Is the Finance Minister’s discretion on ABFA spending Helping Us?

Is the Finance Minister’s discretion on ABFA spending Helping Us?

by Ernest Armah

The Petroleum Revenue Management (PRM) Act 2011 (Act 815) and phase two of the Ghana Shared Growth and Development Agenda (GSGDA II) are two important documents which seeks to ensure good governance and management of Ghana’s oil revenues. These legislative and policy instruments hold fast to the principles of accountability, transparency, equity and inclusive development. Whilst the PRMA (Act 815) requires 70% of projected petroleum receipts (revenues) to be earmarked as the Annual Budget Funding Amount (ABFA), GSGDA II guides the management of ABFA funds by aligning it to long-term development strategies and medium term expenditure frameworks as approved by Parliament (section 21(2)d).

ABFA is the share of petroleum revenues that is allocated to the annual budget of the Government to support development financing. The purposes of ABFA are two-fold; accelerate economic development and approbate equity in the distribution of national wealth (oil). In the absence of a long-term development plan, Section 21(3) of Act 815 lists 12 areas ABFA should be invested in. They include:

  1. Agriculture and industry;
  2. Physical infrastructure and service delivery in education, science and technology;
  3. Portable water delivery and sanitation;
  4. Infrastructure development in telecommunication, road, rail and port;
  5. Physical infrastructure and service delivery in health;
  6. Housing delivery;
  7. Environmental protection, sustainable utilization and protection of natural resources;
  8. Rural development;
  9. Developing alternative energy sources;
  10. Strengthening of institutions of government concerned with governance and the maintenance of law and order;
  11. Public safety and security;
  12. Provision of social welfare and the protection of the physically handicapped and disadvantaged citizens.

It could be recognized that any attempt to spend ABFA on all these 12 areas simultaneously will minimize benefits and affect the overall impact of petroleum receipts on Ghana’s economy. It is on this basis, in addition to other considerations, that the Minister of Ghana’s Finance Ministry is given discretionary powers by section 21(5) of Act 815 to prioritize at most four areas for the use of petroleum receipts. This prioritization is subject to review every three years. But shortening 12 areas to four is a shift from good to better, certainly not the best and “we are spreading ourselves too thin”. According to the African Centre for Energy Policy (ACEP), the ABFA spending portfolio should be reduced to two priority areas (agriculture and education). The centre alludes to countries like Brazil, Botswana, Indonesia, Malaysia and Trinidad and Tobago where their resource revenues are invested in either one area or two areas; or one dominant area and two other areas. Prioritization of one or two areas for resource investment have been shown to have a “quick multiplier effect on the economy” availing good prospects for poverty reduction.

From 2011 to 2015, a total ABFA funds of GHS2,995,750,000 has been allocated and disbursed to four priority areas, which includes expenditure and amortization, road infrastructure, agriculture modernization and capacity building (see table 1 below).

 

 

 

 

 

Year

Table 1

 

 

Total amount disbursed

(GHS ‘mil)

 

Allocation to prioritization areas

(GHS ‘mil)

Expenditure & amortization of loans for oil and gas infrastructure Road infrastructure Agriculture modernization Capacity building (including oil and gas)
2011 261.54 20

(7.6%)

227.64

(87%)

13.15

(5.0%)

0.8

(0.29%)

2012 516.83 100

(19.3%)

232

(45%)

73

(14%)

112

(21.7%)

2013 543.78 137.9

(25.4%)

372.07

(68.4%)

13.6

(2.5%)

20.18

(3.7%)

2014 549.4 163

(30%)

215.7

(39%)

170.6

(31%)

2015 1,124.2 439.23

(39.1%)

483.35

(43%)

59.54

(5.3%)

142.10

(12.6%)

 

Source: National Development Planning Commission; Ministry of Finance (2011-2015)

Investments into road infrastructure, agriculture modernization and capacity building aligns with policy objectives of employment creation; local content development and participation; and linkage of the petroleum industry to the rest of the economy. However over five years and counting, road infrastructure has received a significant chunk of ABFA whilst capacity building has received the least (no allocation was made to this area in 2014). For local professionals and industries to effectively participate in the industry, getting the requisite capacities is a sine qua non. Thus it did not come as a surprise when the National Development Planning Commission (NDPC) repeated recommendations for inclusive development and local participation in its 2015 report. But the root cause of this funding asymmetry is the discretionary power of the Finance Minister to prioritize.

Prioritization of areas for investment had called out a litany of questions, suggestive of potential abuse of this discretionary power for political gains. Spreading across several projects generate good optics likely to draw mass support. It creates impressions on the minds of the people that government is working. However these projects have “suffered time-over-runs and cost over-runs” as a result of irregular disbursement of ABFA. In a report published by ACEP (undated) are two evidences to this effect:

  1. In 2013, the Ghana cedi equivalent of US$24 million was allocated to the Ghana Highways Authority. The money was spread over 63 road infrastructure projects covering 2135 kms. This translated to US$11,000 per km of asphalt road, far lower than the official cost;
  2. Also within the same year, US$96 million to the Department of Urban Roads was used to pay arrears to road contractors.

The next question is the basis for prioritization. The Civil Society Platform on oil and gas posed this question in respect of use of the oil revenues to service debts. According to the group, “although expenditure and amortization of loans for oil and gas infrastructure may be relevant to Ghana’s current circumstances, there is no provision in the law for using the oil revenues to pay back loans that do not fall under the provision for collateralization. And since we do not know if the ABFA has already been collateralized, it remains unclear why the ABFA is being used to finance non-oil collateralized debts”.

Whilst the size of our ambition should commensurate with the “modest levels of oil production”, there should be stringent measures to eliminate discretion in the management of petroleum revenues. This cedes too much power to the Finance Minister which to subject to manipulation by the executive arm of government.

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