Spending oil revenue on ‘Free SHS’ - Sober reflections required (II)
This is the concluding part of the article by the Natural Resource Governance Institute (NRGI) on the need for some reflections on the use of oil revenues to fund the Free SHS policy by the new government.
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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 nine per cent of Ghana’s total petroleum revenue receipts.
Currently, the GHF has accrued a total amount of US$277 million translating into about GHS1.2 billion over five years which is lower than the estimated GHS3.6 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 from the above-mentioned potential economic challenges, the 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 GH¢3.4 billion, representing 39 per cent of total petroleum receipts up until 2015. This means, on the average, ABFA receives about GH¢600 million annually.
Through the ABFA, the government is able to select and fund projects that will help in realising 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 per cent 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 Stabilisation Fund, which was set up to help address the issue of petroleum revenue volatility, also continues to face challenges largely due to the build-up of high interest payments. There is currently a cap on the GSF which limits the amount of money to be accrued to US$100 million; monies in excess of this are to be used for debt repayment.
ABFA allocations have amounted to an average of about four per cent of total government revenue and less than three per cent 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 prioritisation 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 pose a third option for the government. The GNPC currently receives an allocation of up to 30 per cent (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