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Spending oil revenue on ‘Free SHS’- Sober reflections required (1)

Spending oil revenue on ‘Free SHS’- Sober reflections required (1)

Since 1951, Ghana has tried different policies and approaches to ensure free compulsory universal basic education with varying degrees of success.

The 1992 Constitution under Article 25 provides for equal rights to educational opportunities and in particular, introduces progressively free education at the secondary level.

This week, Senior Minister Osafo Marfo hinted government’s intention to use revenues accrued in the Ghana Heritage Fund (GHF) to extend the free basic education to the secondary level- touted as the NPP’s ‘Free SHS’ policy starting September 2017.

The NPP manifesto promised to redefine basic education to include SHS, covering vocational, agricultural and technical schools, and make it available for free for all Ghanaians. Currently basic education includes preschool, primary, and Junior high school. This brief aims to shed light on Ghana’s current economic situation to outline various options that could be considered by the government in funding the ‘Free SHS’ from petroleum revenues.

Ghana is currently experiencing dire economic times with low commodity prices, high costs of living, financial malfeasances (abuse of public funds as cited annually in the Auditor General’s report), limited fiscal space caused by fiscal rigidities, a lower sovereign credit rating, and an ever ballooning public debt constituting about 74 per cent of GDP.

These have forced Ghana to subscribe to an IMF bailout program projected to end in December 2017. Also the presence of significant budget leakages accumulated through inefficiencies in public spending pose further challenges to the Ghanaian economy. The NPP made several campaign promises such as the one district one factory, one village one dam, 814 km railway from Accra to Paga, the Zongo Development Fund amongst others.

These promises, in the midst of Ghana’s poor economic performance may have warranted the need for the government to scout for other funding sources. As a result, it has become very crucial to find sustainable funding options to finance the ‘Free SHS’. The decision to use the GHF has sparked countrywide debates over what, when and how Ghana invests her petroleum revenues.

Ghana’s petroleum revenues present important opportunities to finance her development. However, with the finite nature of this stream of revenues, there is a need for effective management and investments that generate higher returns and allows for equitable enjoyment of these returns. Civil society has raised concerns about the need for a national development plan or a coordinated strategy to guide petroleum revenue spending.

This remains critical since the selection of areas/sectors to benefit from the sector remains at the discretion of the finance minister. With the current intention to source funding from the GHF to support the ‘Free SHS’ policy, these debates have become even more important.

Since oil production in 2010, total petroleum receipts is approximately US$3.2 billion, which is about four per cent of GDP. Although this provides an additional stream of income for the government, it is relatively insignificant as compared with non-oil revenues. The national budget has received a greater share of petroleum receipts followed by the Ghana National Petroleum Corporation (GNPC), Ghana Stabilization Fund (GSF) and then the GHF (see figure 2).

The pursuance of the ‘Free SHS policy has raised important questions:

  • How to increase access and quality and whether the economy can accommodate the full cost of a 'free basic education' that includes- public 'pre-school, primary, JHS and SHS.
  • How will the policy impact on Ghana’s existing education infrastructure deficit?
  • How will the policy affect the quality of teaching and learning as well as the distribution of teachers?
  • How will the policy impact on the short, medium and long term cost of ‘basic education?’

These questions need to be discussed in greater detail to arrive at a national consensus in order to agree on an effective implementation strategy. The discussions will also allow for public buy-in on financing alternatives and decisions thereof.

Whiles the government has not officially published an implementation framework and a figure, information in the public domain suggests that the policy is likely to cost about GH¢3.6 billion annually. Whether the GHF will be the best and sustainable financing option remains debatable. With Ghana’s current economic reality, the following options could be considered in funding the ‘Free SHS’ from petroleum revenues.  

Recommendations on Financing Options

Option 1: Ghana Heritage Fund

Ghana’s heritage fund was set-up under the Petroleum Revenue Management Act (PRMA) with the objective to provide endowment to support future generations when petroleum reserves have been depleted. It has received approximately 9 percent of Ghana’s total petroleum revenue receipts. Currently, the GHF has accrued a total amount of $277 million translating into about GHS 1.2 billion over 5 years which is lower than the estimated GHS 3.6 billion annual cost of the ‘Free SHS.’

This will mean that the government would have to supplement the shortfall from other revenue sources. Petroleum revenues are volatile and so tying the cost of the policy to such revenues could negatively impact its implementation (see Figure 3). Uncertainties surrounding the revenues could worsen in years where there are oil price shocks. With Ghana’s growing recurrent expenditure, the implementation of the policy at the back of inadequate funds from the GHF, could force government to either borrow to supplement or cut other critical expenditures.

Aside the abovementioned potential economic challenges, government could face some legal challenges in accessing the GHF. The PRMA bars any withdrawals from the GHF in the short to medium term. It only permits a partial withdrawal from the interests accrued on the fund only after fifteen years from the commencement of the Act, upon Parliament’s approval. In practice, this means the government can only withdraw accrued interest from the fund from 2026 onwards.

Any attempt to withdraw from the GHF will require amendments to the PRMA. Caution must however be exercised in pursuing this option as international experience has shown that continuously altering the legislative framework for managing petroleum revenues could cause the country to fall victim to the ‘Resource Curse’ hence the need for national dialogue on this decision, in keeping with the broad consultations that brought about the GHF.

Option 2: Annual Budget Funding Amount (ABFA)

The ABFA is the amount of petroleum revenues allocated to support Ghana’s annual budget. Over the last 5 years, the ABFA has received roughly GHS 3.4 billion, representing 39% of total petroleum receipts up until 2015. This means that, on the average, ABFA receives about GHS 600 million annually. Through the ABFA, the government is able to select and fund projects that will help in realizing Ghana’s development objectives through the budget process.

In the recent past, the government has been accused of ‘spreading too thin,’ as the ABFA has been used to either fully fund or co-fund several projects across the priority areas selected by the Minister of Finance. As a way of mitigating this, the government could channel all ABFA spending into the ‘Free SHS’ policy. This will help improve implementation and oversight through stringent measures adopted in budget process.

The PRMA mandates only 30 percent of ABFA receipts to be spent on recurrent expenditure regardless of the projects selected. Also, the recent amendments to the law earmark a portion of ABFA for the Ghana Infrastructure Investment fund (GIIF), tightening the space for the government to implement this policy. The stabilization fund which was set up to help address the issue of petroleum revenue volatility also continues to face challenges largely due to the buildup of high interest payments. There is currently a cap on the GSF which limits the amount of money to be accrued to $ 100 million; monies in excess of this are to be used for debt repayment.

ABFA allocations have amounted to an average of about 4% of total government revenue and less than 3% of GDP since the inception of oil production in Ghana. From Figure 4 below, Roads and other Infrastructure constituted the chunk of allocations from 2011 to 2015. Hence, using all ABFA receipts to finance ‘Free SHS’ would mean finding alternative financing for existing priorities. Civil society has raised questions about how these projects are selected and their ‘value for money.’ Like the GHF, any attempt by the government to use the ABFA would require amendments to the PRMA. This process could also present an opportunity for the government to address the prioritization and spending weaknesses.

Option 3: Consolidation of ABFA, GHF, and Portion of Ghana National Petroleum Corporation (GNPC) Allocations

In order to source for adequate funding for the ‘Free SHS’ policy, a combination of ABFA, GHF and a portion of the allocation to GNPC poses a third option for the government. The GNPC currently receives an allocation of up to 30% (for period 2014-2016, section 7(3) of the PRMA) of net cash flow from participating and carried interests after equity financing costs have been deducted. In the GNPC revenue retention model, the corporation enjoys flexibility of planning its spending over a three-year period while Parliament reserves the right to reassess this proportion every three years.

Public sentiment has however been that the GNPC possesses significant cash holdings that may not be truly representative of its spending capacity due to the substantial amounts invested by the GNPC in quasi-fiscal activities (non-oil related activities). These monies are reported to be very significant, and could be channelled through the budget process to support the implementation of the ‘Free SHS.’ In addition to the above-mentioned challenges associated with accessing ABFA and GHF, ceding money to the ‘Free SHS’ program could compromise the GNPC’s strategic objective. This is because, a substantial amount of money will be required to undertake additional exploration to make more discoveries to boost Ghana’s economic potential in the sector.

Given that it takes a minimum of 7-15 years from Exploration to First Oil production, supporting GNPC is critical to new oil discoveries. Ghana is forecast to enter into Oil production decline by 2020 / 2021 (see Figure 5 below). If Exploration commenced today (2017), it would be practically impossible to add new sources of production by 2021 (4 years from now). Yet, there appears to be no meaningful exploration program ongoing and hence reducing GNPC’s revenue allocations could worsen the prospects for new discoveries.

The ‘Free SHS’ is a very laudable policy as it seeks to improve Ghana’s human capital base to advance national development. In pursuing its successful implementation through the use of petroleum revenue, there’s the need for a broader national consultation and consensus to carve out clear objectives, develop a coordinated implementation strategy detailing costs, and spell out achievable outcomes which are measurable.

 

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