Counting the benefits: Ghana’s oil wealth and development

Ghana must dispel the resource curse

The extraction of oil and gas generates enormous wealth. It creates powerful incentives that lift economies out of poverty to growth and development. Conversely, oil and gas and largely other natural resources have attracted the perverse phenomenon dubbed the “resource curse”, where the large wealth generated undermine the economic growth of most countries like Gabon, Nigeria, Chad, Sierra Leone, Azerbaijan, among others. The International Monetary Fund (IMF) projects that revenues from Ghana’s oil production will reach $1.3 billion per year by 2013 and remain at or slightly above that level until 2022. Again, under projections on Government revenue from Phase I of Jubilee Field production, the World Bank estimates the maximum available for budgeting to be US$250 million on average between 2011 and 2029. Ghana’s transition to an oil-producing status, therefore, represents a challenge for its economic, social and political compositions. If used well, revenues from oil and gas could generate greater prosperity and promote equitable development for both current and future generations.

Official production and commercialization of Ghana’s oil started in December 15, 2010. But the burning question; is the country, three years of being a Petro-state, now better positioned to prudently invest its oil revenues. Needless to say Ghana could benefit from prudent utilization of petrodollars. These benefits to accrue to the country in the upstream, midstream and downstream sectors of the oil economy could be economic, social and technological.

To begin with economic benefits, the country stands to gain from increased growth of its Gross Domestic Product. Revenues from oil are expected to be sizable, being estimated to average US$1 billion per year from 2011 to 2029, or about 5 percent of GDP (Bell, Heller and Heuty 2010). Through the Annual Budget Funding Amount (ABFA) as stipulated in the Ghana Petroleum Revenue Management Act, 2011 (Act 815), revenues will be made available to finance the development of sectors like agriculture, health and education for a diversified economy that supports poverty reduction efforts. These objectives are however not without challenges. According to the Public Interest and Accountability Committee (PIAC) – a major body created by the Petroleum Revenue Management Act, 2011 (Act 815) in ensuring transparency and compliance with accountability in managing oil wealth – in its 2011 report, “not all payments expected to go into the Ghana Petroleum Holding Fund [a dedicated wealth fund for accrued petroleum revenues set up under the Petroleum Revenue Management Act, 2011 (Act 815)] were reported on”. The report indicates that surface rentals were paid into Government of Ghana Non-Tax Revenue Account in 2011 and not accounted for in the Petroleum Holding Fund. This is a gap. This means some revenues had gone missing.

With social benefits, the oil income will finance and invest in basic and higher-level public infrastructure. Ghana’s oil income could finance scientific research into threatening diseases, environmental protection, and basic infrastructure like roads, alternative power, urban water and sanitation, health and education. The World Bank Report “World Bank on the Economy-Wide Impact of Oil Discovery in Ghana, 2009” estimates that Ghana’s infrastructure financing gap ranges between US$ 350 and 800 million. This means the provision of public infrastructure through increased budgetary allocations complemented by oil revenues could serve as an enormous boost to meeting the development needs of the country. The provision of infrastructure has spillover benefits for the entire society in the form of enhanced political stability and increased access to basic human needs. Present and future citizens can be made better off by having a significantly larger share of revenues invested in domestic infrastructure while saving to cushion the economy against volatilities in oil prices. The oil find could attract private investors. As an example, India's state-owned Rashtriya Chemicals and Fertilizers signed an agreement to build a $1.5 billion gas-based fertilizer plant at Shama in the Western Region of Ghana. The proliferation of investments from multinational companies would benefit the country in terms of employment and foreign exchange generation.

In the downstream sector, there could be extensive technological benefits. Ghana’s oil and gas resources have the potential to create local value premised on the use of technology. This is particularly important in terms of job creation, income generation, business expansion, and ensuring industrialization drive. This will, however, materialize when Ghana adopts an effective local content strategy. In Brazil, Petrobras through its local content strategies with the government agency, Sabre, have resulted in the participation of 2,300 small and micro companies. In the same vein, Ghana through its local content and participation policy could benefit immensely from transferred industrialization should Ghana National Petroleum Corporation (GNPC) seek the growth and integration of local businesses. The technological benefits could be evident in operationalization of local industries specializing in fertilizer production for agriculture modernization and LNG for domestic and industrial purposes.

In conclusion, oil and gas revenues have the potential to finance rapid economic progress for the country. Ghana will benefit immensely from the downstream sector and should be developed through effective local content policy to create ancillary services like welding and transport. The revenues generated could be prudently managed when there is a long-term development framework that mainstreams the needs and aspirations of the people to the utilization of revenues. In essence, these are the benefits available to an economy on the basis of sound and effective medium to long term development strategy. It is important to stress however that the benefits enumerated above are strongly conditional upon understanding of and readiness to enable basic trappings of transparency and accountability to work in the oil and gas sector. It is on this ground that the role of the civil society remains very crucial. Also, the existence of the PIAC is important in complementing the oversight responsibilities of Parliament. It is imperative for the central government to resource the PIAC in carrying out its duties effectively.

Reference

• Bell Joseph C, Patrick R.P. Heller and Antoine Heuty. 2010. Comments on Ghana’s Petroleum Revenue Management Bill. New York: Revenue Watch Institute
• Public Interest and Accountability Committee (PIAC). 2011. Report on Petroleum Revenue Management for 2011— Annual Report. PIAC, Accra.