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Ghana Special: Oil & Corruption

By Patrick Smithin Accra
Posted on Monday, 1 February 2010 15:29

As popular expectations rise, Ghana’s

government faces pressure for economic and political reform to ensure

that revenues from its new oil industry are effectively used. Read an extract from the opening of our special report on Ghana.

The optimism in Ghana for the new year is palpable, with commercial oil production due to start in November amid predictions of a wide-ranging economic recovery. On the face of it, the optimists are right: oil revenues will add to Ghana’s fast-increasing production of gold and cocoa, whose world prices have been rising sharply over the past year, and the government is reining in its inherited budget and trade deficits, helped by half a billion dollars of cheap loans from the International Monetary Fund (IMF) and the World Bank.

Ghana’s political and diplomatic standing remains high, helped by its management of a closely and sometimes roughly-fought national election at the end of 2008 and its declarations of liberalism and a free media. Not only was Accra the choice for US President Barack Obama’s first African sojourn last year, but it has also drawn in senior leaders from China, India and Europe in equal measure. The proliferation of Ghanaians in the international system – in the UN, the IMF and the World Bank – has helped steer the country to diplomatic prominence in Africa. Ghana’s economic reforms have been lauded, as have the contributions of its peacekeepers in UN operations across the world.

For all these accolades, many harsh realities remain. After three decades of internationally-backed economic reform, individual incomes have only recently returned to the levels of the 1970s. Successive governments’ economic strategies have failed to promote self-sustaining growth, let alone achieve founding President Kwame Nkrumah’s vision of a diversified industrial economy no longer chronically dependent on selling unprocessed commodities to markets in the West.

Those economic flaws worry Ghanaians, particularly the tens of thousands of people moving to the cities of Accra, Kumasi and Takoradi in search of jobs and opportunities. Voters judge governments and parties more on economic performance than by ideological or ethnic affiliation. According to polling analyst Ben Ephson, Ghana’s last three elections show there is an increasing band of floating voters, about 30% of the national electorate, mainly in the towns. Living standards are the critical issue for these voters.

Two roads diverged?

Accordingly, the start of oil exports this year is an economic and political turning point. Forecast revenues of over a billion dollars a year from the Jubilee field alone – there are another three fields reckoned to be as big – could boost Ghana’s economy if they are properly managed. They will not transform it alone; that requires structural change in the economy, massive investment in agriculture and agro-processing industries, and a rapid expansion of power-generation capacity, much of it fuelled by local gas production.

It will also need determined political leadership to resist the temptation of buying support with the oil money, to maintain the maximum accountability for oil revenues and to establish strong sanctions against corruption and fraud. Much remains to be done here. The government is yet to pass its promised Right To Information Bill, and its main anti-corruption agency, the Commission on Human Rights and Administrative Justice, is underfunded and understaffed.

How to avoid the oil curse

This time it must be different. That is the oft-heard demand
from ?activists, politicians and business-people when discussing
oil’s potential in Ghana. The discovery of the Jubilee field –
with about 1.8bn barrels – is different from its African
counterparts. It is the first time substantial amounts of oil and
gas have been found in one of Africa’s established democracies.

Estimates on the quantum of Ghana’s oil wealth vary hugely.
The common starting point is that Jubilee will produce about
120,000 barrels per day and some $1.2bn in government
revenue a year for 20 years. The adjacent Tweneboa field
is reckoned to be as big as Jubilee’s, but industry experts
forecast the biggest finds will be onshore in the Keta basin.
With companies like Exxon Mobil, BP, ENI and Sinopec
vying to buy equity in the Jubilee field, the assumption is
that Ghana has several billion barrels of reserves.

A key imperative, according to the World Bank’s Sébastien
Dessus, is revenue transparency. That means signing up to
full disclosure under the Extractive Industries Transparency
Initiative and working with civil society groups on the analysis
of contracts and the monitoring of environmental impact.
Then there are the corrosive effects of revenue accruing to
an over-centralised government. Worst of all is the
‘Dutch disease’, under which the currency appreciates as
oil revenues flow. Bank of Ghana Governor Kwesi Bekoe
Amissah-Arthur says he is determined to hold down the
value of the cedi against the US dollar to maintain the
competitiveness of exports.

So far, President John Evans Atta Mills has been cautious about the country’s oil prospects: he has ?dampened down expectations of massive new revenues and is determinedly trying to channel more state finance to support farmers and the countryside. That is also astute politics because there are more voters in rural areas, and they are less changeable than those in the towns.

After a year in power, support for President Mills is still running high. For many, his more open political style is a welcome change from his predecessors, John Agyekum Kufuor and Jerry John Rawlings. Breaking with tradition, Mills spent over an hour taking questions from journalists at a new year press conference at the well-fortified government headquarters at the Castle in Osu. His predecessors had shied away from offering such open invitations to Ghana’s highly-partisan press.

The journalists quizzed Mills in ?detail on economic prospects, his assessment of the government and claims of corruption and factionalism within the governing National Democratic Congress (NDC). For Mills, it was a good-enough performance to boost his standing with voters and to help consolidate his grip on the party ahead of the NDC’s national conference on 15-17 January in the Northern region capital of Tamale.

Despite weeks of political gossip and intrigue, Mills and his volatile predecessor, Jerry Rawlings, and their militant supporters put on a fairly convincing show of unity at the NDC’s Tamale conference, which elected senior party posts for the next five years. The key positions were distributed evenly enough to satisfy most of the party’s key factions. At the end of the conference, Mills joined hands with his ministers and the party faithful, declaring a new unity of purpose, announcing: “The campaign for the 2012 election starts here.”

In one important sense, Mills is right. How he runs the government and the economy this year will make or break his prospects for re-election. Party politics remain highly competitive: Mills won last year’s elections by half a per cent over his rival, Nana Addo Dankwa Akufo-Addo of the New Patriotic Party (NPP). Well-organised special interest groups do well in Ghana’s system and successive governments have prioritised the civil sector wage bill, resisting comprehensive reforms of the public sector.

The power of business interests in politics grew enormously under the previous NPP government of President Kufuor, and business is keen to maintain that influence under NDC rule. The power of civic activists and groups demanding greater accountability has remained comparatively weak.

Expanding expertise?

Despite Ghana’s impressive track record on elections and the excellence of its leading academics and technocrats, policy debate in the country is restricted to a very narrow band of specialists. The capacity of activists to influence government policy has been weak. That is beginning to change in the mining sector, where local community groups are pressing government and the big companies over matters of compensation and local investment. But in the countryside, business interests and the Chamber of Commerce easily overwhelm the voices of local farmers.

For both government and activists, managing the oil will be the biggest test. More money is at stake, and oil revenues are paid directly to the central government in a system that is still heavily-weighted towards the administrative machine in Accra.

President Mills and Finance Minister Kwabena Duffuor talk of incremental change rather than a radical agenda over the next three years.”Stability with growth” was the theme of Duffuor’s budget announced in ?November 2009, and he sets out what he argues is the achievable target of an average of 8% GDP growth between 2010 and 2012.

Duffuor identified his priorities as the modernisation of agriculture; road and port improvements; investment in information and communication technology; and the development of the oil and gas sectors with strong links to the rest of the economy. However, his macroeconomic targets – bringing average inflation down to 10% and the budget deficit down to 3% – look ambitious, given international monetary and trade pressures.

Changing the country’s poor record on revenue collection and management will also be a priority. Duffuor and Mills, an experienced tax lawyer, have launched a wide-ranging review of the tax system. All the revenue services are to be integrated under a new body, the Ghana Revenue Authority.

Businesses are bracing themselves for higher corporate taxes, and consumers will have to deal with higher value-added tax. Some changes are also likely in revenue management. The government has ordered a comprehensive spending analysis this year across all government departments. For now, it has backed away from cutbacks on public-sector spending because of the political risk of job cuts. The 2010 budget forecasts a 37.4% increase in the public-sector wage bill, which is equivalent to 26.9% of total government spending.

The bigger question is whether Mills and Duffuor’s intiatives will withstand the inflow of oil revenues. Can these two technocrats-turned- politicians resist doing what is popular in the short term and push ahead with structural reforms to diversify the economy that will pay dividends beyond the four-year election cycle? The best verdict for now is that they are giving it a damn good try.

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