee should be accorded decision-making powers or be conferred influential powers with regard to the direction of Petroleum revenues investment. Without such decision-making powers such a body can easily be overlooked.
12. Internal, External and Independent Auditing is covered by SECTION 46-50. Such auditors provide additional oversight but outside the ambit of government and public sector control. Their independence therefore must be assured. A detail stipulation of auditor independence is therefore essential.
13. No provisions are made in the current Bill for private pronouncement of rights or Judicial Controls. It is important that the roles of all arms of government are stipulated in the Bill. This includes the Judiciary and the limits of their powers, if any. Legal Sanctions are, however, provided for under SECTION 61.
14. Overall, the transparency provisions are much too vague and although section on ministerial discretion for determination of confidentiality was rectified (ministerial discretionary powers have been limited, to the extent that confidentiality may not be declared without Parliamentary approval), it seems overall the transparency features of the Bill are vague at best. A clear separation of items that might fall under the determination of confidential should be highlighted and like-wise items that do not fall under-confidentiality should be stipulated to further curb discretionary powers and limit opportunities to over-use such discretionary powers. SECTION 51 sets the transparency agenda.
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