Extractive Industries Revenue Management   …Challenges, Solutions, and Risks

Over the years, civil societies have sounded a clarion call for a revenue management framework covering the mining sector to help the citizenry follow through on its disbursement to allow for proper accountability.  Yet the response from government to this has been very slow.

Ghana discovered oil in commercial quantities in 2007 and recorded its first revenues in 2011. In the area of mining, dating back as far as 1493, Ghana at the time was producing 36% of the world’s gold production between 1493 and 1600. That is why the country’s colonial name was the ‘Gold Coast’, reflecting the importance of the mining sector – particularly the gold trade – to the country.[1]

What is Extractive Industries Revenue Management (EIRM) and which laws govern it?

EIRM is a set of robust policies, regulatory, transparent and legal frameworks which guide how decisions on the exploitation of natural resources are taken, and how revenue is distributed in a transparent and accountable manner for the benefit of citizens.

Revenue management in Ghana’s extractive sector is governed by the Petroleum Revenue and Management Act (PRMA), 2011, amended in 2015 (Act 893). The act gives rules for the collection, allocation and management of petroleum revenues, whereas no comprehensive revenue management law exists for mining except for the Minerals and Mining (Amendment) Act 2015  and the Minerals Development Fund Act, 2016, which briefly speak to the modus for payment of royalties and provision of financial resources for the benefit of mining communities, host district assemblies, stool lands, administrator of stool lands and traditional councils.

With existence of the Petroleum Revenue Management Act, one is able to track what has been collected, disbursed and managed. It also prescribes the establishment of oversight bodies, a formula for revenue distribution, and sets clear objectives on how and where to. This cannot be said of the mining sector, which has 80% royalty going to the consolidated fund.

Management and Accountability of Petroleum Revenue in Ghana

The figure below shows the governance structure of petroleum revenues in Ghana:

Adapted from resourcegovernance.org/natural-resource-funds

Current Challenges with Ghana’s Extractive Industries Revenue Management

With respect to petroleum, revenues are not spent in line with long-term national goals. For example, government in the 2017 budget statement selected Agriculture, Education, Health, Road, Rail, and Critical Development as its priority areas for the 2017-2019 financial year.

From figures 2 & 3, one is not sure what government’s priority is. This again raises concerns on economic diversification, bearing in mind post-resource depletion consequences and the need to ensure proper structural transformation to deliver high output, employment and poverty reduction. Again, this may have negative implications on the economy’s structure as well as stifle growth in the agriculture sector.

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Secondly, most oil-funded projects either do not exist or are poorly-executed.[2]

Thirdly, capping the Stabilisation Fund deviates from the intended purpose of the PRMA in establishing the Stabilisation Fund.

Furthermore, absence of the Investment Advisory Committee is a significant violation of section 29 of the PRMA and may not have been a sound investment decision. Another danger is the political nature of persons who may be appointed to serve.

To add to the above, Ghana’s PRMA in its current form may not be fit for onshore revenue allocation of oil and gas because it does not provide a formula for the sub-national allocation of revenues to resource host communities.

Again, support to the Public Interest and Accountability Committee (PIAC) by the government through the Annual Budget Funding Amount (ABFA) poses a threat to the sustainable delivery of proper oversight functions of PIAC should there be protracted periods of bearish oil prices and (or) supply disruptions – a factor that may cause PIAC’s budgets to be cut down or delayed. Again, with regard to PIAC, the Committee is not vested with prosecutorial powers, which makes it “bark” without biting.

On the mining front, Ghana does not have a mineral revenue management law in place; it therefore has implications on how and where to invest mineral revenue, the creation of sovereign wealth funds, establishment of independent oversight bodies among other accountability and transparency measures.

Future Challenges in Ghana Extractive Sector Revenue Management

First of all, overdependence on resource revenues in funding government programmes if not checked may be inimical to the nation. For instance, in the 2018 budget statement total expenditure allocation of GH₵468.73million was made for education, of which an amount of GH₵2.83million (representing 1%) was expected from government. What this means is that in the event of supply disruptions due to some unexpected shock or protracted bearish prices, government’s plan will not be realised.

The increasingly sophisticated nature of corruption in the extractive sector – i.e. transfer pricing, thin capitalisation, bloated production and product sale-related charges – is difficult to detect and takes a long time, and may erode future gains from the sector.

Thirdly, capacity-deficit on the part of the revenue authority can hamper the collection of resource revenues – especially when proper organisational succession plans do not exist to ensure knowledge transfer.

Fourthly, there exists policy inconsistencies and a lack of clarity in our laws with respect to fiscal regimes. This hampers effective revenue collection. For example, the income tax law prescribes a withholding tax rate of 7.5% for resident subcontractors and 15% for non-resident subcontractors; but most petroleum agreements have 5% and in some cases no amount is withheld by the contractor. Also, carry forward of financial cost is 5-years, but that of the ExxonMobil agreement is 10-years

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Finally, due to the absence of a revenue management framework, we may not be able to accurately account for revenues from mining to posterity.

 Proposed Sustainable Solutions to Address Current Extractive Revenue Challenges

There should be broader engagements on the national development plan developed by the previous government in other to gain a national buy-in, especially from the political divide to serve as a blueprint to guide the spending of resource revenues.

The Internal Audit Agency should collaborate with the Auditor-General’s office to effectively conduct pre- and post-audit of expenditures from the petroleum holding fund in line with its mandate.

A review of the cap on Stabilisation Fund (SF) by parliament to rather spend interests on SF for debt repayment.

Government should institute immediate actions to constitute the advisory committee with appointment made by a predetermined criterion (including. interviews).

An amendment of the current Petroleum Revenue Management Act to include provisions for subnational revenue-sharing formula and management for onshore petroleum revenues as in the case of mineral royalties. These provisions should allow statutory payments of a percentage of petroleum revenues by central government to oil host communities – usually directly impacted by exploration and exploitation activities.

Financial independence of PIAC is key. Resources given to PIAC to run its secretariat must be charged to the consolidated fund – and must be released in a timely manner as long as the country continues to exploit hydrocarbons.

There should be a deepened collaboration between PIAC and state agencies like EOCO, OSP and the Auditor General to ensure that our revenues are protected.

Enact a mineral revenue management law similar to the Petroleum Revenue Management Act 2011 (Act 815) to guide the disbursement and utilisation of revenues in the mining sector. This will guarantee more efficient management and the use of revenues from the mining industry.

Potential Risk to Proposed Solutions

In spite of the above-proposed solutions, implementation of the above solutions will not be devoid of risk or concerns, mainly due to ideological differences of political parties, human resource concerns, the use of supermajority in parliament to vote against well-meaning dissenting views, lack of political will and economic concerns.

Conclusion

With commitment from government and a push from civil society, the extractive sector will:

yield the needed dividend, witness improve scores in the Resource Governance index and ensure sustainable development.

Bibliography

[1] Kesse, G. O. (1985). The Mineral and Rock Resources of Ghana. Journal of African Earth

Sciences, 7, 601-610

2 B&FT (2018). Four Oil Funded Project Missing. Retrieved from thebftonline.com/2018/headlines/four-oil-funded-projects-missing-kite/

3 Ghana Chamber of Mines. (1998). Annual chamber of mines report: Accra, Ghana

Gideon is a Policy Analyst at Penplusbytes.

Email: gideon.peasah@penplusbytes.org

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