Leave the Heritage Fund intact

Seth Terkper

Background—recap and rationale

In 2010, before the export of crude oil from the Jubilee Oil Fields, the outcome of public consultations for over one year resulted in a citizens’ mandate to Parliament to pass the Petroleum Revenue Management Act (PRMA), 2011 (Act 815). The gist of the Act is to:

  1. pool all midstream and upstream revenues into a Petroleum Holding Fund (PHF); such incomes include direct and indirect taxes; non-tax revenues such as fees; and proceeds from sale of the State’s share of crude and gas production;
  2. give approving authority to Parliament, to allocate from the PHF into primary Funds and budgets comprising: (a) Ghana National Petroleum Corporation (GNPC); (b) Ghana Petroleum Funds (GPF) comprising the Ghana Stabilization Fund (GSF) and Ghana Heritage Fund (GHF); the Budget [Annual Budget Funding Amount (ABFA)]; and, recently (d) the Public Interest and Accountability Committee (PIAC);
  3. make the Ministry of Finance (MOF) fiscal agent but using “rules-based” methods to curb its discretionary powers over the primary and secondary funds—including the Sinking and Contingency Funds; and Ghana Infrastructure Investment Fund (GIIF);
  4. reserve investment decisions jointly to MOF and the Bank of Ghana (BOG); and
  5. assign audit, monitoring, and supervisory roles to Parliament, Auditor-General, and a Public Interest and Accountability Committee (PIAC).

This is the fiscally-balanced background to an ongoing subtle debate to eliminate or dilute the Heritage and, to a lesser extent, the Stabilization Funds, ostensibly, to meet “current” budget needs.

The Sinking and Contingency Funds are constitutional mandates that were fulfilled for the first time under Articles 177 and 182 since the promulgation of the 1992 Constitution.

The main arguments for diluting or depleting the GHF—and, to a lesser extent, the GSF—is to spend now and generate future wealth, in lieu of the low interest income being earned. From a PRMA perspective, these arguments are not new and, therefore, not convincing or sufficient to make a change to the allocation rules.

The rebuttal is also based on how the discretionary but “rules-based” ABFA is being compromised by changes made to the “priority-sectors”. In this regard, more petroleum resources are going into consumption (“Goods and Services”), not investments while some GNPC spending decisions are under scrutiny.

Distribution of Petroleum Revenues

The notion underlying the PRMA is that current generations must invest in, not consume for, future generations. Subject to Parliamentary approval in many instances, Table 1 shows how the PRMA is used to judiciously distribute the flows into the Petroleum Holding Fund (PHF) to maintain a balance among (a) investments by GNPC; (b) revenue shortfalls leading to budget deficits (Stabilization); (c) savings for future generations (Heritage); (d) general budget needs (ABFA), with mandatory 49 percent for capital expenditure in 4 priority sectors; (e) public debt (Sinking Fund); and (f) national emergencies (contingency).


Table 1: Distribution of Petroleum Revenues


Item Fund and Description Share/Percent
  Revenue Pool
A Petroleum Holding Fund (PHF): All petroleum tax & non-tax revenues; and sales of State share by GNPC 100% (strictly non-discretionary)
  Budget-based allocations
B GNPC: equity, operational and investments costs Annual budget approved by Parliament
C PIAC: supervisory and operational expenses
  Net amount (percent after GNPC & PIAC deductions)
D Ghana Petroleum Funds (GPF): rules-based “reserve” accounts 30 percent
D.1 Ghana Heritage Fund (GHF): savings account for future generations 9 percent
D.2 Ghana Stabilization Fund (GSF): buffer against budget shortfalls 21 percent
  o/w (percent of excess, after “cap” is approved by Parliament under the Public Financial Management Act (PFMA), 2016 (Act 921) and the 1992 Constitution
D.2.1 Sinking Fund: To redeem and restructure the public debt 75% of excess after “cap”
D.2.2 Contingency Fund: meet national emergency needs 25% of excess after “cap”
E Annual Budget Funding Amount (ABFA): annual budget needs 70 percent
E.1 Capital Budget: 4 sectors/uses, reviewed every 3 years by Parliament 70% of ABFA (49% of total)
E.2 Recurrent Budget: “goods & services” and debt service (2014-16). 30% of ABFA (21% of total)
E.3 Ghana Infrastructure Investment Fund (GIIF) Act, 2014 (Act 877)—leverage to borrow from capital budget for commercial projects. 15 percent of ABFA


Performance from 2011 to date


The PRMA’s transparent and comprehensive reporting rules require the Minister and PIAC to present annual reports to Parliament and put others in the public domain. The reports, published since 2011, cover output, prices, finance, and PHF allocations.

The tabling of the 2017 Reports, recently, has sparked a second-round of debates over the GPFs—the first was started by the Senior Minister in 2017. As discussed later, Tables 2 shows that the GPFs—in particular, the GHF—got the least share of flows from the PHF from FY2011 to 2017 and should be left intact.


Table 2: Distribution of Petroleum Receipts (US$ m): 2011-2017

2011 2012 2013 2014 2015 2016 2017 Total
GNPC 208.0 231.0 222.3 180.7 126.9 88.5 182.0 1239.4
ABFA 167.0 286.6 273.2 409.1 239.3 98.4 169.5 1642.9
GSF 54.8 16.9 245.7 271.8 15.2 29.5 142.7 776.5
GHF 14.4 7.2 105.3 116.5 6.5 12.7 61.2 323.7
Total 444.1 541.6 846.6 978.0 387.8 229.0 555.3 3982.5

Source: MOF Petroleum reports


Table 3: Distribution of Petroleum Receipts (%): 2011-2017
2011 2012 2013 2014 2015 2016 2017 Total
GNPC 46.8 42.6 26.3 18.5 32.7 38.6 32.8 31.1
ABFA 37.6 52.9 32.3 41.8 61.7 43.0 30.5 41.3
GSF 12.3 3.1 29.0 27.8 3.9 12.9 25.7 19.5
GHF 3.2 1.3 12.4 11.9 1.7 5.5 11.0 8.1
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: MOF Petroleum reports

Figure 1: Distribution of Petroleum Receipts (2011-2017)




Arguments for depleting Heritage Funds

The first case for depleting the GPF (GSF and GHF) is to prioritize “current budget needs”. Ironically, it is this very “euphemism for consumption at any cost”—and the source of the sad experience of some oil-producing countries–that provided the rationale for setting up the GPFs.

This fear of going on consumption spree and falling into a “Dutch disease” trap led to these Funds being made virtually perpetual and non-discretionary in the PRMA.

The second argument that points to low interest or returns on the Heritage and Stabilization Funds is neither new nor basis for non-performance by BOG. The 2010 petroleum revenue debates concluded that such funds (similar to household pension or child education and business reserve asset accounts) are normally invested in low-risk “conservative” plans.

They deliberately preserve the principal or capital sum at the expense of low returns. Hence, the investment plans include low-risk assets such as highly-rated grade bonds and “blue chips”; convertible currency deposits; issuances by stable sovereign states and central banks; and multilateral institutions. It is also necessary to note that, at the time of accumulating Ghana’s Petroleum Funds from 2011, interest rates were low in the advanced economies house these plans.

Table 4 Ghana Petroleum Funds (GPFs)–US$ million

2011 2012 2013 2014 2015 2016 2017
End-period balances 69.2 93.6 447.1 535.5 436.8 484.7 697.9
  o/w GSF 54.8 71.9 319.0 286.6 177.4 207.7 353.1
          GHF 14.4 21.7 128.1 248.9 259.4 277.0 344.8
Total Net return earned 0.006 0.27 2.51 5.83 4.53 5.74 9.32
   o/w GSF 0.005 0.21 1.41 1.53 0.53 0.84 2.62
           GHF 0.001 0.06 1.10 4.30 4.00 4.90 6.70
Total Net earnings (%) 0.01 0.29 0.56 1.09 1.04 1.18 1.34
   o/w GSF 0.01 0.29 0.44 0.53 0.30 0.40 0.74
           GHF 0.01 0.28 0.86 1.73 1.54 1.77 1.94


Source: Petroleum Reports

The debate on low returns ignores the benefits of various Acts of, and approvals by, Parliament that result in secondary allocations of the GSF and ABFA for investment and debt management. As Tables 5 and 6 show, they led to setting up a Contingency Fund under the 1992 Constitution for crisis management; Sinking Fund for debt management; and GIIF to backstop borrowing for commercial projects with positive internal rates of return (IRR).

Clearly, these secondary flows result in interest savings (Sinking Fund) and investments (GIIF), including the maiden use of the latter to assist in the construction of the Terminal 3 at the Kotoka International Airport.


Table 5: Primary and secondary distribution of PHF (FY2016 & 2017)

DESCRIPTION Amount (US$ m) Amount (%)
2016 2017 2016 2017
Transfer to GNPC 88.5 182.0 38.6 32.8
     o/w Equity Financing Cost 58.1 103.4 25.4 18.6
     o/w Net Carried and Participation Interest 30.4 78.6 13.3 14.2
ABFA and GPFs 140.5 373.3 61.4 67.2
     o/w Annual Budget Funding Amount 98.4 169.5 43.0 30.5
        a) GIIF 17.2 0.0 7.5 0.0
     o/w Ghana Petroleum Funds 42.2 203.8 18.4 36.7
        a) Ghana Stabilization Fund 29.5 142.7 12.9 25.7
        b) Ghana Heritage Fund 12.6 61.2 5.5 11.0
Total Payments 229.0 555.3 100.0 100.0

Source: MOF Petroleum Reports (various)


Table 6: Secondary Distribution from Stabilization Fund (US$ m)


2014 2015 2016 2017 Total Comments
Contingency Fund 17.4 23.8 41.2 2014 K-Nkrumah Circle disasters
Sinking Fund/Debt 288.3 47.5 335.8 Under “smart borrowing”
ABFA (Budget) 53.7 53.7 all in crude prices in 2015/16
GIIF 17.2 17.2 Investments, incl. KIA Terminal 3
Totals 305.7 125.0 17.2 447.9

Source: MOF Petroleum Reports (various)

The argument that current expenditures mean investing in future generations can be dubious and not so clear for us. Ghana lacks enough current or annual resources—and means borrowing—to efficiently repair or replace assets from growth. The depletion of minerals, forest resources, and recently, pollution of seas and rivers show that we have not kept this promise.

Hence, we took loans to repair and replace the First Republic investments at HIPC lows and at risk of debt distress. The triangular railway network is not rehabilitated fully since we lack the space to borrow, as Kenya did recently to reconstruct the Mombasa railway lines. These experiences retard progress and impose huge costs, not benefits, on current and future generations.

The high debt stock and debt service ratios suggest that, until the PRMA and “smart-borrowing” mechanisms, we lacked dedicated revenue flows to amortize our debt. As with the Statutory Funds, we are gradually breaking the PRMA rule of allocating approximately 50 percent (70% of ABFA’s 70 percent flows) for investment in infrastructure—by putting the resources in “goods and services”. This is made worse by not making any ABFA allocations to GIIF. 

Our national record seems to strengthen the case continuing with (a) the “rules-based” disbursements from the Stabilization Fund “rules-based”; while (b) keeping the safe locked on the Heritage Fund. The rules are based on quarterly evaluation of budget performance and substantial exhaustion or depletion of petroleum reserves.

Moreover, withdrawals must be approved by Parliament. These provisions of the PRMA acknowledge that petroleum is a non-renewable resource and that all projections to date clearly show that Ghana’s reserves will be depleted in the not-too-distant future.

In summary, the PRMA provisions for the Stabilization and Heritage Funds protect the nation against itself—against its obvious preoccupation with current consumption by (a) permitting a more aggressive investment strategy for part of the Fund; and (b) using only interest accrued for capital or development expenditures.

This is the rationale for the compromise in Section XX??  of the PRMA to allow Parliament to review the Stabilization Fund strategy after a 25-year build-up.  In final part of this write up will argue that the PRMA allocation to date points to how we can exploit our latest natural resource endowment—crude oil and gas—to meet multiple goals. ..Stay tuned..

By Seth E. Terkper

The writer is the former Minister for Finance and Founder, PFM-TAX (Africa) Network, 44B Tafawa Balewa Street, Ridge, Accra (contact: sterkper@pfmtaxafrica.com; and https:/pfmtaxafrica.com.

0 0 vote
Article Rating
Notify of
Inline Feedbacks
View all comments