Getting It Right With Oil

2. August 2018

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The discovery of oil in 2007 was seen as potential to fuel Ghana’s economic development. Despite this, Ghana is still crippled with several economic and social problems. Poor policies in the oil sector, manifested in the form of poor taxation, have led to loss in government revenue. Low revenue has worsened existing government borrowing, in turn plunging the country into perpetual deficit and public debt. Can Ghana tap the full benefit of its natural resource – oil – to shore up government revenue for development?

The political dimension of a country is critical to the success of its oil exploration. Politics in Ghana have changed since the discovery of oil. Politicians have allegedly been colluding with oil companies, rent seeking, and engaging in political patronage. A weakness in Ghana’s oil governance is the absence of a right to information law. As such, governments’ contractual agreements with oil firms are shrouded in secrecy and not disclosed to the public.

The tax rate levied on extractive firms is the foremost share of revenue that host countries benefit from in the use of their natural resources. The existing 35 percent corporate income tax rate in Ghana’s Petroleum Agreement[i]is depriving the country of the maximum revenue that could be earned from its natural resources. In the 2016 Budget statement, corporate income tax constituted only 3.4 percent of the total petroleum receipt—total revenue from petroleum—for the year 2015.[ii]In Norway, petroleum extractive companies are subject to both a company tax rate of 24 percent and an additional special tax of 54 percent.[iii]Australia has a petroleum resource rent tax (PRRT), which is a general tax on profits generated from the sale of marketable petroleum commodities such as crude oil, liquefied petroleum gas. Such examples demonstrate the ways in which it is possible to benefit from better natural resource management.

Meanwhile, extractive companies in Ghana’s oil sector are reaping excess rents at the expense of the state. The price of oil has always exceeded the cost of its extraction. The surplus is the rent (excessive profit), which is initially wholly under the control of the company that extracts it. Usually, as in Norway, the transfer of the host country’s share of the rent from the extractive company is done through taxation. If Ghana is to benefit from its natural resource, the accruing rents of oil extractive companies have to be taxed progressively. If properly taxed, the rents could provide revenue for development and curb unbridled borrowing by the state.

A study by the Ghana Institute of Governance and Security (GIGS) revealed that until March 31, 2014, Ghana earned only US$2.089 billion from oil while extractive companies earned a whopping US$8.448 billion.[iv]The state must impose progressive taxes on the excessive profit made by these extractive companies. The Ghana Revenue Authority (GRA) has the onus of ensuring that extractive companies are taxed properly.

The root of institutional challenges for countries with concentrated natural resources is the “principal agent problem”.[v]Institutions that are tasked with managing oil resources on behalf of the citizens are often weak. Ghana’s tax authority – the GRA – lacks the capacity to effectively cost audit the oil exploration companies for tax purposes. According to the Deputy Minister of Energy, Amin Adam, “Oil companies conduct self-assessment for the purpose of determining their tax liability and government just accepts that”.[vi] Poor administrative capacity coupled with ineffective tax policies has cost the country millions of dollars in revenue. Ghana’s —and for that matter Africa’s—biggest economic opportunity remains the exploitation of its natural resources. Yet harnessing these natural resources for future economic development requires an effective state policy.[vii]

Bad contracts have also led to Ghana’s loss of its natural resources. Similar to many oil-rich African countries, Ghana has signed bad contracts with extractive firms. These contracts give a disproportionate share of the resources’ value to private foreign companies. The contracts nearly cede the country’s resource ownership to foreign companies. For instance, media information from a recent agreement with Exxon Mobil states that the firm will pay no duty or other charges on its exports, including vessels used in transporting the crude oil. In addition, Value Added Tax (VAT) liability was waived, while the firm is allowed to repatriate 100 percent of its earnings.[viii]What can Ghana do to amend these bad contracts?

The answer to this problem, however, is simple: renegotiation.[ix]Of course, natural-resource companies will push back, threaten to leave and discredit the host country to stop the renegotiation, but the outcome is typically otherwise.[x]Fair renegotiation can be the basis of a better long-term relationship.[xi]Developing countries, such as Botswana, and some developed countries —Israel, Australia—have already renegotiated contracts, laying the foundation for growth in their economies. Ghana can follow this proven path to maximize its oil revenue. The renegotiated contracts should be transparent—necessitating a right to information law— and should ensure that if prices soar, the windfall gain goes to the state.

Governments must also not hastily lease out oil fields to new extractive firms. Resources not extracted today are still around tomorrow—they do not disappear.[xii]It may be preferable to leave the resources in the ground and put in place laws to maximize returns from them.

Given the poor revenue received from Ghana’s “black gold”, there is intense pressure to use oil revenue for current spending rather than to invest it in assets that will be productive over time. Since the onset of Ghana’s oil revenue in 2011, the share of public investment in GDP has fallen, while public sector wages have risen by around 50%.[xiii]

There is a need to divert oil revenue into investment for future development. It is worth to note that, if resource wealth is not re-invested into productive investments above ground, Ghana is actually becoming poorer. Oil has volatile prices on the world market, creating macroeconomic instability for countries that depend heavily on it. Low prices cause deterioration in fiscal accounts and put pressure on external payments, amounting to debt crisis. Also, the so-called Dutch disease hurts the competitiveness of the non-oil sectors creating unemployment and enriching only a few, like in the case of Angola.[xiv] It is therefore imperative to reinvest the oil wealth into employment-creating growth. The creation of a national Heritage Fund from Ghana’s oil revenue is a good step. However, expenditures from the fund should be earmarked for infrastructure, education and other long-term investments in order to prevent politicians’ discretionary use of the fund.

Ghana needs responsible economic management to seize this opportunity and convert its natural assets into productive assets. The absence of effective state policy (taxation) in the extraction of Ghana’s natural resources has created leakage in its revenue mobilization net. This leakage is contributing to its budgetary deficit and underdevelopment. While the aforementioned recommendations, if adopted, will increase the prospect of Ghana’s oil resource, they must be complemented with other policy reforms to propel economic growth.

 

References

Picture by Robert Seale for Maersk Drilling

[i]PriceWaterHouseCoopers, Tax Guide for Petroleum Operation in Ghana, November 2017, http://www.pwc.com/gh.

[ii]Ministry of Finance, 2016 Budget Statement of Ghana, accessed January 24, 2018, https://www.mofep.gov.gh/budget-statements/2016.

[iii]Norwegian Petroleum, The Petroleum tax system, accessed January 24, 2018. http://www.norskpetroleum.no/en/economy/petroleum-tax/.

[iv]Ghana Institute of Governance and Security, “Bad Contracts to cost Ghana $4Ob” last modified March 18, 2015, https://www.ghanaweb.com/GhanaHomePage/economy/Bad-contracts-to-cost-Ghana-US-40b-of-oil-revenue-Expert-350931.

[v]Alan Gelb, David Turner, “Confronting the Resource Curse: Lessons of Experience for African Oil Producers” World Bank, Washington D.C., 2007.

[vi]A taxing affair: Collecting oil revenues in Africa, last modified February, 18,2014, http:www.politicsofpoverty.oxfamamerica.org.

[vii]Paul Collier, “Africa: New Opportunities, old Impediments” 2014 Wincott lecture, October 2014,

http://www.theigc.org/wp-content/uploads/2014/10/Collier-2014-Speech-Transcript.pdf.

[viii]“The Bad and Good Sides of GoG, ExxonMobil Petroleum Agreement”, accessed February 19, 2018, http://www.reportingoilandgas.org.

[ix]Joseph Stiglitz, “Africa’s natural resource can be a blessing, not an economic curse”, last modified August 6, 2012,

https://www.theguardian.com/business/economics-blog/2012/aug/06/africa-natural-resources-economic-curse.

[x]Vernatius Chukwudum Oforka, The Bleeding Continent: How Africa Became Impoverished and Why It Remains Poor, (Bloomington: Xlibris Corporation, 2015)

[xi]Ibid.

[xii]Joseph E. Stiglitz, “Making Natural Resources into a Blessing rather than a Curse”, accessed February 19, 2018. https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/…/2005_Covering_Oil.pdf.

[xiii]Paul Collier, “Africa: New Opportunities, old Impediments” 2014 Wincott lecture, October 2014,

http://www.theigc.org/wp-content/uploads/2014/10/Collier-2014-Speech-Transcript.pdf.

[xiv]Stewart Patrick, “Why natural resources are a curse on developing countries and how to fix it” accesses July 23, 2018. https://www.theatlantic.com/international/archive/2012/04/why-natural-resources-are-a-curse-on-developing-countries-and-how-to-fix-it/256508/

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Isaac Newton Bortey

Isaac holds a masters degree in Development Policy and a Bachelors in Economics. His interests include macroeconomics and development policy research. He is a graduate of KDI School of Public Policy and Management in South Korea and a reviewer in Economic Policy, Development and Health for The Policy Corner. You can find the author on Twitter @nShonaa_boy.