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Potential Implementation Challenges of the Petroleum Revenue Management Act (Act 815)

Mohammed Amin Adam (Coordinator: Civil Society Platform on Oil and Gas)

Presented at the MDBS Annual Review Meeting

1.0. Introduction

The Petroleum Revenue Management Act 815 is one of the major steps taken by Ghana since the Country began the development of the policy and legal frameworks to manage expected oil and gas revenues. The Act is the result of wider consultations and I am happy to state that civil society feel empowered because most of the recommendations we made were taken on by both government and parliament. The provision to establish a Public Interest and Accountability Committee is another demonstration by our country to set good examples of how petroleum revenues can be managed transparently. Indeed, a good model of managing petroleum revenues must take into consideration the political economy side, and this Act exactly does that through the institution of extensive transparency provisions including quarterly and annual reporting to the people of Ghana. In fact, Ghana’s model of transparency in petroleum revenue management is stronger than the EITI by extending coverage beyond revenue transparency to expenditure transparency. So I can say that our law is a good law by all standards. But like all good laws in this country, effective implementation remains a challenge. The Petroleum Revenue Management Act will also likely face operational challenges and I would like to mention a few of them.

2.0. Transparency

Assessment of revenues is based on the fiscal terms which are negotiated in the petroleum contracts. But these contracts continue to be held confidential. There is also no open and competitive bidding for oil concessions including concessions where the country has quality data. It is therefore critical that revenue transparency will become meaningful with contract transparency so that we are all sure we are collecting the right amount of revenues due to the state.  In addition, there are some variations between national tax laws and the petroleum sector taxes. These need to be harmonized especially those relating to capital gain tax, withholding taxes and income tax exemptions for expatriate employees. This will simplify the administration of taxes in the petroleum sector, a major requirement for petroleum tax revenue accounting.

3.0. Regulations

Section 60 of the Act requires regulations to be made by the Minister to cover reference pricing, measurement of the quantity of petroleum and the operational and management guidelines of the Petroleum Funds. Our experience in this country shows that the regulations take time to come and examples are in the Minerals Act and the Disability Act. There are genuine fears that the regulations for petroleum revenue management may delay and which will subject very important assumptions in accounting for the revenues to Ministerial discretion, a practice that is unreliable and unpredictable.

 

4.0. Collateralization of the Annual Budget Funding Amount

I take note of the collateralization of the Annual Budget Funding Amount for 10 years, provided for in the Act. There is no doubt that with oil exports and petroleum revenue inflows, both the solvency and liquidity ratios of Ghana’s debt sustainability indicators will improve creating fiscal space for more borrowing. However, due to the serious problems with public financial management highlighted by the Auditor General’s Report, and the low technical and institutional absorptive capacity, Ghana is likely to accumulate more debts without a corresponding development value.

In the absence of fiscal rules that define targets for debt levels, we must develop a clear nationally owned debt management policy which among others will provide an exit strategy from oil revenue collateralization at the end of the legally mandated ten-year period. That is, it is not enough to provide that the collateralization of the Annual Budget Funding Amount shall be allowed for ten years, without a clear alternative debt substitution policy. If by the end of the collateralization regime, we do not have an alternative, I have no doubt that our politicians will amend this section of the Act to extend the collateralization regime.  The debt circle will engulf our country and affect fiscal sustainability, as well as postponing the burden of repaying unproductive debts to future generations, a situation that is morally wrong.

5.0. Creating Avenues to Deplete the Heritage Fund

Connected with future generations and fiscal sustainability is the provision for a heritage fund, which is not only meant for intergenerational equity but also to create an alternative stream of income to support our national budget when the petroleum resources are depleted. This is provided for in section 20 of the Act. Countries that are socially responsible have found an ally in the establishment of Future Generations Funds and Nigeria is the latest to join these countries only last week. However, this Act undermines itself by providing an avenue to deplete the heritage fund before the time for its spending is due. Section 10(4) allows Parliament to review the restrictions on the Heritage Fund to authorize spending of a portion of the interest accrued to the Fund.

There are genuine fears that with their high appetite for heavy spending, politicians are likely to abuse section 10(4) by using their numbers and parliamentary whip system to authorize the spending of the interests on the heritage fund and prevent the growth of its assets, especially when these abuses are frequent.

6.0. Building the Stabilization Fund

I will like to also draw attention to an obvious technical issue regarding the operation of the Ghana Stabilization Fund provided for in section 9 of the Act. Because of its counter-cyclical purpose and for expenditure smoothing, it is important that the Stabilization Fund is liquid at all times. This is why investment of the funds must be short-term reflecting crude oil price cycles. But considering the relatively smaller percentage of benchmark revenues that will be transferred to the Fund annually, we are likely to see an early depletion of the Fund when we experience sustained revenue shortfalls in the early years of oil production, and therefore the balance standing in the Fund becomes so insignificant to perform its counter-cyclical duty. In fact, Nigeria has tried to avoid this by deciding to put a seed amount of US$1 billion into its Sovereign Wealth Fund, which has a Stabilization component, to ensure that the Fund is liquid at all times. We need to do a budget re-engineering to safeguard the Stabilization Fund and the important role it is meant to play. The alternative, which is inconsistent with the law, is to freeze the deployment of the Fund for the first five years of production to ensure we have a good balance in the Account before we start spending it. But since, this is not provided for in the law, it is an issue we all need to contemplate over.

Finally, section 23 of the Act requires the Minister to determine the maximum limit of the Stabilization Fund and that any excess revenues above the limit shall be transferred to the ‘Contingency Fund or used for debt repayment’. But since the Act does not have jurisdiction over the spending of the Contingency Fund, which is based on Ministerial discretionary and governed by different rules, it is not clear what will be the remedy if the Minister decides to spend that money outside the priorities defined in this Act. Again, this is an issue we must resolve to ensure consistency in the utilization of petroleum revenues.

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Reporting Oil and Gas project was launched on 4th June 2009atTakoradi, Western Region, Ghana by Penplusbytes (PPB – www.penplusbytes.org) with the vision of providing a one stop online information and knowledge about Ghana’s oil and gas sector
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