How to avoid the ‘resource curse’
Greater transparency and accountability are some of the ways governments can turn oil wealth into a blessing, writes Daniel Nonor
Multinational mining and oil companies transfer considerable funds to host governments in the form of, royalties, dividends, taxes and support for local communities.
These large financial inflows should contribute substantially to social and economic development, yet many resource-rich countries especially in Africa, have been unable to transform resource wealth into economic wellbeing.
When revenues from the extractive sector are not managed with transparency and accountability, mineral and petroleum wealth can fuel large-scale corruption, as well as poverty, injustice and conflict. Research points to the fact that countries that are endowed with natural resources have lower growth rates than comparable countries, which are less endowed resource-wise.
It has also become more evident that resource-rich states not only develop more slowly but also tend to become less democratic, more corrupt and more likely to experience civil conflict. All this has come to be known as the ‘resource curse’ and over the years economists have been trying to create a vaccine to cure it.
But first scholars have tried to work out the causes. Some have drawn attention to the volatility of the world commodity market, which tends to expose countries that are over-reliant on a single commodity to economic shocks when prices drop drastically. Others point to the unequal power relations between host country and the oil companies. It has been claimed that producer nations are ill equipped to engage in the sophisticated negotiations that are the multinationals’ stock-in-trade.
Resource management experts such as Joseph Stiglitz argue that most of these host countries may not understand the full implications of each of the contracts they enter into with their commercial partners. He said, “They will be told that some clause is standard, and it may well be: the oil companies may stand together in demanding contracts that benefit them at the expense of the countries from which they get the oil.”
Another school of thought has concentrated on the way in which the oil proceeds have been used or misused, thus undermining the country’s social fabric and encouraging corruption and rent-seeking behaviour that often threatens public order.
Daniel Firger, associate director of the Columbian Centre for Climate Change Law, argues that if the problems of the so-called resource curse were simply a matter of economics then ‘cursed’ states should have been able to achieve more positive results by implementing the simple fiscal policy tools recommended by economists, including monetary sterilisation and temporary subsidies for the manufacturing sectors.
There is now an increasing emphasis on building strong state institutions and creating mechanisms of accountability and transparency between a government and its citizens. This takes into account that a lot is at stake, when oil contracts between governments and oil companies are being negotiated. With annual revenues of several billions of dollars on the table, every detail and percentage point matters.
The complexities of the contracts, together with the secrecy that surrounds negotiations, can create windows for corruption. That is why it is imperative that the process surrounding oil agreements in Ghana be fully transparent and disclosed to the public. Ghana became an Extractive Industry Transparency Initiative (EITI) member in 2007 and so far has produced three reports outlining payments and revenues from its mining sector.
This has helped bring about some level of transparency surrounding mining revenues and, most importantly, brought to light some of the deficiencies in the current regulatory framework governing the mining sector. For example, with the adoption of the principles of the EITI, it is emerging that the Ghana government received little income from corporate income tax due to a very generous system of capital allowances.
The regulatory regime, allows nearly all expenses to be claimed under capital, thus providing companies with a tempting opportunity to reduce tax payments by over-valuing capital goods. Also, due to development agreements between individual mining firms and the government, expatriate staff employed by these companies, paid little or no income tax.
According to a report on taxation in Ghana’s extractive sector published by the Accra-based Integrated Social Development Centre (ISODEC) in 2009, Ghana’s system capital allowance is far more generous than those of comparable countries, and therefore in urgent need of review. Ghana is still at the preparatory stages of extending the EITI into its oil and gas sector. When fully integrated, it is expected that future contracts between oil companies and the government will be made easily accessible to the public.
In his recent budget to parliament a few months ago, the Minister of Finance, Kwabena Duffour, also reported receipts and distribution of oil revenue in accordance with provisions of the Petroleum Revenue Management Act.
According to the budget, the Ghana National Petroleum Corporation (GNPC) lifted oil from the FPSO Kwame Nkrumah three times as at the end of September 2011. The total volume of crude oil from the first three liftings amounted to 2,980,720 barrels, which realised $337.3 million (GH¢506.0 million). Nevertheless, the export of crude oil from the Jubilee Field became mired in controversy following damage to the ultrasonic export flow metre installed on the FPSO Kwame Nkrumah.
In the absence of the metre, the Ghana National Petroleum Corporation (GNPC) reported that the quantities of crude were measured using calibrated portable electronic gauges in the FPSO storage tanks before and after transfer of crude oil to export tankers. Although this is an internationally recognised means of measure, it nevertheless raised suspicions about the volumes of crude being exported. Transparency International states in its 2011 report on oil and gas companies, “When revenues from the extractive sector are not managed with transparency, and accountability, mineral and petroleum wealth can fuel large-scale corruption, as well as poverty, injustice and conflict.”
Ghana thus has the responsibility of building the kind of environment that will ensure oil revenue is used to develop the nation and not line the pockets of individuals. The government is aware of this and has taken up policies and modules of other oil-producing countries that are doing well in their resource management process. But experts say none of them will become effective if they are not fully and broadly owned locally.
It has been widely advocated that citizens have the right to know how their resources are managed, what income they bring in and how this income is allocated. A positive outcome is more likely considering the fact that in the western world NGOs and civil society organisations have to a large extent been able to influence the fiscal instruments in the petroleum industry.
Ghana also needs to take into account the volatility of the oil market, as well as issues such as the pace of oil development, the rate at which international oil companies recoup their investments, the appropriateness of ‘big signature’ bonuses, and how bank loans secured against oil revenues are disbursed then repaid over time.
Another important step is getting the Freedom of Information Bill onto the statute book. This is a major springboard for transparency.
While many remain optimistic that Ghana will avoid all the pitfalls that characterise oil production in some countries, such optimism must be tempered with caution. Without an active civil society and media to demand accountability and transparency in such an opaque industry, Ghana’s story will not be any different from those already blighted by the ‘resource curse’.