oil and national development in ghana
TRANSCRIPT
OKOYE, ANTHONY CHUKWUEBUKA
PG/M.Sc/09/51664
PG/M. Sc/09/51723
OIL AND NATIONAL
DEVELOPMENT IN GHANA
POLITICAL SCIENCE
A THESIS SUBMITTED TO THE DEPARTMENT OF POLITICAL SCIENCE, FACULTY
OF SOCIAL SCIENCES, UNIVERSITY OF NIGERIA, NSUKKA
Webmaster
Digitally Signed by Webmaster’s Name
DN : CN = Webmaster’s name O= University of Nigeria, Nsukka
OU = Innovation Centre
MARCH, 2011
2
OIL AND NATIONAL DEVELOPMENT
IN GHANA
BY
OKOYE, ANTHONY CHUKWUEBUKA
PG/M.Sc/09/51664
A PROJECT REPPORT SUBMITTED TO THE DEPARTMENT
OF POLITICAL SCIENCE, UNIVERSITY OF NIGERIA,
NSUKKA, IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF MASTER OF
SCIENCE DEGREE (M.Sc) IN POLITICAL SCIENCE
(POLITICAL ECONOMY)
SUPERVISOR: ONUOHA, JONAH I.
(PROFESSOR OF POLITICAL SCIENCE AT
UNIVERSITY OF NIGERIA, NSUKKA)
MARCH, 2011
i
TITLE PAGE
OIL AND NATIONAL DEVELOPMENT
IN GHANA
ii
APPROVAL PAGE
This Project Report has been approved on behalf of the Department of Political Science,
University of Nigeria, Nsukka.
BY
-------------------------------- ----------------------------
Prof. Onuoha, Jonah I. Prof. Obasi, Igwe
Project Supervisor Head of Department
----------------------------
External Examiner
iii
DEDICATION
This work is in the ab ovo, dedicated to God Almighty for his innumerable
blessings, which he showered on me in particular and my family at large times without
number.
iv
ACKNOWLEDGEMENT
It is a truism that no man is an island unto himself. Therefore a study of this
nature could have hardly succeeded without the tangible and intangible contributions
from others.
In this regards my invaluable gratitude go to my Supervisor, Prof. Onuoha,
Jonah., for his invaluable cum immeasurable assistance in the supervision of this study. It
was his intellectual inputs that served as motivating factors for me as well as in giving
this work it intellectual and academic outlook; since it is the organisation and not the idea
that is the hallmark of intellectualism. Special thanks goes to my Head of Department,
Prof. Obasi, Igwe for his fatherly concern and advice. Also, the Departmental Post-
Graduate Coordinator, Prof. Ikejiani-Clark; Prof. O. Ibeanu,, Prof. E. O. Ezeani and my
former and ebullient undergraduate lecturer, Prof. H. A. Asobie (current Chairman of the
Nigerian Extractive Initiative Transparency Initiative, NEITI); all of the Department of
Political Science University of Nigeria, Nsukka deserve special mention for their
encouragements in completing this study especially through their priceless lectures.
Though without such appellation that goes with the former group Dr. Ogban-Iyam, whose
unsuken ocean of intellectual ingenuity flows into my little river of intellectualism and
academic radicalism deserves no less kudos.
Other members of staff in the Department of Political Science, University of
Nigeria, Nsukka, to whom my gratitude must be expressed are: Ken, Ifesinachi, (P.hD),
Okolie A. M. (P.hD), Edeh, H. (Ph.D) and Abada, M.I. (P.hD) for their assistance in
getting some of the initial materials for this work ; in addition to their academic input
during my ‘short’ but meaningful and eventful intellectual sojourn in the department.
I also wish to acknowledge the efforts of my mentor, in the person of Ezirim,
Gerald E. of the Social Science Unit, School of General Studies, University of Nigeria,
Nsukka and Chukwu Quentin for their moral supports.
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Special appreciation equally extends to the entire members of my family, namely
My Beloved and Caring Parents Mr. and Mrs. P. N. Okoye, for the moral and financial
deposits they made in me. My humble sense of gratitude equally worships at the altar of
my brothers; Iyke, Chidi, Nnaemeka, Nnamdi, Ugochukwu and Divine as well as my
sisters; Ifeoma, Chigozie, Chinwe and Rejoice, all of whom in their deft and astute sense
of understanding have to stand in for me, in one way or the other during my academic
years as an undergraduate. The prayers and goodwill gestures of every Okoye-Onyeguili
and Emebo families are equally acknowledged and appreciated; since time and space
permits me not to mention your names and contributions individually.
Particular debts of gratitude are owed to these wonderful friends of mine; Onah
Chukwumuanya (Muasky), Mbonu, Chinedu (Edu Yaweh), Anozie Gordon, Asadu
Godwin (JP), Doffe Benedeth S., Chioma, Oluchi and Ogbodo Tochukwu.
Lastly, I am profoundly grateful to all the proprietors of the Schools, Extra-mural
Centres and my students in Nsukka where I taught as well as my classmates and friends
both within and outside “the den” with whom I exchanged great ideas throughout this
academic pilgrimage.
I once more thank them all, but above all the Almighty Father takes all glory for
in him lays our hope and salvation.
OKOYE ANTHONY B. C.
2011
vi
LIST OF MAPS
1: Ghana’s Hydrocarbon Exploration ….. ….. ….. 48
2: Detailed Map of the Jubilee Field off the West Coast of Western Ghana …. 49
vii
LIST OF TABLES
1: Offshore Oil Blocks in Ghana ….. ….. ….. 51
2: Implication of Projected Oil Revenue for Fiscal Consolidation in Ghana …. 56
3: Variables ‘Reach’ of Initiatives on Resource Revenue Transparency,
Accountability and Participation ….. ….. ….. 60
4: Distribution of FDI inflow among Selected (Well and Less Natural
Resource Endowed) African Countries in billion US$ ….. ….. 118
viii
LIST OF FIGURES
1: Comparison of Economic Performance between Resource Rich and Resource
Poor Countries. ….. ….. ….. ….. 21
2: Projected Oil Revenue for Ghana 2010 – 2015 ….. ….. ….. 55
3: Oil Production Chain and Intervention ….. ….. ….. 71
4: Benchmark for the Government Petroleum Fund-Global ….. ….. ….. 77
5: Governance Structure of the Norwegian Pension Fund-Global ….. ….. 77
6: EITI Civil Society Validation Grid ….. ….. ….. 91
7: Ghana Exports 1992 – 2015 ….. ….. ….. 99
8: Foreign Direct Investment Inflow in Ghana ….. ….. ….. 122
9: Ghana’s FDI as Percentage of GDP and Total World FDI Inflow ….. 123
ix
LIST OF ABBREVIATIONS
OFID OPEC Fund for International Development
ISODEC Integrated Social Development Centre
UNDP United Nations Development Programme
IMF International Monetary Fund
GNPC Ghana National Petroleum Corporation
EPA Environmental Protection Agency
FPSO Floating, Production, Storage and Offloading Vessel
EITI Extractive International and Transparency Initiative
GEITI Ghana Extractive International and Transparency Initiative
MNC’S Multi-National Corporations
NOC’s National Oil Companies
TNC’s Trans-National Corporations
IOC’s International Oil Companies
GLSS Ghana Living Standard Surveys
SME’s Small and Medium Scale Enterprises
GSGDA Ghana Shared Growth and Development Agenda
FDI Foreign Direct Investment
PWYP Publish What You Pay
UNCTAD United Nations Conference on Trade and Development
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ABSTRACT
Natural resource discovery in a country can be the beginning of the country’s economic
growth. The wealth from the resources if well managed could promote sustained
economic development. The exploration and exploitation of natural resources is usually
accompanied with the paradox of development and challenges. The discovery of oil in
commercial quantity in Ghana in June 2007, has raised the hope of Ghanaians as it
regards better days to come. However, oil has its own effect on an economy. While it is
supposed to be a blessing, empirical evidence reveals that it has frequently become a
curse in most countries of the Third World, especially in the African Continent, where it
usually produces and reproduces renting seeking, conflict, patronage, Dutch disease and
resource curse. The study seeks to investigate the interface between oil and national
development in Ghana. The thrust of the study however, was to interrogate the possibility
of oil serving as the pillar of the socio-economic development and transformation of the
country; while at the same time avoiding the perennial problem of resource curse and the
Dutch disease that characterize most other oil producing African states. On the account of
this, we examined the ways through which Ghana can transform its oil natural resources
into a blessing rather than a curse by devising transpraent and accountably oil oil
governance best practices. We hypothesised that Ghana can avoid the resource curse
conundrum through the formulation of strong oil sector policies and the adoption of oil
governance best practices and that there is a positive relationship between Oil discovery
and production and the rate of Foreign Direct Investment (FDI) inflow into Ghana. The
institutional theory of resource curse was used as our framework of analysis. We argued
that it is not the natural resources that determines its effect on an economy rather that it is
the operational underpinnings of the institutions in place and the legal regimes that
determines the management, regulations and uses of the oil revenue and wealth that
actually dictate whether the resource will be a blessing or curse within an economy. The
study make use of observation method of secondary sources of textbook, journals,
magazines, conference papers, official documents and Internet sources. It also adopted the
qualitative descriptive method of analysis as our method of data analysis. Through which
we, found that Ghana will escape the resource curse conundrum by adopting and
implementing oil governance best practices as is the case with Alaska, Norway and
Botswana. It was also discovered that with the right management and use of oil revenue
that will manifest in macro-economic stability in addition of other factors that oil
discovery and production will continue to attract Foreign Direct Investment (FDI) into
Ghana. Drawing from this, the work argues that the development of institutions and
policies that pursue prudent macroeconomic and fiscal policies will save Ghana from
resource curse.
xi
TABLE OF CONTENTS
Title Page ….. ….. ….. ….. ….. i
Approval Page ….. ….. ….. ….. ….. ii
Dedication ….. ….. ….. ….. ….. iii
Acknowledgement ….. ….. ….. ….. ….. iv
List of Maps ….. ….. ….. ….. ….. vi
List of Tables….. ….. ….. ….. ….. vii
List of Figures….. ….. ….. ….. ….. viii
List of Abbreviation ….. ….. ….. ….. ix
Abstract ….. ….. ….. ….. ….. x
Table of Contents….. ….. ….. ….. ….. xi
CHAPTER ONE: INTRODUCTION
1.1. Introduction ….. ….. ….. ….. 1
1.2. Statement of the Problem ….. ….. ….. 3
1.3. Objectives of the Study ….. ….. ….. 4
1.4. Significance of the Study ….. ….. ….. 4
1.5. Literature Review ….. ….. ….. 5
1.6. Theoretical Framework ….. ….. ….. 37
1.7. Hypotheses ….. ….. ….. 40
1.8. Method of Data Collection ….. ….. ….. 40
1.9. Method of Data Analysis ….. ….. ….. 40
CHAPTER TWO: HISTORICAL DEVELOPMENT OF OIL EXPLORATION
AND PRODUCTION IN GHANA
2.1: Brief History of Ghana ….. ….. ….. 44
2.2: History of Oil and Gas Exploration in Ghana ….. ….. 45
2.3: Developing the Oil Jubilee Oil Field ….. ….. ….. 49
2.4 Projected Ghana’s Oil Revenue ….. ….. ….. 53
2.5 The Role of the Ghana National Petroleum Corporation….. 56
CHAPTER THREE: OIL GOVERNANCE AND AVOIDANCE OF RESOURCE
CURSE IN GHANA
3.1: Natural Resource Governance Initiatives ….. ….. 59
3.2: Oil Governance Best Practices….. ….. ….. 68
3.3: Case Studies of Oil Governance ….. ….. ….. 71
3.4: Accountability and Transparency in Ghana Public Sector… 78
3.5: Civil Society and the Management of Ghana’s Oil Wealth…. 85
3.6: Ways of Maximizing Transparency in the Oil Sector ….. 93
3.7: Analysis of Ghana’s Petroleum Revenue Management Act… 94
xii
3.8: Estimated Contribution of Oil to Ghana’s Economy ….. 97
CHAPTER FOUR: OIL AND FOREIGN DIRECT INVESTMENT IN GHANA
4.1: Introduction ….. ….. ….. 103
4.2: Determinants of Foreign Direct Investment….. ….. 105
4.3: Factors that Determines Foreign Direct Investment
inflow in Ghana ….. ….. ….. ….. 110
4.4 Ghana’s Policy Environment for FDI ….. ….. ….. 113
4.5: FDI and Its Relationship with Natural Resources ….. 117
4.6: Applying Findings in Case Studies to Ghana ….. ….. 119
4.7: Oil and Foreign Direct Investment in inflow in Ghana ….. 122
4.8: Impact of the Oil Induced FDI to Ghana ….. 125
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1: Summary ….. ….. ….. 128
5.2: Conclusion ….. ….. ….. 120
5.3: Recommendations ….. ….. ….. 131
BIBLIOGRAPHY ….. ….. ….. 133
1
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF STUDY
Ghana’s development path has not been an easy one. From the time of
colonial rule to independence Ghana has not developed the way it
should have. Ghana and Malaysia had independence almost at the
same time. However, Malaysia has developed far more than Ghana.
Whilst Malaysia is counted among middle income nations, Ghana is
struggling to come out of the category of low income nations. To
know whether a nation is a developing or low income one, factors like
Human Development Index, poverty level, unemployment rate, levels
of physical development, per capita income, distribution of wealth
and structure of the economy among other things must be considered.
http://news.myjoyonline.com/features/201011/55056.asp
The citation above captures the situation that characterizes the Ghanaian economy and its
fate in terms of the country’s quest and attempt at economic growth and development over the
years. However, with the coming of oil into the country’s litany of natural resource, it appears
that its story is about to change. This is so because “oil fever” has gripped Ghanaians since the
first major oil discovery in the country’s history was announced in June 2007. Since that time,
Ghana has rapidly emerged as an oil industry hotspot. While there has been some oil exploration
over the past century, with a trickle of oil produced in the Saltpond field, it has only been in the
past decade that serious efforts have been made.
Ghana is on the verge of becoming a major oil-producing and exporting country based on
its proven reserves. Oil production in the country started on 17th December, 2010 however, this
will quickly decline over the following decade as field capacity is tapped. Ghana has an enviable
record of good governance and stability. Despite this progress, Ghana is still a poor country of 23
million people that depend largely on primary commodity exports such as cocoa, gold and timber,
with almost 80 percent of Ghanaians living on less than $2 a day (ISODEC, 2010:7).
However, with the recent discovery of oil and its maiden exportation; it is suggested that
billions of dollars will be flowing into the government treasury, but Ghanaians are all too familiar
with corruption, poor development outcomes in the country’s mining communities, and the
tragedy of Nigeria’s squandered oil wealth. For the international oil industry, the 2007 “Jubilee”
finds called one of the largest recent finds in Africa, has generated enormous interest in the
country’s hydrocarbons potential. It is estimated that in 2011, that Ghana will be producing
approximately 120,000 barrels of oil per day, along with significant quantities of gas. The
International Monetary Fund has predicted that government revenues from oil and gas could
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reach a cumulative US$20 billion over the production period of 2012–30 for the Jubilee field
alone. Now, as in many countries before it, Ghana’s recent discovery of a major offshore oil field
has created a mixture of exuberance and trepidation.
Over the past 20 years, Sub-Saharan Africa has been experiencing a large ramp-up in
investment and production of oil and gas. This surge in production has had profound impacts for
the people and political economy of nations in Africa’s Gulf of Guinea region and elsewhere
(Gary and Karl,, 2003; Ricardo, 2007; Shaxson, 2007; and Ghazvinian, 2007).
However, Ghana is no stranger to extractive industries or development strategies built on
primary commodity exports. Ghana is the second-largest gold producer in Africa; such that
during the era of British colonialism it was called the “Gold Coast” and the country also produces
bauxite, manganese, and diamonds. A large part of the rural population depend on cocoa
production and exports in earning their living. Timber is also an important export. With the
arrival of oil, some are concerned that this could hamper and not aid development strategies that
are working to move the country away from being a producer and exporter of basically primary
commodity.
The country’s Gross National Income per capita is $590, with about 78.5 percent of the
Ghanaians living on less than $2 a day. Life expectancy is 59.1 years, and the infant mortality
rate is 112 deaths per 1,000 live birth (World Bank, 2008,
http://go.worldbank.org/C9GR27WRJ0). Regional income disparities abound, with those in rural
areas and the northern part of the country not experiencing as much reduction in poverty.
According to the UN Development Program’s “Ghana Human Development Report 2007,” 45
percent of those living in the rural savannah area of northern Ghana lived in extreme poverty in
2006, compared with 5.4 percent in Accra, the capital, and a national rate of 18 percent
(www.govindicators.org.). Opposition candidates have jumped on these figures and claimed that
Ghana’s stability and economic growth have left many behind.
Ghana’s former President, John A. Kufuor, (2008) were of the view that the country’s
new “black gold” will be the boost that Ghana needs to become an “African tiger.” During the
euphoric days of June 2007 when the oil discovery was announced, President Kufuor said: “Oil is
money, and we need money to do the schools, the roads, the hospitals; if you find oil, you
manage it well, can you complain about that? Even without oil, we (Ghana) are doing so well,
already. Now, with oil as a shot in the arm, we’re going to fly.” (http://news.bbc.co.uk/go/pr/fr/-
/2/hi/business/6764549.stm.).
Paradoxically, it is now almost conventional wisdom that natural resources (oil) are a
curse for currently developing countries. This claim is supported both by some basic facts, for
example, for OPEC as a whole GDP per capita on average decreased by 1.3% each year from
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1965 to 1998 (Gylfason, 2001), and by cross country empirical work (Sachs and Warner, 1995,
1999; Busby et al., 2004; Mehlum et al., 2006). Moreover, numerous case studies of resource
dependent economies have linked resource abundance to poor development (Gelb, 1988; Karl,
1997; Ross, 1999, 2001).
It is therefore on this background that this study seeks to critically and systematically
assess the chances and possibilities of Ghana in avoiding the seeming intractable resources curse
syndrome, which has bedeviled other oil producing nations.
1.2 STATEMENT OF PROBLEM
Since the discovery of oil in large quantity in Ghana in June 2007, considerable attentions
have been directed to the Ghanaian Petroleum sector. But only little attention has been given to
the study of how to utilize the oil revenue to stimulate the economic growth and development of
the Ghanaian economy. However, this body of literatures has suffered from important
shortcomings. Even in terms of the modest accomplishment of the study of the oil and gas sector
of the Ghanaian economy, research in the area have not adequately articulated the
interconnections between the new found oil in Ghana and its national development.
Generally commentators on Ghana’s new found oil wealth, have variously and
exclusively concentrated either on the use of the oil revenue as a collateral for foreign loans and
borrowing (Adei 2010:1), consolidation of the fund, stashing away of the oil fund in special and
dedicated account, adoption of state policy of capital accumulation and formation (Asenso-
Okyere, 2010:4), or should go the way of Alaska by establishing the policy of cash in hand for
the citizens of the country (Moss, 2010), another group basing their analysis and conclusion on
the negative effect of oil windfall on the economy of other countries; out rightly condemned
Ghana to debased status of resource curse and Dutch disease.
More importantly, these analyses have not adequately clarified the organic
interconnections between oil revenue and Ghana development crises. Emphasis is, placed on the
use the oil revenue to build-up stock of wealth for the nations. Therefore, not much effort is
directed on the systematic analysis of how the general receipt and activities of the new found oil
and gas, will determine the developmental thrust and orientation of the overall socio-economic
development and progress of the Ghanaian economy, through the formulation of efficient oil
sector policies.
Deriving from the above, there has not been an adequate systematic treatment of the
establishment of the right institutions, formulations of practical oil and gas sector revenue
management and regulation laws and policies, that will determine and shape the nature of the
outcome and uses of the Ghana oil windfall for positive impacts and contributions of the oil
towards the economic and inter-sectoral progress (development) of Ghana. Thus, the impact of
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the country’s petroleum sectors on the ability of the nations to break away from its beggar
mentality, diversify its economy, shift from the producer and exporter of primary commodity and
the development of the human person through the enhancement of the nations Gross Domestic
Product (GDP), the quality of life of the people, the country’s preparedness to manage its oil
wealth in addition to attracting the much needed foreign capital in the form of Foreign Direct
Investment, (FDI) has not brought into clear focus.
It is therefore, against this background that an attempt is made to go beyond the façade of
‘journalistic’ rhetoric’s on the use of Ghana’s oil revenue to the critical analysis and assessment
of the organic interconnections between the Ghanaian petroleum sector (in terms of the fiscal
regimes governing the exploration, exploitation, production and marketing, especially the
revenues that guzzles therein) and its implications on her political economy, in terms of its ability
at attracting foreign capital and investment into the country that will directly and indirectly
contribute to the growth and development of the nations economy. In this connection, the
definition and redefinition of the place and role of oil in consonance with the socio-economic
growth and development of Ghana elicits such pertinent research questions as:
1. Given the experiences of other Sub-Saharan African oil producing countries, is it possible
for Ghana to avoid the resource curse conundrum?
2. Has oil discovery and production in Ghana, led to an increase in the rate of Foreign Direct
Investment (FDI) inflow into the country?
1.3 OBJECTIVE OF STUDY
The broad objective of this study is to critically assess the expected role that the new
found oil (wealth) in Ghana can play towards the socio-economic and political development of
the Ghanaian economy.
Specifically, the study has been designed to achieve the following detailed objective:
1. To determine if Ghana can avoid the resource curse conundrum through the formulation
of strong oil sector policies and the adoption of oil governance best practices.
2. To ascertain if oil discovery and production in Ghana has directly or indirectly led to an
increase in the rate of Foreign Direct Investment (FDI) into the country.
1.4. SIGNIFICANCE OF STUDY
Ideally, every social science research possesses two levels of significance; the theoretical
and the practical. In keeping with this ideal, this study is of both theoretical and practical import.
At the theoretical level, the study will attempt to add to the existing body of knowledge
that attempts to explain the role of oil to national development especially as it concerns Ghana; in
its generic sense and specifically on the methods and ways through which it can escape the oil
induced resource curse. This, it is hoped, would enhance the understanding of the issue area. It is
5
also hoped that the findings of this study would help to stimulate further discussion on and
research into the subject matter.
At the practical level, the study hopes to serve as a resource material for Ghana’s policy
makers, general public, businessmen, investors as well as other oil producing countries in Africa
especially those in the Gulf of Guinea that is presently suffering from the debilitating conundrum
of the Dutch disease and resource curse syndrome in general. The empirical significance is of
utmost importance as it will direct the Ghanaian diplomats, policy and decision makers towards
the formulation of policies and programme that will practically lunch Ghana into developmental
path, while at the same time avoiding the pitfalls that comes with oil discovery and production
that has manifested in rent seeking, paradox of plenty, oil induced conflict et cetera in other oil
rich countries in the Sub-Saharan Africa. In this way, we will be contributing to the better
appreciation of the way forward in Ghana new found oil industry as well as in its multilateral
relations with the outside world as represented in the Multinational Oil Corporations and Foreign
Direct Investments, that is already competing for the soul of the Ghanaian State [oil industry] (see
Onuoha, 2008:10).
1.5 LITERATURE REVIEW
The focus of this literature review is in the areas of development, resource curse, Foreign
Direct Investment and issues relating to the oil discovery in Ghana the development, resource
curse, role and use of oil in Ghana. In so doing, attempt will be made to conceptualise the term
development. In the process concepts of economic development and development perspectives
will be exhaustively examined. More significantly, we shall categorise the basic propositions of
the distinct strands of thought in development economics and then explore alternative views in
the explanation of underdevelopment in peripheral socio-formations such as Ghana. The review
will also identify, discuss and present the various strands in the resource curse argument, in
addition to its various causes. It will also consider the propositions on the Foreign Direct
Investment and economic growth and development nexus. Finally, we shall evaluate the
propositions, positions and recommendations of commentators on Ghana’s new oil found with a
view to determining their strength and weaknesses as guide-post towards the socio-economic
advancement of the Ghanaian economy that will directly and indirectly enable it to escape the
resource curse conundrum.
Arising from the various literatures that have attempted explanation of the term is the fact
that development as a term that suffers from problems of definition. Hence, it assumes vastly
different meanings to scholars and political actors whose appreciation and application of the term,
reflect and manifest their distinct and diversifying methodological, epistemological and material
foundations and twists. In fact, so confused had the situation becomes that Seers (1969:12)
6
wondered whether “instead of worrying about brushing aside the web of fantasy and
shipshoddedness surrounding the word ‘development’, we should not simply abolish its use and
look for a better and less debased word”. However, he proposed a redefinition of the term.
Generally, the term is often used to describe the process of economic and social
transformation within countries. This process often follows a well-ordered sequence and exhibits
common characteristics across countries. Meanwhile, Todaro (1992) perceives development as a
multi-dimensional process involving the reorganisation and re-orientation of entire economic and
social systems. He maintained that development must represent the entire gamut of changes by
which an entire social system, tuned to the diverse basic needs and desires of individuals and
social groups within that system, moves away from a condition of life widely perceived as
unsatisfactory and towards a situation or condition of life regarded as materially and spiritually
better. Nevertheless, Todaro’s analysis underplayed the vital role played by human factors and
the process through which development is actualized and sustained. Besides, his analysis was
anchored on immeasurable situational factors.
Perhaps, a much more concrete analysis was that adduced by Seers (1969:3). He
succinctly noted that:
The questions to ask about a country’s development are three: what
has been happening to poverty? What has been happening to
unemployment? What has been happening to inequality? If all these
three have declined from high levels, then beyond doubt this has been
a period of development for the country concerned.
Subsequently (Seers, 1977:12) added self-reliance as one of the cardinal ingredients of
development. He nonetheless, failed to provide measurement instruments and/or criteria for the
prescribed cardinal ingredients of development and like most writers glossed over the role of
human factors in the process of development.
In fact, Cairncross (1961:250) correctly observed that “the key to development lies in
men’s minds, in the institutions in which their thinking finds expression and in the play of
opportunities on ideas and institutions”. Therefore, development embraces the major economic
and social objectives and values that societies strive for. Thus Goulet (1971:87-94) and Thirlwall
(1989:9) argue that development occurs when there are improvement in life sustenance, self-
esteem and freedom and when material advancement has expanded the range of choice for
individuals. In the same vein, Mabogunje (1981:46) underscores the primacy of human factors.
He noted among others that development is essentially a human issue, a concern with the capacity
of individuals to realize their inherent potential and effectively cope with the changing
circumstances of their lives. He also noted that development involves the total and full
mobilization of a society towards a self-centered and self-reliant position with regards not only to
7
the process of decision-making, but more importantly the pattern and style of production and
consumption.
Meanwhile, social science literatures are inundated with writings, which conceive
development in terms of economic growth and modernisation. Specifically, western-orientated
scholars encourage underdeveloped states to model their societies in line with the international
and structural arrangements and orientations reminiscent of advanced capitalist states. These
scholars include: Pye (1966), Rostow (1960), Coleman (1968), Huntington (1965) et cetera. They
churn out a checklist of artifacts which they perceive as indicators of development; these include
industrialization; economic affluence; military hegemony; advanced technology; urbanization,
and the parliamentary political process (Nnoli:1981:21).
However, Frank (1969), Amin (1973), Baran (1967), Ake (1996), Nnoli (1981), Gana
(1989), et cetera have in their various writings unleashed a deserved and unmitigated critique of
the modernization theorists. They among others noted that the modernizations persuasion
abstracted from history and concluded by presenting logically inconsistent analysis. Hence, their
suggestion and prescriptions are not only theoretically inadequate, but empirically untenable and
policy-wise ineffective.
In particular, Nnoli (1981), Ake (1972) and Rodney (1982) observed that development is
multifaceted and man-centred. It derives from the material conditions of the people concerned
and hence it is neither imposed nor hoisted. In fact, Ate (1972) warned that ‘development that
commits us to a wholesome imitation of others leads to a wholesale reputation of our being”.
Similarly Nnoli (1981) conceives development as “a dialectical phenomenon in which the
individual and society interact with their physical, biological and inter-human environment
transforming them for their own betterment and that of humanity at large and being transformed
in the process”. The above conceptualization appears comprehensive but were not anchored
something concrete, precise and measurable.
Development should better be perceived as man-directed phenomenal socio-economic
and political transformation of self and entire structure of a given political system. These involve
acquisition of new and relevant ideas, skills, propensities, preferences and predispositions which
are directed towards improvement of the living conditions and existentialities of the concerned
population. The above subsequently translate into improvement in man’s potentials and
capabilities; elimination or rather reduction of poverty, inequality, unemployment and thus
improvement in life sustenance, self-esteem, freedom and value-orientations.
As a corollary of the above, development refers to anything that advances the individual
through the qualitative transformation of his or her immediate environment, a transformation of
which the main purpose is simply to provide him or her in due course with a better standard of
8
living in economic or human terms. The development process must first and foremost make room
for an awakening of the potentials of the beings who are both its initial protagonists and its
ultimate targets; human beings (Mayor, 1996:87). The conceptualization above will provide a
good framework with which we can realistically put the underdeveloped countries (Ghana
inclusive) back on the trajectory of development.
Nevertheless, development is usually perceived essentially as an economic phenomenon.
But this is rather parochial. Development has political, economic and social ramifications. It is a
comprehensive and integrative phenomenon which must be appreciated as such and applied
accordingly. Hitherto, liberal writers state that economic development concentrates primarily on
economic growth as reflected by increases in Gross National Product (GNP), industrialization,
capital formation, welfare services, the development of infrastructure such as roads, electricity
and railways and increased economic efficiency (Nnoli, 1981:29). However, using GNP as a
parameter for measuring levels of development is not only dubious but misleading. As Webster
rightly observes, it does not account for activities like smuggling, domestic labourers and network
of families engaged in subsistence food production (Webster, 1990:29).
In fact, an analysis of economic development should concentrate on the process by which
various economic activities appear, grow in importance, and in some cases, decline or disappear.
Basically, literature on economic development has been dominated by three major strands of
thought:
1. the ‘stages of economic growth’ theories of the1950’s and early 1960’s;
2. the ‘international dependency’ theories of the late 1960s and the 1970’s; and
3. the ‘free market’ theories of the 1980s and 90’s (Todaro, 1992:29).
In 1950s, development was conceptualized from the perceptive of the modernisation
persuasion. The modernisation theory was the dominant mode of analysis and it attributes the
causes of underdevelopment to factors sui generis and endogenous to the less developed
countries. Thus, the theory advocates a total transformation of traditional or pre-modern entities
approximating the technologies and organisation of the advanced capitalist societies.
The chief proponents who included, Rostow (1960), Hoselitz (1971), McClelland (1971)
and Hagen (1980) et cetera, compartmentalized the world into the traditional and modern
societies. The former is seen as backwards, primitive, and technologically deformed. They also
argued that traditional societies are held down by certain inhibiting factors that usually undermine
realistic and sustained economic development. On the other hand, they classified modern
societies as the advanced capitalist societies that are technologically advanced, politically stable
and governed by pragmatism and oriented to development. Thus they encourage underdeveloped
9
societies to imbibe imitative attitudes, and remodel their societies after the advanced capitalist
societies.
However, the apparent failure of the modernisation prescription to stimulate sustainable
development lead to the emergence of international dependence school of thought, which brewed
the dependency theory. The theory has Latin American origin. The movement emerged as a
critique of modernisation paradigm, especially as a critique of import substitution
industrialization, which failed to accomplish industrial development in Latin America.
The dependency paradigm attempts an understanding and explanation of socio-political
and economic variables that re-enforce underdevelopment by focusing on the historical
circumstances surrounding the underdeveloped countries. It argues among others, that the
conditions and circumstances of the Third World Countries would be concretely appreciated if we
examined the experiences of the underdeveloped countries in terms of the mode of their
incorporation into the capitalist economy, their performances within it, and the mechanism for
sustaining the conditions of underdevelopment. Notable among the advocates of the dependency
paradigm are Cardoso (19: 83-95). Frank (1969), Furtado (1976), Santos (1970), Baran (1967),
and Sunkel (1973:132-76) et cetera.
As a direct corollary to the above, underdevelopment is here perceived in terms of
international and domestic power relationships, institutional and structural economic rigidities,
and the resulting proliferation of dual economies and dual societies both within and among the
nations of the World. They maintain that the less developed countries could only develop if they
repudiate Western oriented development strategies and simply adopt internally stimulated
development strategies, simply put, if they first delink.
However, by emphasizing more of exogenous variables rather than the entire structure of
the socio-economic system, to explain underdevelopment and the dynamics of international
political economy, the dependency theory presents a picture of absolute fatalism; condemning the
underdeveloped countries to unalterable deteriorating position; almost irreversibly determined by
neo-colonialism and offering no hope of escape from the stranglehold of underdevelopment.
Moreover, by prescribing delinking as an alternative option for development, the dependentistas
glossed over the internal conditions of the less developed countries, including the leadership
factor, which obviously cannot sustain the demands of their prescription.
Thus, in the 1980s through the new millennium, emphasis shifted to free market and less
government intervention in the economy; in order to promote competition and stimulate rapid
growth and development. Through the much propagated and re-invigorated globalisaition and its
processes, developing states are practically coerced into imbibing the market economy doctrine.
Developing Countries are inveigled into accepting and swallowing the pill of trade liberalization,
10
foreign direct investment (FDI), privatization, deregulation et cetera. However, these have not put
the economies of underdeveloped countries back on the trajectory of sustainable development.
Instead this new surge of World Capitalism is introducing even greater distortions into the
polities of Third World States.
The above concretely demonstrates that the developing states have been wallowing from
one development fad to another. This results basically from the different perceptions of
development, both as a fact-situation, and a process. Hence in the attempt to grasp the substantive
and methodological features of development, and use same for public administration and a basis
for political action, successive political leaders in developing countries, adopt specific
development models ranging from the state-centric perspective to the models which emphasize
the expansion of the market from the domestic to the interdependent.
Nevertheless, the adoption of any of the models of development has not practically
translated into remarkable development. Various explanations have been adduced for the
prevailing and persisting economic conditions of distinct underdeveloped states. These, though,
appears to melt under the boiling pot of the nature and character of international political
economy which sustains an asymmetrical relationship between the developed and developing
states.
Therefore, while Prebisch (1950), Singer (1950) and Baldwin (1972) blame
underdevelopment on terms of trade; Okishio (1963) and Emmanuel (1992) anchors their
explanation on unequal exchange; all these however centers on the nature and character of
international trade. Nevertheless, the structuralists, among whom is Rodriques (1980) based their
analysis on the structure of the mode of production. They criticized the conventional theory of
international trade and maintain that the problem can be located on the international division of
labour which they argue was of much greater benefit to the centre than the periphery. To break
this yoke, the structuralists prescribe rapid and massive industrialization. Nonetheless, they gave
no consideration to the social relations of production which are at the base of the process of
import-substituting industrialization and of the transformation in other structures of society that
this brings to/in its wake. This however, is not under-playing the fact that the international
economic system is characterised by inequality and lop-sided development.
Arguing further on this, Nweke (1984:7) observes that underdevelopment is sustained by
global inequality and distorted development. This, he argues, is a largely unavoidable
consequence of their colonial past. This is not stating that colonialism is a singular cause of
underdevelopment. Global inequality is a natural phenomenon. It is a consequence of differing
levels of development of productive forces in the constituting political units. Hence, global
equality negates the cosmic order. Of course, uneven development is an intrinsic or inherent
11
property of the economic process. Far from being merely transitory, it seems to be a pervasive
and permanent condition (1989:335). The present economic configuration in the international
economic relations is essentially a product of differential growth of the productive potentials
and/or pattern of production.
The international economic order is analytically classified into two poles, the ‘centre’ and
the ‘periphery’. Although the classification is not mutually exclusive, the two poles are closely
bound together, and are mutually and reciprocally conditioning. Nevertheless, the periphery is
subordinated by the international division of labour, to a status of ‘hewer of wood and drawer of
water’. Most of the underdeveloped countries come from Africa.
Most African states are bedeviled by retarded economic growth spiraling inflation,
currency devaluation, trade deficits, external debt burden, poverty, illiteracy, disease, inadequate
socio-economic infrastructure, political instability amidst intractable population explosion and
low life expectancy. The question that at remains at this point therefore is how Ghana’s new
found oil can assist it in addressing this developmental anomaly.
Oil and National Development in Ghana
There is a vast literature that looks at the impact of oil windfalls and natural resources in
general on a small open economy (Collier and Gunning, 1999:20). The oil-price shocks first
sparked discussions on the harmful side effects of oil windfalls, due to the observation that oil
producing countries under-performed relative to other developing countries despite the
unprecedented increase in wealth following the oil-price hikes (Gelb, 1989:23).
Wijinberger (1984:41-55) and Krugman (1987:41-55) centering their studies on the issue
of ”Dutch Disease” phenomenon, which refers to the negative effects that an export boom may
have on traditional export sectors and overall productivity growth, maintained that most oil based
economies are usually trapped in learning-by-doing effects in their tradable sectors.
Majid (1960:12) in his study of the contribution of the oil sector to Arab Economic
Development maintained that the role of oil sector in an economy usually pass through various
stages and forms; that are in themselves a function of (dependent on) the developments in the oil
markets and flow of revenues. He however went on to assert that the peculiar roles of the oil
sector generated revenues varies across and among nations depending on the political,
institutional and fiscal relations between the oil sectors as represented by the National Oil
Companies (NOCs) and their respective governments.
Scott (1970:156) in his study of the Nigerian petroleum industry, its operations, effects
and implications, opined that there are basically four methods and/or strategies by which a
technologically less advanced country (in this case Ghana) can tap on potential extractive mineral
reserve; which in include the following:
12
Invite foreign concessionaire to form local subsidiaries and thereby supply management
and technology, capital and market.
Undertake joint venture in which foreign investors supply managements, technology and
market as well as a portion of the capital with the remaining capital furnished by the host
country supplies the capital and tries to find the market.
Institute management contracts whereby experienced foreign firms offer managements
and technology only and the host country supplies the capital and tries to find market.
Do without foreign participation altogether and furnish management, technology, capital
and market itself.
He went to state that the colonial governments around the 3rd world countries usually
adopts the first options, the colonial governments adopted the first options while the post-colonial
states usually opt for the latter. The situation is occasioned by the fact that these countries lack
equipment and expertise needed in the sector. He conclude by arguing that the general unresolved
question of development that, confronts such an economy namely rivalry, large and increasing
urban unemployment, proper degree of government intervention in the industry.
Tugendhat (1968:5) gives a most brilliant account of the history of international oil
industry from 1859 when Edwin L. Drake drilled the first oil well near Titusville in Pennsylvania,
USA to 1960 when the OPEC was formed in Baghdad and recounted the struggle over reduction
of posted price of oil between the companies and host governments. He recounted the events that
eventually led to the formation of OPEC, which turned the table in favour of oil producing states
in the sense that they now control both economic and political powers. Thus:
As practical executives with experience of the international
oil industry, these men understand why the companies had cut
their prices, and some of their public statements not
withstanding, they knew that the reduction would not be
rescinded. Their aim was to make unilateral action impossible
in future and to ensure that the companies always kept the
product government’s interest rather that those of anybody
else in the forefront of their minds… The result of their
deliberation was the formation of the Organisation of
Petroleum Exporting Countries (OPEC)… The wheel had
turned full circles since Achanacarry and the companies have
never since tried to reduce the posted price.
In effect this means that oil producing countries such as Ghana are in position to
determine at what price their petroleum sells and what quantity to produce. As a result of this
hard-won power, Ghana as an oil producer will soon experience tremendous increase in its
revenue in the years ahead starting from 2011 when it starts oil exportation. A situation that will
13
enable the country to disentangle itself from the socio-economic morass that presently
characterizes it.
Addotey (2010:1) observes that the oil industry do actually generates lots of money;
however it does not create an economy, since it is a narrow industry that does not employ a lot of
people. Buttressing his point he opined that:
Moscow has more millionaires than any other city in the
world with their source of wealth traceable to Russia’s oil
industry but Russia’s economy is short of pride. ...it (oil)
creates layers of difficulties to economic development than it
helps. The Middle Eastern countries provide us with further
insight where oil money has led to misplaced priority and
continuous arm race. The situation becomes more acute for
economies that heavily produce crude for export. Apart from
a quick sight of barrels been loaded into ships for export the
ordinary person would have no idea of what goes on in the
industry.
In furtherance he maintained that in Saudi Arabia, that continuous inflow of oil money
means that there is more money in the country but fewer jobs for the people. The economy for
ages remains less diversified. The scenario gets worse when populist sentiments begins to set in,
that is when the people begin to feel that the oil is in fact being used against them. Describing the
situation in Nigeria, he states that the Nigeria’s oil grinding machine has been grinding for
decades but oil receipt has never manage to turn the economy round let alone provide a decent
life for the local people on whose land the black stuff is produced.
Abbey (2010: 1-2) posited that for Ghana to actually enjoy the benefits of the expected oil
windfall that Ghana must avoid the mistakes of other oil drilling countries, where oil has turned
out to be a curse rather than a blessing. He also noted that in other to avoid such mistakes and
make Ghana’s oil find beneficial to the citizenry that there is a need to assess the country’s socio-
economic situation.
Moreover, he stressed that Ghanaians are neither more brainy nor luckier than citizens of
other countries that are suffering the ravages of oil conflicts. He therefore advocated for the need
for consensus building as a means of maximizing the profits of oil revenue, thus:
Let us prepare well. Let the oil be a facilitator. Let it be the thing
that broke our beggar mentality; the oil find should be a call to
action, particularly for those who have the capacity and skill to
advise government on the way forward.
14
He went on to state categorically that the Jubilee oil field discovery and its expected
revenue and Ghana’s status as an oil producer have several implications for the country, which
the country’s policy and decision makers should concern themselves with in order to circumvent
possible negative consequences that may come with the country’s new socio-economic status.
We should by now have sat down to ascertain how much money
donors are likely to hold back as a result of our oil producing
status and determine how much of the oil money we plan to
spend or set aside for future generations.
On the proposition that the revenue from the crude oil production should be saved for
future use, he maintained that stashing the oil money away rather than put them into economic
use on the mere pretence of saving for the future is tantamount to inefficiency and utter lack of
vision on the path of the nation in terms of the developmental path or strides the nation wishes to
achieve, which by implication is an admission that the country is obviously confused about what
to do with the oil revenue. Thus he contends that:
It is when you are incapable of using your talents that you bury it.
“In fact, the bigger the amount we want to set aside, the louder we
announce to the world that we don’t trust we’ll use this resource
judiciously and that we are not prepared to plan our future.
…about entering into something that could ignite or stall the
country’s development and yet have no idea exactly what to do
with the expected oil wealth.
Moreover, he opined that the questions as to how much (money) the country is to put in
an endowment or stabilisation fund among others, must hinge on the basis of where the country is
and where it want to go. The basis for determining the rate of distribution of the projected
revenue must in turn hinge on knowing where we are. He described these as fundamentals for
determining what levels of investments to make in meeting Ghana’s present developmental needs
and what to set aside for future use.
Asenso-Okyere (2010:4) posited that the only way through which Ghana can practically
benefits and ensures sustainable development of its economy on the basis of the oil revenue is by
adopting a state policy of capital accumulation and formation. A situation in which the country
will build up stock of oil wealth and stash it away in bank vault for the future generations of
Ghanaians rather that utilizing all of the entire money. Hence he opined:
We must avoid the Nigerian and Dutch … He explained that
Nigeria, for instance, was estimated to have gained some
US$600 billion in oil benefits but the country still remained
one of the 20 poorest countries in the world because it did not
save some of that wealth against the future.
15
In the case of the Dutch, the economy evolved around their
natural gas to the detriment of all other sectors of the
economy and that mistake resulted in the infamous Dutch
Disease characterised by a near collapse of that economy.
He was also of the view that deep sea oil exploration and extraction is expensive and so a
lot of the revenue that would be generated would be reinvested, hence there exists that dire need
and frugality on the part of the country as to the wise use of the little that would be left. As a
result he maintained that the current trend of events around the world in terms of natural resource
use and management posed a threat to future generations; because of the crave for immediate
survival other than the future, was the cause of indiscriminate depletion of natural resource,
resulting in climate change and its resultant disasters, conflicts over extractive mineral revenue,
corruption, crime and disease. In fact, he attributed the behaviour of the present generation
towards natural resources to greed, insatiable and careless consumption and blatant disregard for
the needs of the yet unborn.
Sunnu-Atta (see, Ato Kobbie, 2010:1) asserted that Ghana has the requisite human
resource to make local content work in the oil and gas industry, citing successes chalked in the
country taking over the leadership of such mega-projects like the Tema Oil Refinery (TOR) and
the Volta River Authority (VRA), stating that “those entities are running and expanding and have
not failed,” though not without some hitches here and there. Hence “It will take hard work, a lot
of innovative brainwork and, above all, strong willpower to make it a success; we have no choice
other than to make oil a blessing for Ghana”. In furtherance, he advocated for joint venture,
which will involve the Ghanaian government and some foreign companies, a situation he believes
will enhance both transfer of technology, research and development (R and D) in addition to local
content.
Huno and Konda (2010:3-5) commenting on the attendant joy and jubilation that
accompanied the discovery of oil in commercial quantity in Ghana opined that the oil find is a
very welcomed piece of news; since Ghana has always been noted to have oil deposits but what
was not known was the commercial viability of the deposits. The joy was due to the fact that
Ghanaians are aware that oil generates a lot of revenue for a country and very soon the oil
revenue will begin to trickle in. This means a lot to a poor country like Ghana that is in desperate
want of development and socio-economic transformation. The problems with this type of
assertion is that if fails to tell us what actually that needs to be done with the so-called oil mega
wealth that oil brings in order for it to help in the transformation of the Ghanaian economy.
Adei (2010:1) the former Rector of the Ghana Institute of Management and Public
Administration (GIMPA), on his part advocated that Ghana should use its oil revenue as a
collateral for foreign loans and borrowing, which according to him is in the national interest for
16
national development. And that “There is nothing wrong with that since the country (Ghana) has
been into collateralisation all these years, hence the oil is not different.” He, however, indicated
that the move should be backed by a comprehensive, non-partisan national development agenda
and the process made more transparent.
What we must not forget is that anytime a country takes a
loan, it is backed by collateral. The question, therefore, should
be, how is it done? It is the process that should be transparent,
not the collateralisation itself.
He concluded by pointing out categorically that the country had, over the years, been
collateralising cocoa and other resources for loans. Despite the plausibility of this proposition,
what Adei failed to take cognizance of, is the fact that it is the human factor in the political class
are the single most important variable and element that will decide the end into which the money
borrowed or loaned will be put into. Besides this may result to a situation in which a cabal may
ride on their positions and connection to not only plunder the state treasury but equally deepen
the debt problem of the country that will in turn derail the development focus and quest of the
nation.
On the other hand, Yaa (2010:1-2) was in total dissonance with the apostles of
collateralization; he on the contrary held the opinion that without a cogent National Development
Plan indiscriminate borrowing on the basis of the country’s expected oil revenues will tie the
hands of Ghanaians. Hence they should be careful how they approach the use or lack thereof of
the oil revenues in the country because it is too early in the game to think of using future oil
revenues as collateral for loans, bearing in mind that the country is yet to receive a dime from the
new found national resource and they are already all over themselves about mortgaging the future
earnings. He therefore asserts:
We are all aware of how loans are procured for the Nation and
the potential of individuals greed to sell off the country, As a
country we have shown a lack of sophistication in
procurement of loans and we have shown a lack of an ability
to monitor or police these loans to ensure that they are used
for whatever they are intended for.
Continuing he argued that Ghana's petroleum wealth at any point in time is held in three
assets: the proven reserves, the revenues in the transitory petroleum account, and finally the
savings in the funds. Whereas the entire Clause 5 of Petroleum Revenue Management Bill seeks
to protect two things. First, the potential securitization of the proven reserves which includes the
entitlements of the private oil companies as well as the savings for the future generations. To the
extent that only portion of the reserves would finally be converted into government revenues.
17
Hence, pledging the reserves in whole or in part can be a hazardous exercise. Besides, how will
the people ascertain how much of the reserves successive governments can borrow against and
for how long.
He stressed that throwing caution to the wind and thinking that the only way Ghana can
develop as a nation is through the acquisition of loans is dangerous. Since according to him the
nations have no clear national development agenda, rather what the country has been witnessing
is a situation in which loans are procured in a knee jerk fashion without a clear understanding of
how each loan fits in the overall national development plan. He goes on to outline number of
reasons why Ghana should at least for the present moment shun collateralization of the its oil on
the account of the nations experiences from its other natural resources and the conditionalities
that are usually attached to these loans that are basically in no way to the favour of the borrower.
Thus:
Loans are not gifts they subject the borrower to all kinds of
terms and conditions depending on the loan structure. We
should hold off collaterizing our oil reserves, see how
production goes and the trend thereof , see what kind of
revenue streams will come through, …and above all lets do all
of these in a transparent fashion.
This oil belongs to all of us. We should be prudent about how
we use it. Those shouting from the roof top about using our
future oil revenues as collateral for loans should not forget we
have had other natural resources and have made nothing of
them. What has happened to our revenues from our timber,
gold, bauxite, diamond, cocoa to mention a few. What is our
experience from the manipulation of these other national
assets? Today our gold industry is owned by foreign
companies. Our cocoa is smuggled to Ivory Coast and we
pardon companies who do the smuggling. The oil will go the
same way if we are not careful.
He however, conceded to the fact that there are certain conditions under which it can be
rational to use the oil for loan but, it must be strictly in line with the national developmental
projects that the country is pursuing rather than serving as a pawn in the hands of a rent seeking
and comprador political class and their allies. That is to say that even at this that the need and
importance of such a loan will be thoroughly scrutinized and debated upon before the country
embarks upon it in order to ensure that it will actually serve the proposed national interest. This
not withstanding he posited that Ghana should as a matter of fact desist from borrowing within
the next five or thereabout years, a period in which the country must have actually understand not
18
just the line the oil industry is going but must understood the revenue yielding capacity of the oil
in addition to what the developmental needs of the country really are.
Is there a place for using future oil revenues for loans? Yes
there is. But it must be within the context of a National
Development Plan and not based on the whims and caprices
of any group of people or of political persuasion. There must
not be a blanket statement in the oil bill about using future
revenues as collateral. Instead each consideration of a loan
must be individually debated, viewed in the broad context of
national development, its urgency debated before a
consideration of whether that particular loan qualifies for such
a waiver. I propose that in the next five years we should
refrain from using future oil revenues as collateral for loans.
This period will at least give us breathing space to understand
the industry and see what revenues will accrue, have an
understanding of how to apply the revenue to our
development. Ghana will not perish from the surface of the
earth if we apply caution and learn now to crawl before
running. Ghana is poised for greatness but this greatness will
elude us if we are arrogant and mindless of our future.
Amin (see, Akli, 2010:2) in collaboration with the view enunciated above by Yaa (2010)
advised that the Ghanaian government should take a cue from Nigeria, which resorted to the same
collaterisation of its oil revenue, and ended piling up debts to the tune of over $32 billion. Since
prices of oil sometimes fluctuate on the international market; therefore, if revenue from the sector
is used as collateral, re-payment of the debt would become problematic if the prices tumble, a
situation that severely hampers and derails the developmental agendas of such a country. Hence
he asserted that the government of Ghana and its policy makers and formulators should do away
with the idea of collaterisation of the oil revenue.
Osabutey (2010:7) expressed regrets that though the first Sub-Saharan African country to
gain independence with a bright lift, Ghana could be rated low in terms of development, thus,
“given Ghana’s rich endowment in human and natural resources, her development experience
may succinctly be described as one of missed opportunities.” Thus he stressed that Ghana’s oil
find, that is expected to generate about one billion dollars a year, falls short of over 1.4 billion
donor assistance the country receives every year, and “if donor assistance, which far surpasses the
expected revenue from the oil, have proven inadequate in tackling the nations developmental
challenges, then it is important for the country to properly manage the political and social
expectations of the many Ghanaians, who expect the oil discovery to all of a sudden translate to
economic prosperity and reflect directly in their pockets.”
Moss (2010, n.p) in his analysis of how to ensure that the oil receipts is ploughed back
into national development for the benefit of the people posited that Ghana should go the way of
Alaska’s by establishing the policy of cash in hand for the citizens of the country. Under which
19
an account will be opened for every Ghanaian into which the annual proceed made from oil be
reimbursed as a share of the national revenue. On one side the idea may sound informed. The
principle is to avoid the old age government indigestions and to make way for the people to have
a connection with the oil revenue in their lives as a safeguard to the potential divisive element of
oil resources. The problem is that the position is not supported by economic prudence and the
policy becomes even less desirable if you work in specificities
Moreover, Alaska is part of the federal state (United States) and receives a wider national
budget support. More to that Alaska is a unit of the leading economy in the world. Economic
interplay among the 50 states of America alone is enough to keep Alaska going strong. Ghana on
the other hand, as a single economic unit by itself does not have any of those luxuries. And even
more revealing is the point which other observers have equally pointed out, its remotely less clear
how an approximate amount of 500 dollars a year – as predicted - can adequately incentivize an
angry natives who believe oil exploration on their soil is not providing enough for their well
being to desist from been violent. We therefore observed that what the people of Ghana need is
not a daily “meal allowance” as Moss appears to suggest but to be born and live in an
environment that provides for development and opportunity.
(http://www.danquahinstitute.org/news/1222-oil-receipts-and-national-development.html)
Twumasi (2010:1) commenting on the history of natural resource extraction and
(mis)management in Ghana’s economic past states that the present generation of Ghanaians is
anxious of the crude oil discovered, and holds the perception that, the entire economic challenges
facing the nation would varnish into thin air as Ghana would soon attain the Organisation of
Petroleum Exporting Countries (OPEC) status.
However, he holds that despite years of extracting natural and human resource, Ghana
still has to source budgetary support from the World Bank, which showcased inefficiency and
corruption on the part of the managers. The query therefore is, how judicious have funds from
these extractive resources been managed, including those still being exploited, which then raises
questions on how prepared the country is to succeed with the black gold. In order to drive home
his point he maintains inter alia:
…gold exploitation at Obuasi began almost at the same time
with Johannesburg in the Republic of South Africa (RSA).
But, undoubtedly the rate of development at Johannesburg is
worthy a tale to tell. However, the story of Obuasi is that of
despise and desperation. The inhabitants of Obuasi are almost
all the time splitting hair, with Anglo gold Ashanti, either
ignoring its social responsibility of exposing the inhabitants to
one health hazard, or the other. This calls on the Ghana Police
Service, which often simply represents the calm before the
storm.
20
Natural Resources (Oil) and the Phenomena of the Resource Curse
The literature on the resource curse has presented considerable evidence to suggest that
natural resources are bad for development. This section reviews this evidence. It is organised
according to sub-literature for the sake of clarity.
Economic performance: A large number of studies have presented evidence to suggest that
natural resource abundance, or at least an abundance of particular natural resources, reduces
economic growth. Wheeler (1984), for instance, found that within sub-Saharan Africa, countries
that were rich in minerals grew more slowly than those that were not rich in minerals during the
1970s. Similarly, Gelb and Associates (1988) found that mineral economies experienced a more
serious deterioration in the efficiency of domestic capital formation during the boom period of
1971–1983 than non-mineral economies, leading to negative growth in hard mineral economies
and dramatically reduced in oil exporting economies (see also Auty 1993). Sachs and Warner
(1995) examined the experiences of a large and diverse set of natural resource economies
between 1970 and 1989 and found that natural resource abundance was negatively correlated with
economic growth. Leite and Weidmann (1999) and Gylfason et al. (1999) produced similar
results, also using large datasets. Auty (2001a) found that the per capita incomes of resource-poor
countries grew at rates two to three times higher than resource abundant countries between 1960
and 1990. Neumayer (2004) examined whether natural resource abundance had a negative effect
on economic growth if one measured growth in terms of ‘genuine income’ – that is, GDP minus
the depreciation of produced and natural capital – rather than GDP. He found that it did.
Other scholars have presented evidence to suggest that the economic problems of
resource abundant countries have gone beyond poor levels of economic growth. Nankani (1979),
for instance, found that mineral economies performed relatively poorly in terms of agricultural
growth, export diversification, and inflation compared to non-mineral economies and were more
likely to be characterised by poor savings performance, greater technological and wage dualism,
high unemployment, high external indebtedness, and high export earnings instability. Wood and
Berge (1997) found that resource abundant countries were less likely to export manufactured
goods than resource poor countries. Leite and Weidmann (1999) found that natural resource
abundance tends to worsen corruption. Atkinson and Hamilton (2003) found that savings rates are
on average lower in resource abundant countries than in resource poor countries. Finally, Ross
(2003a) found that oil wealth and non-fuel mineral wealth are associated with bad outcomes for
the poor in terms of poverty and human development levels. The figure below illustrates the
economic performance and growth between resource rich countries and resource poor countries.
21
Fig. 1: Comparison of Economic Performance between Resource Rich and Resource Poor
Countries
Source: Auty, 1997 cited in ODI, 2008:9
Civil war: The literature also contains numerous studies that suggest that natural resource
abundance is associated with the onset of civil war and influences the duration and intensity of
civil war – that is the number of battle-related deaths. After examining the experiences of 98
countries and 27 civil wars, Collier and Hoeffler (1998), for instance, found that natural resource
abundance, defined in terms of the ratio of primary exports to GDP, is a strong and significant
determinant of the onset of civil war, although they also found that the relationship between these
variables was curvilinear: initially, natural resource wealth increased the risk of civil war but after
a certain level of exports, it reduced this risk. In a subsequent study, they confirmed this finding
using a better data set (Collier and Hoeffler 2000). In a third study, they examined the effect of
natural resource abundance on different types of civil wars.
They found that natural resources increased the risk of both secessionist and
nonsecessionist civil wars, but that the former were three times more likely to be associated with
natural resources than the latter (Collier and Hoeffler 2002).
Reynal-Querol (2002) conducted a similar study, focused on examining the association
between natural resources and the onset of ethnic and non-ethnic civil wars. Using data from a
sample of 138 countries between 1960 and 1995, she found that natural resource abundance was
an important variable in explaining the incidence of non ethnic civil wars and other forms of
political violence but not the incidence of ethnic civil wars. In their most recent paper, Collier and
Hoeffler (2005) report on work showing that natural resource wealth continues to exhibit a
curvilinear relationship with the onset of civil war even if a rent-based measure of natural
resource abundance is substituted for their original export-based measure. However, they note
that this result is less significant than their earlier finding and that the rent-based measure of
natural resource abundance becomes insignificant, when the original measure of natural resource
wealth is included in the regression analysis as well.
22
Some researchers have also suggested that natural resource abundance may lengthen the
duration of civil wars. Collier and Hoeffler (1998), for instance, found that natural resource
abundance and the duration of civil wars also had a curvilinear relationship.
Similarly, Doyle and Sambanis (2000) found that natural resource wealth was
significantly and negatively correlated with the success of peace-building initiatives. As Ross
(2004a: 341) has noted, in so far as there is a link between the failure of such initiatives and the
duration of civil wars, this finding suggests that natural resource wealth is associated with longer
wars. Fearon (2004) found that countries that are rich in contraband resources such as opium,
diamonds, or coca tend to experience longer civil wars and Ballantine (2003) found that natural
resources served to prolong civil wars in a selection of resource rich developing countries.
Finally, as Ross (2004b: 45) has noted, several observers of Africa’s civil wars, have
suggested that natural resources worsen the intensity of civil wars ‘by causing combatants to fight
for territory that would otherwise have little value’. Ross (2004b) himself found only very modest
support for this idea: of the thirteen cases of civil war he examined, natural resources only clearly
increased the intensity of conflict in two cases; in the eleven others, natural resources either had
no effect or a mixed effect on civil war intensity.
Regime type: The resource curse literature also contains a number of studies that suggest that
natural resource abundance is associated with low levels of democracy. Wantchekon (1999), for
instance, examined data related to 141 countries between 1950 and 1990 and found that a one per
cent increase in natural resource dependence, as measured by the ratio of primary exports to
GDP, increased the probability of authoritarian government by nearly 8 per cent. He also found
that countries that were rich in natural resources were more likely to experience failed or slow
transitions to democracy. Jensen and Wantchekon (2004) presented similar findings in relation to
Africa, concluding that resource abundant countries in this region were more likely to be
authoritarian and experience breakdowns in democracy after the democratic transition. Ross
(2001a) investigated whether there was any variation in regime outcomes across different types of
resource economy and different regions. After examining data from 113 states between 1971 and
1997, he concluded that ‘a state’s reliance on oil or mineral exports tends to make it less
democratic; that this effect is not caused by other types of primary exports; that it is not limited to
the Arabian peninsula, to the Middle East, or to sub-Saharan Africa; and that it is not limited to
small states’.
While there is thus considerable evidence to support the notion of a resource curse, there
are several reasons to treat this evidence with caution. First, some scholars have suggested that
the findings of studies such as those cited above may not be robust to differences in the
measurement of natural resource abundance. In general, researchers have measured natural
23
resource abundance in terms of either the ratio of countries’ natural resource exports to GDP or
the ratio of countries’ natural resource exports to total exports. When they have used different
measures of natural resource abundance, their results have been less clearly supportive of the
notion of a resource curse.
Stijns (2001), for instance found that when natural resource abundance was measured in
terms of levels of production and reserves rather than exports, it did not have a significant
influence on economic growth. Similarly, Herb (2003) found that when natural resource
abundance was measured in terms of the percentage of rents in government revenues rather than
levels of natural resource exports, there is little support for the idea that there is a negative
relationship between natural resource abundance and the occurrence of democracy.
De Soysa (2000) found that when natural resource abundance was measured in terms of
the level of natural resource stock per capita, there was no relationship between the incidence of
civil war and the overall level of natural resource abundance. Auty (2001a: 5) has pointed out that
a number of studies have used non-export based measures of natural resource abundance
including Gylfason et al. (1999) (who used labour force in the primary sector) and Auty (2001a)
(who used crop land per head), suggesting that the findings of these studies may be more robust
than critics of the resource curse hypothesis have suggested. But the question of whether these
findings are robust to broader changes in the measure of natural resource abundance remains
unresolved.
Second, it is not clear that the ratio of natural resource exports to GDP or the ratio of
natural resource exports to total exports are appropriate measures of natural resource wealth. As
we will see below, most studies that attempt to explain the resource curse suggest that the main
problem with natural resource abundance is not that it leads to economic dependence on natural
resources or a skewed export structure per se but that it creates rents – that is, excess earnings
above normal profits. The existence of these rents is in turn variously seen as contributing to
negative development outcomes by encouraging myopia and over-exuberance on the part of
political elites, promoting damaging rent seeking behaviour by political elites and/or social
actors, weakening state capacity to regulate and supervise the economy, empowering social
elements that are opposed to growth-promoting policies, or encouraging foreign intervention. As
such, it could be argued that rent-based measures of natural resource abundance provide a more
useful basis for making judgements about the existence or non-existence of a resource curse. Yet
studies that have used such measures – such as Herb (2003) and Collier and Hoeffler (2005) –
have so far provided only mixed support for the notion of a resource curse.
Third, the finding that there is a strong relationship between natural resource abundance
and the onset and duration of civil war seems to be contingent on the use of a particular civil war
24
database. As Ross (2004a: 347–8) has pointed out, the studies that have presented this finding
have all used Collier and Hoeffler’s list of civil wars, yet scholars who have used alternative lists
of civil wars have generally come to different conclusions. He suggests several reasons for this
related to the way in which civil wars are coded and civil war duration is measured. In short,
however, he suggests that Collier and Hoeffler’s database ‘may be biased in a way that overstates
the impact of primary commodities’ (2004a: 342).
Fourth, a number of scholars have presented evidence that suggests that the main problem
vis-à-vis development outcomes in resource abundant countries is not natural resource abundance
per se – as many of the aforementioned studies suggest – but an abundance of particular types of
natural resources. At the same time, there is some disagreement, at least in relation to civil war,
about which natural resources are the main problem. Many researchers have pointed to ‘point
source’ natural resources – for instance, oil, minerals, and plantation crops – as being particularly
problematic. Isham et al. (2002), for instance, found that countries that are rich in point source
natural resources grew much more slowly during the 1980s and 1990s than countries that are rich
in ‘diffuse’ natural resources – for instance, wheat and rice – and countries that are rich in cocoa
and coffee. Similarly, Sala-i-Martin and Subramanian (2003) found that an abundance of point
source natural resources was significantly correlated with poor economic growth but that an
abundance of diffuse natural resources was not. Leite and Weidmann (1999) found that fuel and
ores had a more negative effect on growth than agriculture (although a less significant negative
effect than food production). Ross (2003a) found that oil wealth and non-fuel mineral wealth are
associated with bad outcomes for the poor but not agricultural resources. De Soysa (2000) found
that, while the incidence of civil wars was not related to total natural resource wealth, it was
strongly related to the level of mineral wealth, suggesting that point source resources (specifically
mineral resources) rather than natural resources in general are the main problem as far as the
onset of civil war is concerned. In a subsequent study, he found that, among mineral-rich
countries, oil exporters were particularly prone to civil war (De Soysa 2002).
Fearon and Laitin (2003) have presented similar evidence on this point, showing that the
size of countries’ primary commodity exports is not a significant determinant of the onset of civil
wars but that their level of oil wealth is. Fearon (2005) has provided further evidence to this
effect. Finally, Ross’ (2001a) findings on the relationship between oil wealth and democracy are
also consistent with the emphasis on the negative effects of point source resources.
His findings in relation to civil war, however, are not. In Ross (2003b), he presents
evidence to suggest that it is ‘lootable’ resources such as diamonds (particularly alluvial
diamonds) and drugs (particularly opium and coca) rather than point source resources that are the
most likely to produce civil war. After analysing 12 civil wars and three minor conflicts that
25
occurred between 1990 and 2000, he found that, once income per capita was accounted for, there
was little difference in civil war rates between resource abundant countries in the four main
categories of natural resources – oil and gas, minerals, food crops, and non-food crops. By
contrast, he found that diamonds and drugs were strongly associated with the incidence of civil
war. Humphreys (2005) has also presented evidence to suggest that point source resources are not
the main problem vis-à-vis the onset of civil war, although his findings also challenge Ross’s
findings concerning lootable resources. According to his evidence, the main problem vis-a-vis the
onset of civil war is the extent to which countries are dependent on agricultural production. This
effect, he notes, is independent of a country’s endowment of oil and diamonds, suggesting that
the problem of resource dependence is not simply one of the availability of point source or
lootable resources but also economic structure and how this shapes social relations (2005: 524–
5).
These findings stand in marked contrast to those of Fearon, Fearon and Laitin, and De
Soysa and suggest that the issue of which types of natural resources are most likely to lead to the
onset of civil war has not yet been resolved.
Fifth, there is some evidence, albeit very limited, that natural resource wealth may in fact
have a beneficial, or at least neutral, effect on development performance. Davis (1995), for
instance, has shown that, by certain economic and social measures, mineral economies
outperformed non-mineral economies between 1970 and 1991. These measures include average
GNP per capita and improvement in various social indicators such as infant mortality, life
expectancy, calorie supply per capita, and the UN’s human development index. None of this
evidence is necessarily inconsistent with the findings of the aforementioned studies because it
focuses on social indicators rather than economic indicators such as growth. But it does raise the
question of whether economic growth in particular is the only measure that we should examine in
judging the economic performance of resource abundant countries. In addition, some scholars
have produced evidence to suggest that natural resource abundance may not have a negative
effect on the onset, duration or intensity of civil war. In a study of the effects of oil dependence
on regime failure and conflict in 107 developing countries between 1960 and 1999, Smith (2004),
for instance, found that oil wealth is associated with lower levels of civil war and anti-state
protest.
Similarly, Sørli et al. (2005) found that oil dependence has not exercised a significant
influence on the onset of civil war in the Middle East in recent decades. In respect of the duration
of civil war, Humphreys (2005) has presented evidence to suggest that natural resource conflicts
are more likely to end quickly while Ross (2003b) has presented evidence to suggest that while
lootable resources may serve to prolong non-separatist conflicts, nonlootable resources serve to
26
reduce non-separatist conflicts (see also Collier et al. 2004). In respect of the intensity of civil
war, Ballantine (2003) has suggested that natural resource abundance has, in some cases, reduced
the number of battle-related deaths during civil war.
Finally, while the studies above provide evidence that natural resource abundance – or at
least an abundance of particular types of natural resources – and various development outcomes
are correlated with one another, they do not prove that the former causes the latter. Those arguing
in favour of the notion of a resource curse have merely inferred causality from the evidence of
correlation. However, the direction of causation may in fact run the other way. That is, it may be
that civil war, for instance, causes economic dependence on the natural resources sector by
making it difficult for countries to attract manufacturing investment. As Schrank (2004) puts it,
natural resource dependence may be a symptom of underdevelopment rather than the cause.
Alternatively, the relationship between natural resource dependence and various development
outcomes may be entirely spurious – that is, their correlation with one another may simply reflect
the influence of an unidentified third variable. Just as ice cream sales and the number of sunburn
cases are highly correlated because of changes in the seasons, rather than because ice cream
consumption causes sunburn or vice versa, so it may be that natural resource abundance and civil
war, for instance, are correlated because a third variable (say, the weak rule of law) both increases
the risk of civil war and the difficulties countries face in attracting manufacturing investment
(Ross 2004a: 338). It will only be by examining more closely the causal mechanisms surrounding
the resource curse that scholars will adequately resolve these issues.
What Causes The Resource Curse?
Notwithstanding the inconclusive nature of the evidence in support of the notion of a
resource curse, many researchers have taken it as read that natural resource wealth leads to bad
development outcomes and have focused on trying to explain why this is the case, either in
general or in respect of particular regions or countries. The perspectives they have offered vary
considerably in terms of the causal mechanisms that they emphasise but can be broadly grouped
into seven categories: (i) economistic perspectives that emphasise economic mechanisms; (ii)
behaviouralist perspectives that emphasise emotional or irrational behaviour on the part of
political actors; (iii) rational actor perspectives that emphasise self-interested behaviour on the
part of political actors; (iv) state-centred perspectives that emphasise the nature of the state; (v)
social capital perspectives that emphasise the degree of social cohesion in countries; (vi)
structuralist perspectives that emphasise the role of social groups or socio-economic structure;
and (vii) radical perspectives that emphasise the role of foreign actors and structures of power at
the global level. Explanations from all of these categories feature in the sub-literature on natural
resources and economic performance, with more limited sets of explanations featuring in the sub-
27
literatures on natural resources and civil war and natural resources and regime type, reflecting
greater academic engagement with issues in the first sub-literature.
Economic performance/Perspective
Much early work on the economic performance of resource abundant countries suggested
that the causal mechanisms linking natural resource abundance and economic performance were
essentially economic in nature. Singer (1950) and Prebisch (1950), for instance, argued that
resource abundant countries had suffered from declining terms of trade over time, in turn
constraining their prospects for economic growth and development. Other scholars such as
Nurske (1958) and Levin (1960) argued that the problem for resource abundant countries was that
international commodity markets were inherently unstable and that any instability within them
could easily be transferred to domestic economies, in turn affecting the reliability of government
revenues and foreign exchange supplies and dramatically increasing risks for private investors.
Hirschman (1958) suggested that the problem was the ‘enclave’ nature of natural resource
activities and the fact that multinational enterprises in these sectors tended to repatriate profits
rather than reinvest them in the local economy. This, he said, made development difficult by
restricting opportunities for the development of backward and forward linkages between these
activities and the rest of the economy.
Finally, in the early 1980s, several commentators argued that resource abundant countries
were susceptible to the so-called ‘Dutch disease’ – a condition whereby a resource boom leads to
appreciation of the real exchange rate and in turn damages manufacturing and other tradable
sectors (Corden and Neary 1982; Bruno and Sachs 1982).
Most of these explanations are now regarded with some scepticism. Subsequent studies of
trends in international commodity prices have suggested that while in overall terms international
commodity prices have declined during the twentieth century, this has been due largely to
declines in the prices of commodities that are exported exclusively by developed countries or
more or less exclusively by relatively successful developing countries – the prices of
commodities exported primarily by other developing countries have not declined severely during
this period. Similarly, several studies have suggested that export price instability may be
beneficial to exporters in so far as it can encourage higher levels of private investment as
exporters seek to protect themselves against future price shocks.
Other studies have suggested that export price instability does harm exporters but have
not clearly demonstrated that it harms exporters of primary commodities. There has been more
support in subsequent studies for Hirschman’s argument regarding economic linkages and for the
Dutch disease hypothesis. But these studies also suggest that governments can take action to
28
address these problems, in turn suggesting that these negative effects may operate more through
political than economic mechanisms.
For this reason, most recent work on the relationship between natural resource abundance
and economic performance has given much greater attention to the role of political variables in
mediating this relationship. On the one hand, economists have increasingly incorporated ideas
from political science into their work on the resource curse, particularly, although not
exclusively, ideas from neoclassical political economy and the new institutionalism (Eifert et al.
2003; Rodrik 2003; Isham et al. 2002; Auty 2001c, 2001d; Torvik 2002). On the other hand,
political scientists have entered debates on the resource curse, bringing with them analytical
frameworks such as behaviouralism, public choice theory, Marxism, instititutionalism/statism,
dependency and world systems theories, and fiscal sociology, all of which give central attention
to the role of political factors in shaping economic outcomes. For the most part, both economists
and political scientists have agreed that the immediate cause of poor economic performance in
resource abundant countries has been poor economic management. In particular, they have
pointed to fiscal profligacy, overvalued exchange rates, excessive protection, and inefficient use
of resource windfalls as being the main problems in this respect (Usui 1997; Anderson 1998;
Mitra 1994; Karl 1997; Ascher 1999). However, the broad consensus that poor economic
management has been the immediate cause of poor economic performance has not reflected
consensus about the underlying causes of this poor performance. Generally speaking, five main
sets of perspectives have emerged on this issue:
Behaviouralist perspectives: These perspectives have suggested that natural resource
abundance leads to various types of emotional or irrational behaviour on the part of political
elites, in turn contributing to poor economic policy-making and institutional deterioration. In
particular, it is argued, resource booms induce myopia, sloth, and/or over-exuberance in political
elites. Such arguments featured in the work of great political and economic theorists such as
Machiavelli, Montesquieu, Smith and Mill and in the work of economists such as Wallich (1960),
Levin (1960), Nurske (1958) and Watkins (1963). More recently, they have appeared in the work
of economists such as Mitra (1994) and political scientists such as Krause (1995) (Ross 1999:
309). Mitra (1994: 295) has argued that resource booms produce a ‘tendency to optimism’ in
countries that benefit from such booms, in turn leading to excessive government spending.
Similarly, Krause (1995: 322) has suggested that natural resources lead to ‘wishful
thinking’ among policy-makers in resource-rich countries. Behaviouralist ideas have also featured
in commentary on the resource curse in the popular media (e.g. Useem 2003).
Rational actor perspectives: In contrast to behaviouralist perspectives, these perspectives
portray political actors as rational utility-maximising individuals. Accordingly, they have
29
suggested that the problem with natural resource abundance is not that it leads to irrational
behaviour on the part of political actors but that it provides them with an opportunity to line their
own pockets by engaging in rentseeking.
Most scholars have suggested that members of the political elite are the main problem in
this respect. Ross (2001b), for instance, argues that when governments receive windfalls from a
resource boom, rational political elites will take the opportunity to either directly seize the rents
created by resource booms or gain control over the right to allocate them – a process he calls
‘rent-seizing’ (Ross 2001b).
In a similar vein, Ascher (1999) has suggested that resource abundant countries have
generally wasted their natural resources because political elites have tended to use them to pursue
various programmatic and political objectives including financing controversial development
programs, providing economic benefits to particular groups, capturing rents for the government
treasury, creating rent-seeking opportunities in order to secure private sector cooperation in
relation to other objectives, gaining control over rent allocation, and evading accountability.
Robinson et al. (2002) have suggested that such rent-seeking behaviour is most likely to lead to
negative economic outcomes when resource booms are perceived to be temporary because
political elites will focus on maximising the rents that they can extract in the short-term. Where
resource booms are perceived to be permanent, they argue, political elites will be less interested
in short term rent-maximisation because permanent booms increase the likelihood that they will
stay in power and hence the gains that they can make by promoting long-term economic
development. Even where booms are perceived to be permanent, however, Robinson et al. (2002)
suggest that economic outcomes are likely to be negative because political elites will still have an
incentive to engage in inefficient redistribution of economic resources in order to influence
elections. Other scholars, however, have suggested that social actors are more to blame for the
increased rent-seeking. Torvik (2002), for instance, has argued that natural resource abundance
increases the rewards that social actors can gain from rent-seeking, and in turn provides them
with greater incentive to engage in such behaviour.
State-centred perspectives: These perspectives suggest that natural resource abundance
leads to poor economic performance not by influencing the behaviour of political elites or social
actors but by influencing the state’s capacity to promote economic development. Numerous
scholars, for instance, have pointed to the problems associated with so-called ‘rentier’ states –
that is, states that receive regular and substantial amounts of ‘unearned’ income in the form of,
for instance, taxes on natural resource exports or royalties on natural resource production
(Mahdavy 1970; First 1974; Skocpol 1982; Beblawi 1987; Luciani 1987; Tanter 1990; Chaudhry
1994; Vandewalle 1998; Gunn 1993). Because these states have large amounts of unearned
30
income to spend, it is argued, they tend to develop greater capacity in distributive functions such
as social welfare, education, and health and productive functions – state-owned enterprise sectors
are typically quite large in rentier states – than in functions related to the regulation and
supervision of the economy and domestic taxation (Garaibeh 1987; Chaudhry 1994). As Luciani
(1987: 74) has put it, rentier states do ‘not need to formulate anything deserving the appellation of
economic policy: all [they need] is an expenditure policy’. Karl (1997), Moore (2000, 2004),
Auty (2001c, 2001d), and Auty and Gelb (2001) have presented similar analyses to rentier state
theorists using slightly different terminology and concepts. Karl (1997: 16) for instance, has
argued that dependence on oil revenues leads to the emergence of ‘petro-states’, that is, states that
are geared towards the ‘political distribution of rents’ rather than promotion of private
investment, production and economic growth. The emergence of petro-states, she suggests, is
particularly likely where oil’s domination of the economy coincides with the process of state
formation (see also Vandewalle 1998: 33–8). In these cases, the domination of oil gives the state
a distributive character from its inception, which, given the stickiness of institutions, becomes
locked in. Moore (2000, 2004) has suggested that natural resource abundance leads to ‘bad
governance’ in developing countries because states’ financial autonomy means that they have
little accountability to their citizens. Auty (2001c, 2001d) and Auty and Gelb (2001) have argued
that natural resource abundance significantly increases the likelihood that countries will develop
predatory or factional oligarchic states rather than developmental ones for four main reasons: (i)
the relative abundance of land and the existence of natural resource rents in these countries
creates a relatively high tolerance by the poor majority for inequitable asset distribution and
predatory rent extraction, in turn decreasing the chances that the state will promote asset
redistribution; (ii) resource abundant countries are more likely to adopt protective trade policies
rather than developmental export-oriented policies because they are affected by the Dutch
disease; (iii) the large size of the resources sector means that it can support inefficient inward-
looking industrial sectors with transfers from the resources sector; and (iv) resource abundant
countries are more prone to ‘cumulative policy error’ (Auty and Gelb 2001: 128–9).
Historico-structuralist perspectives: These perspectives have suggested that natural
resource abundance has pernicious economic effects not because of its effects on the behaviour of
political elites or the institutional capacity of the state but because of its effect on the relative
power of different social groups or classes. One group of researchers, for instance, has suggested
that natural resource abundance strengthens well-connected business groups, in turn increasing
pressure on governments to pursue economic policies that serve the interests of these groups
rather than the common economic interest or the interests of the poor (Urrutia 1988; Broad 1995).
In a similar vein, several writers have suggested that one of the main reasons that Latin America
31
has performed less well than East Asia in terms of economic growth and poverty reduction in
recent decades is the effect of the two region’s natural resource endowments on their industrial
policies. In Latin America, it is argued, natural resource abundance led to the social and political
dominance of landed and business elites that had a vested interest in import-substitution
industrialisation (ISI), hence preventing the development of an externally competitive industrial
sector, while in East Asia, resource poverty meant that such elites did not exist, or at least did not
exercise significant political and social power, in turn making it easier for governments to shift
away from ISI towards export-oriented industrialisation and the development of an externally
competitive industrial sector (Mahon 1992; Auty 1995).
Social capital perspectives: These perspectives have suggested that the problem with natural
resource abundance, particularly an abundance of point source resources, is that it undermines
social cohesion and in turn limits the capacity of governments to manage economic shocks.
Ownership of point source resources resources, it is argued, is typically concentrated in the hands
of a few well-connected individuals or families, a situation that creates severe social tensions.
While these tensions may be masked during periods of economic prosperity they come to the
surface at times of economic crisis. The result, it is argued, is that it is difficult to generate a
social consensus around a reformist strategy for coping with the crisis. In this context, powerful
vested interests typically win out and economic reform is stymied (Isham et al. 2002: 18–19; see
also Rodrik 1999 and Hausman 2003).
country a target for forced incorporation into the global capitalist system – a system in which the
interests of poor developing countries are subordinated to those of wealthy developed countries –
in turn impairing their ability to pursue autonomous programs of economic development.
Perelman (2003: 200), for instance has argued: ‘a rich natural resource base makes a poor
country, especially a relatively powerless one, an inviting target – both politically and militarily –
for dominant nations. In the case of oil, the powerful nations will not risk letting such a valuable
resource fall under the control of an independent government, especially one that might pursue
policies that do not coincide with the economic interests of the great transnational corporations’.
The result, dependency theorists suggest, is that governments in resource abundant developing
countries are permitted to engage in corrupt and economically damaging activities so long as they
remain loyal to the dominant nations and allow the natural resource wealth within their borders to
be looted by firms from wealthy countries (see also Bellamy et al. 2004 and Amin 2001).
32
The Inflow of FDI Enhances Economic Growth and Development
Renewed research interest in FDI stems from the change of perspectives among policy
makers from “hostility” to “conscious encouragement”, especially among developing countries.
FDI had been seen as “parasitic” and retarding the development of domestic industries for export
promotion until recently. However, Bende-Nabende and Ford (1998) submit that the wide
externalities in respect of technology transfer, the development of human capital and the opening
up of the economy to international forces, among other factors, have served to change the former
image.
Caves (1996) observes that the rationale for increased efforts to attract more FDI stems
from the belief that FDI has several positive effects. Among these are productivity gains,
technology transfers, the introduction of new processes, managerial skills and know-how in the
domestic market, employee training, international production networks, and access to markets.
Borensztein et al. (1998) see FDI as an important vehicle for the transfer of technology,
contributing to growth in larger measure than domestic investment. Findlay (1978) postulates that
FDI increases the rate of technical progress in the host country through a “contagion” effect from
the more advanced technology, management practices, etc., used by foreign firms.
On the basis of these assertions governments have often provided special incentives to
foreign firms to set up companies in their countries. Carkovic and Levine (2002) note that the
economic rationale for offering special incentives to attract FDI frequently derives from the belief
that foreign investment produces externalities in the form of technology transfers and spillovers.
Curiously, the empirical evidence of these benefits both at the firm level and at the
national level remains ambiguous. De Gregorio (2003), while contributing to the debate on the
importance of FDI, notes that FDI may allow a country to bring in technologies and knowledge
that are not readily available to domestic investors, and in this way increases productivity growth
throughout the economy. FDI may also bring in expertise that the country does not possess, and
foreign investors may have access to global markets.
In fact, he found that increasing aggregate investment by 1 percentage point of GDP
increased economic growth of Latin American countries by 0.1% to 0.2% a year, but increasing
FDI by the same amount increased growth by approximately 0.6% a year during the period 1950–
1985, thus indicating that FDI is three times more efficient than domestic investment.
A lot of research interest has been shown on the relationship between FDI and economic
growth, although most of such work is not situated in Africa. The focus of the research work on
FDI and economic growth can be broadly classified into two. First, FDI is considered to have
direct impact on trade through which the growth process is assured (Markussen and Vernables,
1998). Second, FDI is assumed to augment domestic capital thereby stimulating the productivity
33
of domestic investments (Borensztein et al., 1998; Driffield, 2001). These two arguments are in
conformity with endogenous growth theories (Romer, 1990) and cross country models on
industrialization (Chenery et al., 1986) in which both the quantity and quality of factors of
production as well as the transformation of the production processes are ingredients in developing
a competitive advantage. FDI has empirically been found to stimulate economic growth by a
number of researchers (Borensztein et al., 1998; Glass and Saggi, 1999). Dees (1998) submits
that FDI has been important in explaining China’s economic growth, while De Mello (1997)
presents a positive correlation for selected Latin American countries. Inflows of foreign capital
are assumed to boost investment levels.
Blomstrom et al. (1994) report that FDI exerts a positive effect on economic growth, but
that there seems to be a threshold level of income above which FDI has positive effect on
economic growth and below which it does not. The explanation was that only those countries that
have reached a certain income level can absorb new technologies and benefit from technology
diffusion, and thus reap the extra advantages that FDI can offer. Previous works suggest human
capital as one of the reasons for the differential response to FDI at different levels of income.
This is because it takes a well-educated population to understand and spread the benefits of new
innovations to the whole economy. Borensztein et al. (1998) also found that the interaction of
FDI and human capital had important effect on economic growth, and suggest that the differences
in the technological absorptive ability may explain the variation in growth effects of FDI across
countries. They suggest further that countries may need a minimum threshold stock of human
capital in order to experience positive effects of FDI.
Balasubramanyan et al. (1996) report positive interaction between human capital and
FDI. They had earlier found significant results supporting the assumption that FDI is more
important for economic growth in export-promoting than import-substituting countries. This
implies that the impact of FDI varies across countries and that trade policy can affect the role of
FDI in economic growth. In summary, UNCTAD (1999) submits that FDI has either a positive or
negative impact on output depending on the variables that are entered alongside it in the test
equation. These variables include the initial per capita GDP, education attainment, domestic
investment ratio, political instability, terms of trade, black market exchange rate premiums, and
the state of financial development. Examining other variables that could explain the interaction
between FDI and growth, Olofsdotter (1998) submits that the beneficiary effects of FDI are
stronger in those countries with a higher level of institutional capability. He therefore emphasized
the importance of bureaucratic efficiency in enabling FDI effects.
The neoclassical economists argue that FDI influences economic growth by increasing
the amount of capital per person. However, because of diminishing returns to capital, it does not
34
influence long-run economic growth. Bengos and Sanchez-Robles (2003) assert that even though
FDI is positively correlated with economic growth, host countries require minimum human
capital, economic stability and liberalized markets in order to benefit from long-term FDI
inflows. Interestingly, Bende-Nabende et al. (2002) found that direct long-term impact of FDI on
output is significant and positive for comparatively economically less advanced Philippines and
Thailand, but negative in the more economically advanced Japan and Taiwan. Hence, the level of
economic development may not be the main enabling factor in FDI growth nexus. On the other
hand, the endogenous school of thought opines that FDI also influences long-run variables such
as research and development (R&D) and human capital (Romer, 1986; Lucas, 1988).
FDI could be beneficial in the short term but not in the long term. Durham (2004), for
example, failed to establish a positive relationship between FDI and growth, but instead suggests
that the effects of FDI are contingent on the “absorptive capability” of host countries. Obwona
(2001) notes in his study of the determinants of FDI and their impact on growth in Uganda that
macroeconomic and political stability and policy consistency are important parameters
determining the flow of FDI into Uganda and that FDI affects growth positively but
insignificantly. Ekpo (1995) reports that political regime, real income per capita, rate of inflation,
world interest rate, credit rating and debt service explain the variance of FDI in Nigeria. For non-
oil FDI, however, Nigeria’s credit rating is very important in drawing the needed FDI into the
country.
Furthermore, spillover effects could be observed in the labour markets through learning
and its impact on the productivity of domestic investment (Sjoholm, 1999). Sjoholm suggests that
through technology transfer to their affiliates and technological spillovers to unaffiliated firms in
host economy, transnational corporations (TNCs) can speed up development of new intermediate
product varieties, raise the quality of the product, facilitate international collaboration on R&D,
and introduce new forms of human capital.
FDI also contributes to economic growth via technology transfer. TNCs can transfer
technology either directly (internally) to their foreign owned enterprises (FOE) or indirectly
(externally) to domestically owned and controlled firms in the host country (Blomstrom et al.,
2000; UNCTAD, 2000). Spillovers of advanced technology from foreign owned enterprises to
domestically owned enterprises can take any of four ways: vertical linkages between affiliates
and domestic suppliers and consumers; horizontal linkages between the affiliates and firms in the
same industry in the host country (Lim, 2001; Smarzynska, 2002); labour turnover from affiliates
to domestic firms; and internationalization of R&D (Hanson, 2001; Blomstrom and Kokko,
1998). The pace of technological change in the economy as a whole will depend on the
35
innovative and social capabilities of the host country, together with the absorptive capacity of
other enterprises in the country (Carkovic and Levine, 2002).
Other than the capital augmenting element, some economists see FDI as having a direct
impact on trade in goods and services (Markussen and Vernables, 1998). Trade theory expects
FDI inflows to result in improved competitiveness of host countries' exports (Blomstrom and
Kokko, 1998).
TNCs can have a negative impact on the direct transfer of technology to the FOEs,
however, and thereby reduce the spillover from FDI in the host country in several ways.
They can provide their affiliate with too few or the wrong kind of technological
capabilities, or even limit access to the technology of the parent company. The transfer of
technology can be prevented if it is not consistent with the TNC’s profit maximizing objective
and if the cost of preventing the transfer is low. Consequently, the production of its affiliates
could be restricted to low-level activities and the scope for technical change and technological
learning within the affiliate reduced. This would be by limiting downstream producers to low
value intermediate products, and in some cases “crowding out” local producers to eliminate
competition. They may also limit exports to competitors and confine production to the needs of
the TNCs. These may ultimately result in a decline in the overall growth rate of the “host country
and worsened balance of payment situation” (Blomstrom and Kokko, 1998).
Among the many theories trying to explain FDI, Dunning (1993) proposes a framework
that synthesizes the explanations and suggests that three conditions are required to motivate a
firm to undertake FDI. This has become known in the FDI literature as the OLI paradigm because
it explains the activities of MNCs in terms of ownership (O), location (L) and internalization
advantages (I). When selling its products abroad, a firm is at least initially disadvantaged relative
to local producers. Thus, in order to compete effectively with indigenous firms, a foreign
producer must possess some ownership advantages. They can take the form of a superior
production technology or improved organizational and marketing systems, capacity to innovate,
trademarks, reputation, or other assets. Ownership advantages assure a firm’s ability to enter the
host country’s market, but do not explain why the foreign presence should be established through
production rather than exports. This issue is, in turn, addressed by location advantages that arise
due to differences in factor quality, costs and endowments, international transport and
communication costs, overcoming trade restrictions, and host government policies. The last
advantage, internalization, explains why a foreign firm prefers to retain full control over the
production process instead of licensing its intangible assets to local firms. This decision may be
attributable to high transaction costs involved in regulating and enforcing licensing contracts.
36
Gap in the Literature
Having rigorously and systematically x-rayed what scholars have said and what they had
did not adequately addressed in the extant literatures reviewed above; as it concerns Oil and
National Development in Ghana. It therefore become evident to note that most scholars and
commentators on the resource thesis in which it was argued that the abundance of natural
resource in an economy fuels authoritarianism, conflict, corruption, rent-seeking,
underdevelopment and harms the other non-oil tradable sectors of the economy especially
agriculture and manufacturing. However, they fail to account for the reasons why such resource
rich countries like Alaska, Norway, and Botswana have been experiencing continued growth rate
and resource blessing rather than curse. Hence the explanation of the nature of implication oil can
bring to an economy lies elsewhere outside the resources.
Again, FDI as was presented in the literature is appears to promote and engender
economic growth and development of the economy that witnesses its inflow, however, as has
already been mentioned most, if not all of the case studies was not conducted in the Sub-Saharan
African countries rather they were mainly drawn from the experiences of the Latin American and
Asian countries. Besides, none of the study attempted to show if there is a positive relationship
between discovery and production of oil and the rate of Foreign Direct Investment inflow into
any of the economy.
Finally, most of the commentators on the Ghana oil and gas industry concentrates their
effort on the amount of revenues that the sector is likely to generates or rake into the Ghanaian
economy. While other basing their analysis on the experiences of some other oil producing
countries, especially in the Sub-Saharan African simply concludes that oil will be a curse rather
than a blessing to Ghana, starting with authoritarian reversal and hurting of the countries enviable
democratic records. However, they fail to understand and address in concrete terms the specific
ways and strategies through which oil can actually develop the country’s economy. Through the
adroit enactment of oil and gas laws and fiscal policy regimes that will ensure the efficient and
transparent accountability and management of the oil and gas revenues in such a manner that the
revenue generated from the oil has both immediate and long-term benefit to the entire economy.
Moreover, Ghana’s oil discovery and production can well place it among the leading economies
in the world, if it adopts and subscribes to the internationally acclaimed oil governance good
practices and initiatives, as was the case with Norway and Alaska. In so doing, the nations oil
sector will in turn serve as an instrument of national development by attracting foreign direct
investments into the country that will not oil complement the local industries both will bring with
it other benefits. It is therefore the lacuna in knowledge that this study is set to fill.
37
1.6 THEORETICAL FFRAMEWORK
There exist plethora of theoretical perspectives which scholars utilize in the explanation
of the role and place of oil in a country’s quest for development. However for us to empirically
and analytically succeed in our present task, we shall employ some propositions emanating from
the resource curse theory.
Studies in Political Science and Economics (social sciences writ large) unequivocally
accept the general proposition that abundance of mineral resources is more often a curse than a
blessing, particularly for developing countries. According to Malomo (2008), the idea that
natural resources might be more an economic curse than a blessing began to emerge in the
1980s. In this light, the term ‘resource curse thesis’ was first used by Richard Auty in 1993 to
describe how countries rich in natural resources were unable to use that wealth to boost their
economies and how, counter-intuitively, these countries had lower economic growth than
countries without an abundance of natural resources. Numerous studies by Jeffrey Sachs and
Andrew Warner have shown a link between natural resource abundance and poor economic
growth. Looking at any example from any of the oil-producing countries, one can see the
disconnection between natural resource wealth and economic growth.
Accordingly, Luong and Weinthal (2006) argue that the widely accepted contention that
an abundance of mineral resources and the influx of external rents generated from these resources
during boom periods are to blame for the so-called ‘resource curse’, should be revisited. Instead,
they offer a new research agenda for studying the problem of resource-rich states that shifts the
locus of study away from the ‘paradox of plenty’ to a more appropriate paradox – that the
concentration of wealth impoverishes the state whereas the dispersion of wealth enriches the
state. This agenda, according to them, focuses on three interrelated issues: the structure of
ownership over mineral resources, the importance of strong institutions, and the relative influence
of domestic versus international factors.
This study thus unfolds from the resource curse theory whose proponents argue that
extraction of resources lowers the wealth of a country unless the funds generated are invested in
other forms (Stiglitz, 2005: 13-19; Karl, 2005:21-26). It refers to countries that are
overwhelmingly dependent on oil revenues, which is generally measured by the extent to which
oil revenues dominate total exports or by the ratio of oil export to GDP.
The resource curse theory has different perspectives. According to Rosser (2006), the
Behaviouralist perspective asserts that natural resource abundance can lead to emotional or
irrational behaviour on the part of political elites, which fosters poor resource management. The
Rational-Actor perspective points to the problems caused by rent-seeking political actors in
contexts of resource wealth. The state-centered theorists propose that states, which rely on
38
unearned income, avoid developing sound economic policies or public accountability by relying
on rent-distribution politics. The historico-structuralist perspective argues that natural resources
can empower elites, which then influence government policies in their favour against other social
groups. Finally, the social capital perspective professes that natural resources create social
tensions between those who have access to the resources and those who do not, which prevents
societal cooperation and enables powerful vested interests to dominate. These different
perspectives of the theory show more or less that developing petro-states tend to over-reach
themselves in terms of what they expect from the oil resources at their disposal, while not making
efforts to utilize these resources to the optimal benefits of the people in terms of good
governance.
Application of the Resource Curse Theory
The resource curse theory links corruption to the gross story of the underdevelopment of
the oil producing states, especially with regards to mismanagement and misappropriation of her
natural resources, which is mis-governance.
We have noted earlier that the term ‘resource curse’ was first coined by Auty (1993) to
explain why resource-rich countries fail in the abundance of plenty as opposed to resource poor
countries. The study has however gain popularity among scholars. Though popular, the concept is
not a proven phenomenon (Wright et al, 2004 and Alexeev et al, 2008) and remains contestable
within the academic literature. The theoretical debate however is divided into two namely
economic interpretation and politico-institutional analysis.
This thesis surveys the theoretical strands within the resource curse and narrows the
debate to politico-institutional analysis. Under this framework, the institutionalist school that
suggests that quality institutions interaction with resources produces a blessing rather than curse
will occupy this research (Tornell and Lane 1999; Mehlum et al, 2006 and Karl, 1997). It
however highlights opposing schools of thoughts that neutralizes the role of institutions in
resource curse (Sachs and Warner, 2000 and Murshed, 2003) and those that views quality
institutions as negatively affected by resources (Collier and Hoeffler, 2004 and Ross 2001).
We argued that the economic ontological interpretation of the resource curse is limited in
its explanatory force. It pays little attention to politico-institutional analysis which is central to
explaining the resource curse. The resource addresses this slippage through the prospect of
Ghana’s oil find.
Furthermore, the generalization of the models results is problematic and misleading. This
is evident in the time bound and methodological limitation of the research. Yet, apostles of the
resource curse advocate a universal identity with strong empirical evidence to support the
assertion that a causal relationship exist between natural resources and underdevelopment. On the
39
contrary, there is compelling empirical evidence of natural resources leading to industrialization
and economic boom. This is succinctly captured by Maloney (2002) who argues “…there is little
long term evidence that natural resources abundant countries generally underperform… [Rather]
natural resources have played an integral role in the success of many successful industrialised
countries” [Alaska and Norway for instance](Maloney, 2002:1). This thesis argues for context
specific approach which tackles issues on case-by-case basis.
This brings into perspective the suggestion for a change of name from ‘resource curse’ to
‘resource impact’. The ‘impact’ is the outcome that determines whether resources has become a
‘blessing or a curse’ (Stevens, 2003). This is all-encompassing and will harmonise the various
theoretical strand within the literature. It can be concluded that the problem is not with natural
resource per se but the arrangement that surrounds its extraction and how it is used.
With the above exposition, we therefore accept the theory as a good explanatory
framework for analysis in this research as it explains the developmental prospects that natural
resources such as oil holds in addition to inexplicable accountability and transparency issues in
the management of the oil windfall revenue that will be accruing to the government over the
years, and in spite of various seeming corrupt practices roadblock that may appear inherent in the
oil sector. It becomes more pertinent given the enormous revenues that have accrued to the
Ghanaian State over the past decades through its mining sector and for which the leadership of
the country has been managing and using over the years in sterling the affairs of the state, which
today is regarded as one of the best performing and promising country in Africa. In addition to its
stable political atmosphere and the absence of resource based wars and conflicts, which attests to
the effective and efficient management of the nations natural resources as an instrument of
effectuating national development. The theory explains the two problematiques we have in this
study which are that Ghana will avoid the debilitating effects of the resource curse conundrum, if
it adopts the oil governance best practices on revenue transparency and accountability in the
management of its oil revenue as well as the development of strong oil revenue management law;
moreover, when the country manages its revenue well, such that it gains the trust and confidence
international finance and investors that will draw and attract the much needed Foreign Direct
Investment into the country, history has shown that, foreign direct investment has developmental
drive and macro-economic benefits towards the development of the FDI recipient country
through forward and backward linkages into the other sectors of the economy. It therefore, the
institutional underpinning of the polices making processes and its implementation in the
management and use of oil revenues that determines its net effects an economy; and not just on
the natural resource itself. As history and experience has shown countries that have shown
commitment to accountability and transparency in the management of its public and natural
40
resources has always ended up turning its natural resources into blessing than curse. These we
believe will the lot of Ghana.
1.7 HYPOTHESES
The hypotheses which this works sets to explore are as follows:
1 Ghana can avoid the resource curse conundrum through the formulation of strong oil
sector policies and the adoption of oil governance best practices.
2 There is a positive relationship between Oil production and the rate of Foreign Direct
Investment (FDI) inflow into Ghana.
1.8 METHOD OF DATA COLLECTION
The method of data collection adopted in this study is based on content analysis of
documentary and other secondary data sources. The documentary sources include institutional
and official documents from international organizations such as the UNDP, IMF, ISODEC and
World Bank etc on the Ghanaian economy, information on the use of oil revenue, management of
offshore oil exploration and exploitation, the contribution of oil sector economic development
and on the international best practices in the oil industry. Also official documents, statistics and
tables were sourced from the Internet, as well as the libraries of the University of Nigeria, Nsukka
(UNN) and the Centre for American Studies (CAST).
Apart from institutional and official documents, this inquiry was based on such secondary
data sources as textbooks, journals and magazines, articles and other written works dealing with
Ghana’s national development and it’s oil and gas sector. When we speak of secondary data
sources, what we make reference to, is any information originally collected for a purpose other
than the present one (Black and Champion). The advantage of secondary data is that it saves time
and money through purposive and random selection of recorded materials in order to investigate
the problem and test hypotheses. There is also the possibility of using the work of others to
broaden the base from which scientific generalizations can be made.
The use of documents and other secondary data sources was complemented by the
technique of non-participant observation of the researcher who has been an active observer of the
trends in Ghana’s development of its oil and gas sector since its discovery of oil in commercial
quantity in June 2007.
1.9 METHOD OF DATA ANALYSIS
For the purpose of analyzing our secondary data, we adopted the qualitative
descriptive method of data analysis. According to Asika (1991), qualitative descriptive
analysis is used to verbally summarize the information gathered in the research.
41
Through, qualitative descriptive analysis, descriptive explanation is given to statistical
data gathered on our research work, in order to establish the relationship between the
variables under study. Thus, the use of this method of analysis is informed by the simplicity
with which it summarizes, exposes and interprets relationship implicit in a given data by
giving a qualitative description or explanation to a statistical information.
Research Design
A research design is simply a plan that specifies how a data should be collected and
analyzed. Data in this sense is information gathered by investigations with the aid of their
instruments, techniques and other means and they have meaning only in relation to the particular
problems being investigated (Obasi, 1999). For our research purpose, the One-Group Pretest-
Post-test design will be used in carrying out our study. This design involves taking a careful
measurement of a phenomenon before a causal event occurs and then after the causal event
occurs (Legge and Francis, 1974). The difference in scores from t1 to t2 is attributed to the causal
event.
The One-Group Pretest-Post-test design is one of the most commonly used research
design in political science literature and often explained as the O1 X O2 research design. X refers
to the experimental treatment (independent variable) while O1, 2…… refers to the time order of
observations, the subscript indicating the order. Through the One—Group Pretest-Post- test
design, our X variable(Food Security in Nigeria) is carefully examined before and after the causal
event (dependence on oil) in order to establish a link between the change in our experimental
variable and the causal event. O1 in the research work shows the nature and character of the
Ghanaian economy before the Jubilee field oil discovery and its consequent production and
export (sale) while O2 (post-jubilee oil field discovery , 2007 to date) provides a valid scenario of
the chances and preparedness of Ghana towards avoiding the oil resource curse conundrum ,
since it joins the league of oil producing states in 2010.
Also, using the One-Group Pretest-Post-test design, the pattern of Foreign Direct
Investment (FDI) inflow into Ghana, is examined both before and after oil was discovered in the
country, as a veritable grounds for establishing causal relationship between oil discovery, its
production and increase in the volume of Foreign Direct Investment inflow into Ghana.
The systematic use and application of the One-Group Pretest-Post-test research design in
our study no doubt provides a formidable mechanism tool for validating our hypothesis that
Ghana will avoid the resource curse conundrum through the formulation of strong oil sector
polices and the adoption of oil governance best practices; as well as that there exist a positive
relationship between oil production and the rate of Foreign Direct Investment inflow into Ghana.
42
Logical Data Framework
Hypotheses Variables Main indicators Data source Method of
Data
Collection
Method of
Data Analysis
(Hypothesis 1)
Ghana can
avoid the
resource curse
conundrum
through the
formulation of
strong oil
sector policies
and the
adoption of oil
governance
best practices
(X)
Ghana can
avoid the
resource
curse
conundrum
Signatory to
the EITI
Adoption of oil
governance
best practices
Formulation of
Petroleum
revenue
management
law.
Establishment
of Ghana
petroleum
regulatory
authority.
Textbooks
Journals
Newspapers
Articles and
conference
papers
Internet sources
Official
documents
Qualitative
method of
data
collection,
through
reliance on
documentar
y sources
like
textbooks,
journals,
articles,
newspapers
et cetera.
One-Group
Pretest-Post-test
design and the
theory of the
resource curse;
qualitative
descriptive
analysis
(y)
The
formulation
of strong oil
sector
policies and
the adoption
of oil
governance
best practices
Disclosure of
Petroleum
Sector
Contracts and
agreement.
Disclosure of
revenues and
rents received
from oil
companies.
Oil revenue
accountability
Establishment
of oil fund.
Textbooks
Journals
Newspapers
Articles and
conference
papers
Internet sources
Official
documents
Qualitative
method of
data
collection,
through
reliance on
documentar
y sources
like
textbooks,
journals,
articles,
newspapers
et cetera.
One-Group
Pretest-Post-test
design and the
theory of the
resource curse;
qualitative
descriptive
analysis
(Hypothesis 2)
There is a
positive
relationship
between oil
discovery and
production in
Ghana and the
rate of FDI
inflow into the
Country
(X)
There is a
positive
relationship
between oil
discovery
and
production
Oil and gas
sector in Ghana
account for the
recent increase
in the volume
of FDI in the
economy
Increase in the
number of oil
MNCs
applications for
hydrocarbon
exploration and
production in
Ghana
Oil alone
attracted in FDI
Textbooks
Journals
Newspapers
Articles and
conference
papers
Internet sources
Official
documents
Qualitative
method of
data
collection,
through
reliance on
documentar
y sources
like
textbooks,
journals,
articles,
newspapers
et cetera.
One-Group
Pretest-Post-test
design and the
theory of
resource curse;
qualitative
descriptive
analysis
43
approximately
$2.5 billion in
early 2011
(Y)
Increase in
the rate of
FDI inflow
into the
Country
Over 100%
increase in the
stock FDI in
Ghana in the
first quarter of
2011
About 70%
annual FDI
increase
between 2009
and 2010.
Textbooks
Journals
Newspapers
Articles and
conference
papers
Internet sources
Official
documents
Qualitative
method of
data
collection,
through
reliance on
documentar
y sources
like
textbooks,
journals,
articles,
newspapers
et cetera.
One-Group
Pretest-Post-test
design and the
theory of the
resource curse;
qualitative
descriptive
analysis
44
CHAPTER TWO
HISTORICAL DEVELOPMENT OF OIL EXPLORATION IN GHANA
This chapter will among others, examine the history of oil exploration and production
activities in Ghana. We shall however, begin by appraising the fact that right from the time of its
independence in 1957 it has been part of every Ghanaian government's policy to explore Ghana's
hydrocarbon deposits. Between 1898 to the late nineties an estimated hundred exploration wells
had been drilled in Ghana with no significant discovery except for the Saltpond oil find in 1970
(Ghana Oil Watchdog, 2009). The chapter will equally evaluate the location, size, and quantity of
the hydrocarbon that are contained in the Jubilee oil field as well as its implication for national
development in Ghana, in terms of how much revenue that it is expected to contribute into the
coffers of the Ghanaian Government. Finally, effort will also be made to study and understand the
major structure and agency that controls, regulates and represents the interest of the government
of Ghana in the petroleum sector (Oil and Gas). However, before venturing into the analysis of
oil exploration in Ghana, it is pertinent and germane that we first and foremost introduce our
country of study, which is Ghana.
2.1 BRIEF HISTORY OF GHANA
Ghana is a country located in West Africa. The country spans an area of 238,500 km2
(92,085 sq mi). It is bordered by Côte d'Ivoire (Ivory Coast) to the west, Burkina Faso to the
north, Togo to the east, and the Gulf of Guinea (Atlantic Ocean) to the south. The word Ghana
means "Warrior King" (Jackson, 2001:201) and is derived from the ancient Ghana Empire.
Ghana lies between latitudes 4° and 12°N, and longitudes 4°W and 2°E. The Prime
Meridian passes through the country, specifically through the industrial city of Tema. Ghana is
geographically closer to the "centre" of the world than any other country even though the notional
centre, (0°, 0°) is located in the Atlantic Ocean approximately 614 km (382 mi) south of Accra,
Ghana, in the Gulf of Guinea (http://wikipedia.org.htm).
The country encompasses flat plains, low hills and a few rivers. Ghana can be divided
into five different geographical regions. The coastline is mostly a low, sandy shore backed by
plains and scrub and intersected by several rivers and streams while the northern part of the
country features high plains. Southwest and south central Ghana is made up of a forested plateau
region consisting of the Ashanti uplands and the Kwahu Plateau; the hilly Akuapim-Togo ranges
are found along the country's eastern border.
The country Ghana has a population of about 24 million people. It is home to more than
100 different ethnic groups. Ghana as an independent country has not seen the kind of ethnic
45
conflict that has created internecine civil wars in many other African countries. The official
language is English; however, most Ghanaians also speak at least one local language.
The ethnic groups in Ghana are the Akan (which includes the Fante, Akyem, Ashanti,
Kwahu, Akuapem, Nzema, Bono, Akwamu, Ahanta and others) that made up 49.3% of the
countries population, Mole-Dagbon 15.2%, Ewe 11.7%, Ga-Dangme (comprising the Ga,
Adangbe, Ada, Krobo and others) 7.3%, Guan 4%, Gurma 3.6%, Gurunsi 2.6%, Mande-Busanga
1%, other tribes 1.4%, other (Hausa, Zabarema, Fulani) 1.8% (2000 census). According to the
CIA World Factbook, Ghana’s religious divisions indicates that while about 68.8% of the entire
population are Christians; 15.9% are Muslim adherents and 8.5% are of Traditional African
belief.
Ghana achieved independence from the United Kingdom in 1957, becoming the first sub-
Saharan African nation to do so, (see, Stearns and Langer, 2001: 813,
http://encarta.msn.com/encyclopedia_761570799/Ghana.html and
http://news.bbc.co.uk/2/hi/africa/country_profiles/1023355.stm). The name Ghana was chosen for
the new nation to reflect the ancient Empire of Ghana, which once extended throughout much of
West Africa. Ghana is a member of the United Nations Organisation, South Atlantic Peace and
Cooperation Zone, the Commonwealth of Nations, the Economic Community of West African
States, the African Union, and an associate member of La Francophonie. Ghana is the second
largest producer of cocoa in the world and is home to Lake Volta, the largest artificial lake in the
world by surface area (Geography.about.com.
http://geography.about.com/library/cia/blcghana.htm) and is signatory to host of international
charters, treaties and protocols.
2.2 CONCISE HISTORY OF OIL AND GAS EXPLORATION IN GHANA
Ghana has a fairly checkered history of petroleum exploration dating back over 100 years.
In 1896, the West Africa Oil and Fuel Company (WAOFCO) became on record, the first oil
company to pioneer oil exploration in the then Gold Coast (now modern day Ghana). Though
there is scarcely much corroborative primary data available on this company, it is however
contended that, WAOFCO's arrival was most remarkable as inadequate if any trusted data had
accumulated on the prospects of uncovering commercially viable hydrocarbon reserves in the
Tano fields.
Nonetheless, WAOFCO's chief ambition at the time was directed at the rich onshore Tano
fields in Ghana's Western Region. Between 1896 and 1903, WAOFCO drilled a total of five (5)
wells. Only one of these, the (WAOFCO-2) well, resulted in the very first documented oil
discovery. Between 1909 and 1913, Societe Francaise de Petrole (SFP) a French oil company
also followed WAOFCO's pioneering lead into the Gold Coast prospecting for oil. SFP on its
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own drilled a total of six (6) wells. Its first well, the SFP-1 struck oil at a depth of 10-17 meters
and produced 7 barrels of oil per day (bopd). Four (4) out of its remaining five (5) wells also had
promising oil indications. Between 1923 and 1925 the African and Eastern Trade Corporation
(AETC), a subsidiary of United African Company (UAC) join in the early oil exploration and
drilling rush in the onshore Tano area and it encountered oil and gas. Subsequently, Gulf Oil
Company also acquired the Onshore Tano license and drilled four (4) more deep wells in the area
between the periods 1956 to 1957.
Consequent upon this, the news of promising oil discoveries made Ghana an attractive
site to foreign interests. For instance diverse groups of Soviet and Romanian geo-scientists in the
early to mid 1960's (1960 - 1967) joined in the rush for petroleum resources in the Volta and
Accra/Keta Basins. Their exploratory activities and its resulting geophysical data however led to
a very important operational shift; a shift from onshore to offshore shallow waters exploration.
Even though the period following 1967 saw the exit of the Soviets and Romanians, new
and ambitious expatriate companies came onboard, who carried out further offshore drilling
activities. It was during this period that the discoveries of hydrocarbons were made for the very
first time in the Saltpond Basin, in Ghana.
In 1971, under the Busia government, R.R. Amponsah, with a sample of oil collected
from one such successful exploratory well headed to Parliament and made public exhibition of
locally discovered oil. The first offshore commercial hydrocarbon production in the Saltpond
Basin however started in 1975 under the regime of General Kutu Acheampong from a plant
operated by Agripetco. Up to the late 1970's management of the petroleum sector was under
Petroleum Department of the Ministry of Fuel and Power.
Ghana's first petroleum law, Ghana National Petroleum Corporation (GNPC) Law, 1983,
(PNDCL 64) was passed in 1983. Under section 26 of that Law, suitable staffs of the Petroleum
Department were transferred to form the core of the GNPC. From 1984, exploration activities
took a new turn with the enactment of PNDCL 64 which provided new statutory and legal
framework that would accelerate exploration and production (E&P) efforts.
Between 1983 and 1989, GNPC concluded several agreements with a number of foreign
firms. One of the most notable of these agreements permitted US-based oil company Amoco, to
prospect in ten offshore blocks between Ada and the western border with Togo. In 1989 three
companies, two American and one Dutch, spent US$30 million drilling wells in the Tano basin.
On June 21, 1992, an offshore Tano basin well produced about 6,900 barrels of oil daily.
It has been argued that for a time, especially during the early 1990s, there were domestic
attempts at appraising earlier oil and gas discoveries to determine whether a predominantly local
operation might make exploitation more commercially viable. GNPC at then wanted to set up a
47
floating system for production, storage, off-loading, processing, and gas-turbine electricity
generation, hoping to produce 22 billion cubic feet per day, from which 135 megawatts of power
could be generated and fed into the national and regional grid. GNPC also won a contract in 1992
with Angola's state oil company, Sonangol, which provided for drilling and, production at two of
Sonangol's offshore oilfields. GNPC in return was to be paid with a share of the oil.
In 1989, the country's first and only refinery at Tema underwent its first major
rehabilitation. The second phase of rehabilitation work also commenced in April 1990 at an
estimated cost of US$36 million and it was expected that as soon as its rehabilitation is
completed, distribution of liquefied petroleum gas will be improved, and the quantity supplied
will rise from 28,000 to 34,000 barrels a day. Construction on the new Tema/Akosombo oil
products pipeline, designed to improve the distribution system was further, made in January
1992. The pipeline is to carry refined products from Tema to Akosombo Port, where they will be
transported across Lake Volta to the northern regions of Ghana. Distribution continues to be
uneven, however. Other measures to improve the situation include a US$28 million project to set
up a national network of storage depots in all regions.
In 1992, the Tema Lube Oil Company commissioned a new oil blending plant, designed
to produce 25,000 tons of oil per year. The plant it were estimated and expected will satisfy all of
Ghana's requirements for motor and gear lubricants and 60 percent of the country's need for
industrial lubricants, or, in all, 90 percent of Ghana's demand for lubricant products. The
shareholders of this company include Mobil, Shell, and British Petroleum (together accounting
for 48 percent of equity), Ghana National Petroleum Corporation, and the Social Security and
National Insurance Trust.
Moreover, in order to accelerate deepwater oil exploration, the GNPC funded the
acquisition, processing and interpretation of the first 3-D seismic data over the South Tano Field
and other areas between 1989 and 1991. The GNPC subsequently drilled several wells that
established the viability of three fields in the Tano area namely:
1. The North Tano (Gas) Field with estimated reserves of over 73 billion cubic feet of
gas;
2. The Tano South (Oil and Gas) Field with estimated reserves of over 14 million barrels
of oil and about 120 billion cubic feet of gas;
3. The West Tano (Oil) Field bearing heavy crude oil estimated at over 4.0 million
barrels. GNPC produced over 62,000 barrels of oil in the South Tano fields in 1992.
This production of oil was refined at TOR.
In addition to the above, the GNPC attracted several companies to conduct exploration
activities in the offshore basin of the country, which among other include:
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a. Dana Petroleum;
b. Nuevo Energy;
c. AGIP;
d. Diamond Shamrock;
e. Devon Energy;
f. Santa Fe Energy; and
g. Fusion Oil.
The activities of these multi-national oil companies resulted in the accumulation of a
large volume of valuable data that was to become useful in future operations in the country’s
prospect and search for oil.
MAP 1: Ghana’s Hydrocarbon Exploration
Source: African Energy
As corollary to the above, on June 18, 2007 Kosmos Energy, a relatively small Dallas-
based exploratory company in a press release announced that its exploration well offshore the
Republic of Ghana in the rich West Cape Three Points Block has discovered significant oil
accumulation based on the results of drilling and wire-line logs, and a sample of the reservoir
fluid; which is today known and designated the Jubilee Oil Field. The jubilee field find is
reputed to be one of the largest discovery in Africa and contains significant oil and gas reserve.
49
The oil and gas reserve are estimated between 600milion and 1.2 million and 80 billion
respectively (Oxfam, 2007:25).
The discovery of the jubilee field has opened the floodgate for further positive findings in
Ghana such as the Mahogany 3 and Hyedua 2 wells located within the deepwater Tano Block
(See map 2, for detailed outlay of the block). Leading oil companies include Kosmos Energy and
Tullow oil companies, while others include Anadorko Petroleum corporation, E.O. Group,
GNPC, Ker Corporation (Norway) Sabre oil and Gas Ltd (Source: African Energy, Upstream.
Available at http://www.gnpcgahana.com/home/), with an upsurge rush in application for
exploratory licensing (African Energy, No 147, October 4, 2008:3).
The offshore discovery however is presumed to be capitally intensive and expensive. The
IMF predicts that it will cost $2.7 billion to start-up the Jubilee (Oxfam, 2008:26). This presents a
challenge to the survival of the oil companies in Ghana.
MAP 2: Detailed Map of the Jubilee Oil field off the coast of western Ghana
Source: Tullow Oil cited in ISODEC, (2008: 19),
2.3 DEVELOPING THE JUBILEE FIELD
Developing an offshore field such as Jubilee take years, the involvement of several
companies and many contractors, and several billions of dollars in financing. Scarce and
expensive drilling rigs will be moved into place, costing $600,000 to $1 million or more per
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day—and a floating production, storage, and offloading (FPSO) vessel will be manufactured and
put into place to gather, store, and load oil onto tankers for the export market.
The four main companies involved in the field are Kosmos, Tullow, Anadarko, and the
GNPC , negotiated a unitization agreement during mid- to late 2008 and worked together to
present a field development plan to the Ghanaian government for approval. Originally scheduled
for presentation in September 2008 for sanctioning by the government. Potential conflicts of
interest exist in that the government, through GNPC, is in the position of both participating in the
development of and evaluating the field development plan. A formal review by the Ministry of
Energy was conducted in December 2008 with outside assistance from experts from Norway and
Britain but the Ministry of Energy will rely on GNPC, where the government’s petroleum
expertise is concentrated. Barring any objection, the consortium may assume approval. According
to the 2004 petroleum agreement with Kosmos for the West Cape Three Points block, 30 days
after submission of a development plan by the companies to the minister of energy, the
“development plan shall be deemed approved as submitted, unless the minister has before the end
of the period” given notice to the companies that the plan has not been approved or that revisions
are proposed (ISODEC, 2008).
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Table 1: Offshore Oil Blocks in Ghana
Source: ISODEC (2008:22).
Disclosures by GNPC have stated that royalty, carried interest, and petroleum income tax
terms are identical, with differences in the additional oil entitlement and additional interest
While there are some rivalries the CEO of Kosmos said that “Tullow followed us here.
When we came in 2003, we had the pick of any block. … Tullow doesn’t have the technical
expertise to carry out a deepwater development program of this size” there is strong interest from
all parties to settle disputes and move forward quickly to develop the field (“Kosmos seeks more
credit for Jubilee,” African Energy, Oct. 17, 2008).
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The field development plan has not been made public, but some details have been
reported. An Interdisciplinary Production Team including the four companies had regular
meetings in Dallas during 2008 to develop the plan. Tullow has been named the “unit operator”
of the field, with Kosmos the “technical operator of the integrated project team,” while Anadarko
contributes its deepwater drilling experience. Tullow is responsible for the FPSO, shore base
operations, and community and government relations (News in Brief, Petroleum Economist,
October 2008).
Field development plans, based on data about the field and engineering studies, may
include the following:
i. Details on how the development and production of the field will be financed Details on
the drilling and completion of wells and the production, storage, transportation, and
delivery facilities for petroleum, including a timetable
ii. Method for disposal/use of associated gas
iii. Onshore installations required
iv. Production profiles for oil and gas from the field
v. Economic feasibility studies of alternative methods of developing the field
vi. Measures to be taken to protect the environment
vii. Proposals or requirements for procurement of staff, goods, and services from the national
market
The field development plan can have important impacts on technical, financial,
environmental and other aspects regarding how the field, and Ghana’s petroleum industry,
develops. Early decisions that are taken as part of the plan can narrow options for companies and
the government down the road. There have been difficult negotiations regarding gas utilization
and environmental management.
The consortium pursued a fast-track field development plan, in which the filed started
producing for just over three years from the date of discovery. (In many other countries, fields
may take five to seven years to bring into production.). Former Triton executives, now with
Kosmos, brought the Ceiba field in Equatorial Guinea into production in 17 months. (An action
plan published by Kosmos Energy in December 2008 sets a target of November 1, 2010, as the
date of first oil production.)
According to a report published in Upstream magazine, “Brian Maxted, chief operating
officer for Kosmos, says a strategic decision was made to pursue a parallel, fast-track appraisal
and development strategy due to a combination of factors, including the size of the discovery, the
project’s importance to the partners, and ‘strong encouragement from Ghana’s government.’ ”
Some concerns have been privately expressed that the government, eager for cash, was pushing
53
the consortium to do a “quick and dirty” plan that would cut corners to exploit the field as quickly
as possible.
Without a careful plan in place, the field could be damaged and oil recovery rates would
diminish. Says Kosmos CEO Musselman, “We’re working in 4,000 feet of water, and the design,
pre-planning, and engineering have to be done absolutely right.” Most West African oil fields
experience peak production early with a relatively quick decline. If an oil company—or
government—has financial incentives to pump oil quickly, that could reduce field life. (Industry
experts estimate that globally, on average, 30 percent of oil in place is recovered. Norway’s
recovery rate is around 40 percent.)
The development plan has the Jubilee field being developed in phases. The first phase
will have 17 wells drilled—nine production wells, three wells to reinject associated gas, and five
wells to reinject water to maintain pressure on the field. Four drilling rigs will arrive in Ghana by
the first quarter of 2009. Tullow has signed a contract with MODEC, a Japanese company, for an
FPSO for the first phase of the project. The FPSO, with a capacity of 2 million barrels, can
process 120,000 bpd of oil, 160 million cubic feet of gas per day, and 100,000 bpd of water and
will be installed in 3,609 feet of water. The FPSO is the Ohdoh, a second-hand single hulled
tanker that will be converted into the FPSO. Shuttle tankers will off-load from the FPSO every 10
days. A subsea gathering system will be built by French contractor Technip, and Norway’s Aker
Solutions will provide umbilicals. Approximately $300 million will be spent in the first phase on
support infrastructure, including support facilities and pipe yard at Takoradi. (These plans have
created a “gold rush” mentality in the town and have locals complaining about rising prices.)
The Jubilee field will average 60,000 bpd in the first year (starting in the second half of
2010 or early 2011), ramping up to a peak of 120,000 bpd during the first phase. Later phases will
be developed as partners discover more reserves through appraisal drilling. The second phase—
starting perhaps in 2013—could include a second FPSO to possibly increase production to
240,000 bpd, with 2.6 billion cubic meters of gas per year.
2.4 PROJECTED GHANA’S OIL REVENUES
The estimations of Ghana’s future revenues inevitably depend on a number of variables:
the size and production rate of the Jubilee field and other potential finds, assumptions regarding
exports of oil versus import substitution, the highly volatile world oil price, production costs and
the internal rate of return of the oil consortium, the outcomes of negotiations for future oil blocks,
and other factors (ISODEC, 2008).
IMF predicted that government revenues from oil and gas could reach a cumulative
US$20 billion over the production period of 2012–30 for the Jubilee field alone, or about 4–5
percent of GDP per year. This would equal 160 percent of 2008 GDP estimates (IMF, 2008). In
54
an internal document reported by the Financial Times, the IMF says that the government’s take
could be $1.3 billion in 2013, more than cocoa and gold earnings combined (Financial Times,
2008).
GNPC in its estimates issued in July 2008, using a 100,000-bpd production rate and a
$60-per-barrel oil price, forecasted $836 million per year. At a 200,000-bpd production rate,
“which could be achieved five years after commencement of production,” the total annual
revenue to the state would be over $1.6 billion per year.
Moreover, the German technical cooperation organization, GTZ estimates issued in early
2008 put it thus:
… in the most conservative scenario with 40,000 barrels
produced at an oil price of US$50, annual government
revenues from taxes, royalties, and the participating interest
of the (GNPC) would amount to at least US$200 million per
annum. At a daily production of 150,000 bpd, Ghana would
become an oil exporter. Again, assuming an oil price of
US$50 per barrel, ... annual government receipts from the
sector would total more than US$1 billion. In the latter
scenario, our estimates suggest that annual government
revenues will be composed roughly as follows: royalties,
US$135 million; interest (carried and additional), US$300
million, and petroleum income tax, US$630 million. For
comparison ... government receipts from the mining
sector—royalties, taxes, and dividends—totaled US$27
million in 2004.
The following simplified assumptions can be made to estimate the revenue that will
accrue to Ghana based on current discoveries.
Production began in December, 2010 with the number of barrels produced per day
estimated to be around 120,000. The 2010 production level is around 48% of the targeted
total of 250,000 barrels/day.
The number of working days in the year is 365.
The projection of the proportion of revenues that will come to the Government of Ghana
is 40%. This is based on the GNPC projection that the government is to get 40%-50% of
the total oil revenue based on the agreements signed with the oil producing countries.
The number of barrels produced increases by around 44% annually from 2010 so that by
2012 the total number of barrels/day is almost 250,000.
The price of oil is assumed to average around US$70 per barrel under scenario 1 and
US$100 per barrel under scenario 2 over the entire period.
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Based on these conservative assumptions we obtain a projected revenue from oil of the
range of US$1.22 billion to US$1.75 billion in 2010, under scenarios 1 and 2, respectively. This
is expected to reach between US$2.54 billion to US$3.62 billion by 2012 under scenario two (as
indicated in the figure below). Clearly these are quite significant inflows compared to the total of
grants and loans of around US$1.34 billion in 2007.
Figure 2: Projected Oil Revenue for Ghana, 2010-15
Source: Osei and Domfe, 2008
Implications of the Projected Oil Revenue for Fiscal Consolidation in Ghana
There is no doubt that the estimated oil revenue will help fiscal consolidation in Ghana.
The overall budget deficits over 2006-07 were in the range of 7%-8% of GDP. From Figure 4
above, it can be seen that, even under scenario 1, the oil revenues can cover a significant portion
of these deficits. Furthermore, projected oil revenues far exceed the 2007 level of grants, loans,
cocoa exports and gold exports. Indeed, at the projected levels, oil revenue will become the most
important export earner for the country, contributing over 60% of exports by 2012. We estimate
GDP and domestic revenue levels for 2010-15 based on an annual growth of around 21% (the
average for 2004-07). Based on these estimates, the projected oil revenue will constitute around
19% of domestic revenue in 2007 and reach a peak of around 27% in 2012.
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Table 2: Importance of Projected oil Revenue for Fiscal Consolidation in Ghana
US$ million 2010 2011 2012 2013 2014 2015
Projected oil revenue
(scenario 1)
1,223 1,761 2,536 2,536 2,536 2,536
Projected oil revenue
(scenario 2)
1,747 2,516 3,623 3,623 3,623 3,623
Loans (2007 level) 480 480 480 480 480 480
Grants (2007 level) 857 857 857 857 857 857
Domestic revenue 6,547 7,893 9,516 11,473 13,831 16,675
Total exports (2007 level) 4,027 4,027 4,027 4,027 4,027 4,027
Cocoa exports (2007
level)
1,103 1,103 1,103 1,103 1,103 1,103
Gold exports (2007 level) 1,734 1,734 1,734 1,734 1,734 1,734
GDP 25,245 30,435 36,692 44,235 53,330 64,294
Oil rev (scenario 1) % of
Loans (2007 level) 255 367 528 528 528 528
Grants (2007 level) 143 205 296 296 296 296
Domestic revenue 19 22 27 22 18 15
Total exports (2007 level) 30 44 63 63 63 63
Cocoa exports (2007
level)
111 160 230 230 230 230
Gold exports (2007 level) 71 102 146 146 146 146
GDP 5 6 7 6 5 4
Source: Osei and Domfe, 2008.
2.5 THE GNPC AND ITS ROLES
The GNPC (Ghana National Petroleum Corporation) is established during the military
regime of Flt. Lt. Rawlings, the GNPC was created to undertake exploration, development, and
production of petroleum, either on its own or in association with foreign oil companies, and to
kick start the petroleum industry in Ghana. By holding exclusive rights to Ghana’s onshore and
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offshore petroleum basins, GNPC became the channel through which any foreign oil company
can gain access to petroleum exploration and production rights, in the country.
GNPC's corporate mission was to promote, explore and develop the hydrocarbon
resources of the nation (Ghana) through lean, efficient and technology-driven investments so as
to enhance the economic development of Ghana. Its vision was to become a world-class
corporation capable of making Ghana a fast growing destination for upstream petroleum
investments in West Africa.
In line, with its operational vision and mission, the GNPC performs the following
functions and roles:
i. Undertaking geological data acquisition and management;
ii. Promoting Ghana’s exploration potential;
iii. Evaluating potential investors;
iv. Negotiating petroleum agreements;
v. Participating through equity in field development;
vi. Approving development plans;
vii. Monitoring petroleum costs.
viii. Monitoring activities of oil and gas companies.
As a participant in and chair of the Joint Management Committee for the Jubilee field, it
oversees the consortium’s work plans and operational budgets and has a role in determining and
monitoring production and production costs—vital determinants for revenue calculations and
payments to the state. According to GNPC’s chief legal officer, the petroleum agreements
empower GNPC to effectively monitor and control operations of oil companies and apply
sanctions where necessary through the minister of energy. As one GNPC staff member
commented, the GNPC wears “a lot of hats” and does “a lot of things we are not supposed to do”
(ISODEC, 2008:38).
For much of the GNPC’s life, very little interest was expressed by international oil and
gas companies and very little petroleum sector activity occurred. But at present it has become the
locus for government expertise in the sector and dreams of oil riches that seemed until very
recently to be a mirage. With the GNPC now serving as both a de facto regulator and a participant
in a commercially viable field, there have been calls by donors, including the World Bank and the
German government aid agency GTZ, and others to unbundle the GNPC and split the roles of
regulator and commercial entity.
However, the management of the GNPC were reluctant to cede functions and expressed
resistance to the idea during the national forum in February 2008. Manu (2008:n.p.), director of
operations at GNPC, once argued in a presentation that GNPC’s current combination of
58
commercial, regulatory, and noncommercial functions at this stage of our developmental life
cycle is more beneficial than if these roles were split. He also argued that the GNPC gained
valuable insights into the company operations and could therefore better regulate the sector and
that limited human resources in Ghana meant the GNPC should play all roles for the time being.
But the consensus of the international experts at the workshop, who had seen the
problems of other countries, such as Angola, where the national oil company had become an
unaccountable state within a state, was that the commercial and regulatory roles should be split
and that transparency and accountability were vital elements in natural resource management
institutions.
It is therefore, in response to this clarion calls that the Ghana Oil Revenue Management
law unbundled these various functions of the GNPC through the establishment of the Ghana
Petroleum Regulatory Authority (GPRA) in 2011.
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CHAPTER THREE
OIL GOVERNANCE AND THE AVOIDANCE OF RESOURCE CURSE CONUNDRUM
IN GHANA
Ever since commercial oil discovery was made in Ghana,
there have been several suggestions urging the government to
use the oil and gas resources of the country for the economic
transformation of the country. The combined manifestos of
the NPP, NDC and CPP running for presidential elections in
late 2008 expressed intentions to apply oil revenue to priority
areas of infrastructure, agriculture and food processing, ICT,
education, health, rural development, housing, water and
sanitation, among others. (Nana, 2010:1).
For Ghana, one of the most peaceful and relatively prosperous
countries in West Africa, the start of oil production in late
2010 appears to come as good news. With the peaceful
transition of power from the New Patriotic Party (NPP)
government to the National Democratic Congress (NDC)
government in 2009, Ghana hopes that its star will continue to
shine and that oil revenues will help accelerate the country’s
effort to meet the UN Millennium Development Goals by
2015. (ISODEC, 2010:2)
In this chapter, we shall evaluate the various strands of natural resources and oil
governance initiatives that have been globally accepted as best practices in combating the
negative effects of natural resources in the economy of rich natural resource endowed countries.
However, our primary focus will be on the chances and strategies through which Ghana can
escape the phenomena of resource curse, in addition to its efforts in transforming and in ensuring
that its oil found into blessing rather than curse. We shall nonetheless, begin by assessing the
resource governance initiatives and best practices and conclude by identifying and scrutinizing
Ghana’s oil revenue policy, that regulates, controls and guides both the collection and use of oil
revenue in the country.
3.1 NATURAL RESOURCE (OIL) GOVERNANCE INITIATIVES
Many of the more recent initiatives that have to do with natural resource revenue
management have focused on issues of transparency, ‘downward’ accountability and public
participation. In this study, we will discuss a number of them such as:
1. Extractive Industries Transparency Initiative
2. Global Reporting Initiative
3. Publish What You Pay
4. IMF Code on Good Practices in Revenue Transparency
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5. Aarhus Convention
Other initiatives and methodologies of relevance include:
1. OECD Best Practices for Budget Transparency
2. Promoting Transparency in the African Oil Sector – Centre for Strategic and International
Studies
3. Proposed Economic Assistance Conditionality Act – US House of Representatives
4. Bank Track – NGO coalition
5. OECD Guidelines for Multi-National Enterprises
6. Proposed IAS Accounting Standards – Association for Accounting and Business Affairs
7. FTSEGOOD Indices
8. Dow Jones Sustainability Indexes
9. Africa Governance report – UNECA
10. Bribe Payers Index – Transparency International
11. Corruption Perceptions Index – Transparency International
12. Democracy Index – Institute for Democracy in South Africa
13. Global Integrity Report – Centre for Public Integrity, Washington DC
14. Worldwide Governance Indicators – World Bank
In addition, the efforts of some international donors with sector-wide and general budget
support and in facilitation of Poverty Reduction Strategies Papers (PRSP) for highly indebted
countries, have also contributed to greater transparency, accountability and participation in
revenue management, though not necessarily directed only at natural resource revenues.
The need to focus attention particularly on these three elements of the resource revenue
management is built around the growing evidence that:
1. where the government is the only shareholder, the national oil companies are subject to
little pressure to be transparent in their operations. Few national oil companies publish
accounts that are either consistent with International Accounting Standards, or
independently or externally audited (Olsen, 2002: 6) and
2. where public revenues come from a small number of concentrated sources, such as a few
foreign oil companies or a public mining enterprise, it is relatively easy for revenue and
expenditure to be hidden from view. If a legislature exists, it has limited capacity to
exercise oversight over the state because it has very incomplete knowledge of (let alone
control over) the myriad ways in which state and quasi-state agencies raise and spend
money. The official “budget” may represent a mere shadow of the true fiscal situation
(Moore, 2004:306).
61
There is however also criticism that transparency initiatives are possibly overrated204. It
is noted that large portions of revenues accrue to national resource companies, middle men or
intermediary agents rather than the government or the operating companies directly.
Table 2 below summarises the main initiatives around resource revenue transparency,
accountability and civil society participation, and assesses them in terms of their reach against a
continuum of transparency, accountability and participation activities. Some highlights are given
below.
IFC Code of Good Practices on Fiscal Transparency
An updated ‘Code of Good Practices on Fiscal Transparency’ was approved by the
Executive Board of the IMF in 2001. Notably, the code is the only formal instrument that appears
to offer a fully comprehensive approach, covering all of the main features of effective revenue
management (see Table). Most other initiatives are predominantly piece-meal in comparison. The
IMF code thus offers a possible template for undertaking a ‘gap analysis’ to determine the best
role to be played by donors (including UNDP) and others in supporting resource revenue
management.
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Table 3: Variable ‘Reach’ of Initiatives on Resource Revenue Transparency, Accountability and
Participation
IMF Revised Code of Good Practices on Fiscal Transparency (IMF, 2005)
1. Clarity of Roles and Responsibilities
a. Clear mechanisms for the coordination and management of budgetary and extra budgetary
activities should be established.
b. Government involvement in the private sector (e.g., through regulation and equity
ownership) should be conducted in an open and public manner, and on the basis of clear
rules and procedures that are applied in a non-discriminatory way. Any commitment or
63
expenditure of public funds should be governed by comprehensive budget laws and
openly available administrative rules.
c. Taxes, duties, fees, and charges should have an explicit legal basis. Tax laws and
regulations should be easily accessible and understandable, and clear criteria should guide
any administrative discretion in their application.
d. Ethical standards of behaviour for public servants should be clear and well publicized.
2. Public Availability of Information
a. The public should be provided with full information on the past, current, and
projected fiscal activity of government.
b. The budget documentation, final accounts, and other fiscal reports for the public
should cover all budgetary and extra budgetary activities of the central government,
and the consolidated fiscal position of the central government should be published.
c. Where sub-national levels of government are significant, their combined fiscal
position and the consolidated fiscal position of the general government should be
published.
d. The publication of fiscal information should be a legal obligation of government.
3. Open Budget Preparation, Execution, and Reporting
a. The budget documentation should specify fiscal policy objectives, the macroeconomic
framework, the policy basis for the budget, and identifiable major fiscal risks.
b. The annual budget be prepared and presented within a comprehensive and consistent
quantitative macroeconomic framework, and the main assumptions underlying the budget
should be provided.
c. Major fiscal risks should be identified and quantified where possible, including variations
in economic assumptions and the uncertain costs of specific expenditure commitments
(e.g., financial restructuring).
d. Budget data should be reported on a gross basis, distinguishing revenue, expenditure, and
financing, with expenditure classified by economic, functional, and administrative
category. Data on extra budgetary activities should be reported on the same basis.
e. A statement of objectives to be achieved by major budget programs (e.g., improvement in
relevant social indicators) should be provided.
f. Procedures for the execution and monitoring of approved expenditure and for collecting
revenue should be clearly specified.
g. Procurement and employment regulations standardized and accessible to all interested
parties.
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h. Budget execution should be internally audited, and audit procedures should be open to
review.
i. The national tax administration should be legally protected from political direction and
should report regularly to the public on its activities.
j. There should be regular fiscal reporting to the legislature and the public.
4. Assurances of Integrity
a. Budget data should reflect recent revenue and expenditure trends, underlying
macroeconomic developments, and well-defined policy commitments.
b. A national audit body or equivalent organization, which is independent of the executive,
should provide timely reports for the legislature and public on the financial integrity of
government accounts.
c. Independent experts should be invited to assess fiscal forecasts, the macroeconomic
forecasts on which they are based, and all underlying assumptions.
d. A national statistics agency should be provided with the institutional independence to
verify the quality of fiscal data.
Extractive Industries Transparency Initiative
The Extractive Industries Transparency Initiative (EITI) programme is managed by the
UK Department for International Development and the World Bank. Presently eight countries are
implementing the EITI principles: Azerbaijan, DRC, Ghana, Kyrgyz, Nigeria, Sao Tomé , Timor
L’Este and Trinidad and Tobago. Another twelve countries have endorsed the initiative (see -
http://www.eitransparency.org/).
Central to the initiative is commitment by governments to:
(i) voluntarily disclosure independently reconciled audits of revenues (received by governments)
and payments (made by companies to governments); and
(ii) initiative a multi-stakeholder process to design, monitor and evaluate the transparency
commitments.
EITI is now expanding into skills training for national level public sector. For example
the Nigerian EITI chapter recently commissioned a training programme on petroleum industry
economics, tax policy and revenue management, a move which takes EITI beyond just
transparency. ETIT is thus at a cross-roads. Two clear choices face the initiative, either develop a
"narrower but deeper" strategy, focused on only a few countries, but extending activities into
national expenditure monitoring and reconciliation of payments/revenues at sub national levels of
government; versus a "shallower but wider” approach which would remain focused on
transparency and bring into the initiative countries such as China, India and Russia.
It is recommended that UNDP continue to discuss with EITI how to align their strategies.
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Guiding Principles of the Extractive Industries Transparency Initiative (EITI)
EITI implementation rests on six guiding principles namely:
1. Publication of payment/receipt in a publicly and readily accessible form;
2. Independent audit of payments/receipts by a reputable audit firm applying
international auditing standards;
3. Payments and receipts are reconciled by a credible, independent administrator, with
publication of the administrator’s opinion regarding that reconciliation;
4. Extension of the above to all companies including national resource companies;
5. Active engagement of civil society in the design, monitoring, and public debate
around the implementation process; and
6. Commitment to a work plan and timeline for implementation.
Source: Extractive Industries Transparency Initiative, 2003
Good Practice Examples of the EITI
Azerbaijan – the Government’s State Commission on the EITI (responsible for overseeing the
implementation of the Initiative) is a ‘proactive and sophisticated’ local NGO transparency
coalition. All operating companies have signed a “Memorandum of Understanding” to provide
guidance to stakeholder groups as to their responsibilities within the tri-partite process and how
disputed issues will be addressed. The MOU guarantees that the local NGO coalition will play a
fundamental role in the design and monitoring of EITI implementation and in selecting an
independent auditor to verify published data.
Sao Tomé e Príncipe – a National Forum was established by President Fradique de Menezes in
order to inform citizens about the potential impact of the oil industry on the country and to seek
advice on how revenues should be spent. Various ‘popular information bulletins’ were generated
for participants in the forum as well as several questionnaires to get their feedback directly.
Timor L’Este – consultations were held with local civil society organisations, remote
communities, universities and schools during the development of the country’s oil revenue
management legislation (PWYP, 2005).
Publish What You Pay
Publish What You Pay (PWYP) is a coalition of 250 international and national NGOs.
The coalition actively gathers and reports information the disclosure of payments by companies
to host governments, highlighting deficiencies as a means to encourage improved performance.
The grouping also advocates for:
a. mandatory disclosure of payments by companies, and argue that this serve as a substitute
for reporting of income by governments that do not supply such information;
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b. transparency in the extractive industries to be made a condition of all lending,
development and technical assistance programmes by international financial institutions
like the International Monetary Fund and World Bank Group;
c. an amendment to the rules for all oil, gas and mining companies listed on stock markets,
which would require the disclosure of payments (taxes, fees, royalties and other
d. transactions) made to governments for all countries of operation;
e. an International Financial Reporting Standard for the extractive industries to include a
requirement that extractive industry companies disclose in their accounts all payments
that they make to the governments of countries in which they extract resources, and to
agencies or representatives of those governments;
f. export credit agencies to require the public disclosure of all payments (taxes, fees,
royalties and other transactions) as a condition of their support to extractive industry
companies seeking loans, guarantees and risk insurance;
g. all private, commercial and retail banks to require transparency of revenues from
extractive industries as a condition for all resource-backed loans to developing countries,
meaning loans which are secured against future resource revenues;
h. country governments to:
i. remove legal and extra-legal obstacles to transparent disclosure of company
payments and government revenues from the extractives sector, including
removing non-disclosure clauses in production sharing agreements;
ii. collaborate with citizen groups monitoring the management and allocation of
resource wealth including the development of revenue oversight mechanisms
involving both government and civil society;
iii. publish the results of regular independent audits of national resource companies;
iv. identify resource revenues in the national budget.
A toolkit has recently been published by PWYP. The resource cites four key success
factors for effective participation of civil society in monitoring revenue management:
1. a capacity to gather the right information through formal and informal channels, and
analyse and translate the material into an understandable form for the public, the media,
and policymakers;
2. building and maintaining effective advocacy positions;
3. working with the media; and
4. engaging public officials and ‘push’ them in the direction of civil society’s agenda.
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OTHER TRANSPARENCY INITIATIVES
Other organisations in the somewhat crowded field of revenue transparency,
accountability and participation include: the Global Reporting Initiative; IMF - Code on Good
Practices in Revenue Transparency; Open Society Institute; International Budget Project (IBP) of
the Centre on Budget and Policy Priorities; OECD Best Practices for Budget Transparency. A
number of international conventions are also relevant to this topic: the UNECE Aarhus
Convention; UN Convention Against Corruption; African Union Convention Against Corruption;
and SADC Protocol Against Corruption.
Working with Parliament, the Media and NGOs
A key component of accountability in NRNR management is an effective role for
parliamentary institutions, the media and established key civil organisations. The aim here is to
foster an enhanced scrutiny and oversight capacity explicitly targeted at how NRNR revenues are,
or are not, being linked to development goals. This may involve strengthening the capacity of
parliamentarians, supporting civil servants on Public Accounts and other relevant parliamentary
sub-committees, as well as working with key journalists and editors of the newsprint and
broadcast media, and with faith groups and key non-governmental organisations.
Specialist training packages, technical advice and consultancy management expertise
already lies with a number of international transparency initiatives, including the International
Budget project (IBP) programme, the recommendations of the World Bank Extractive Industries
Review (EIR), the IMF Code on Good Practices in Revenue Transparency, the Publish What You
Pay (PWYP) toolkit and the programmes of the Open Society Institute. Building on these
initiatives, UNDP could offer to co-ordinate or implement a wide range of initiatives, including:
a. oversight of a process of natural resource revenue laws formulation;
b. oversight of interagency co-ordination among Central Bank, Ministry of Finance,
Ministry of Energy/Petroleum/Minerals and the national oil company;
c. oversight of production and royalty negotiations with foreign extractive industry
investors;
d. interpretation of reports on resource production, payments and revenue receipts;
e. review of auditors reconciliations;
f. oversight of state mineral or oil stabilisation and savings funds;
g. contribute to public expenditure policy formulation on NRNR revenue stabilisation,
intergenerational savings, productive investment and economic policy;
h. review of budgets, revenue distribution and public expenditure management; and
i. oversight of public sector procurement.
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3.2 OIL GOVERNANCE BEST PRACTICES
The oil industry has several stakeholders: the multi-national companies (MNCs) that
pump the oil; the government who receive part of the profits; the citizens who should benefit
from resource wealth and often, international donors who contribute financing for production.
Two of these groups namely the oil MNCs and the government have direct access to and control
over oil revenues. It is typically citizens and donors, however, who have the strongest interest in
averting the resource curse. Citizens suffer directly from the poverty, inequality, and violence that
accompany failed oil policies (Ross, 2003). Multinational donors increasingly condition their
support on institutional reform and democracy promotion (World Bank, 2007: 1-7). Oil
companies, in the other hand, simply want to maximize profit they have little interest in whether
they promote wealth or poverty, democracy or authoritarianism (Frynas, 2005:581). In fact, they
will be happy to support authoritarian governments; if it facilitates oil production (the case of
Nigeria during the military rule and Bashir’s Sudan are typical examples). In theory,
governments represent the needs of their constituents, but officials and the electorates often have
divergent interests. Officials benefit personally from corruption and often use oil money to
consolidate power (Ross, 2003). To keep companies and the government in check, therefore,
stakeholders must be able to hold them accountable; monitor their actions, demand and receive
explanations for decisions made, and impose sanctions if they fail to conform to established
agreements and priorities (Robinson, et al, 2006 and Bannon and Collier 2003).
Of course, creating accountability is no easy task. But that has not stopped the
international community from trying. Over the years, experts have come up with a litany of
governance best practices that, if adopted and implemented, should result in more responsive and
effective oil management (see, IMF, 2005, World Bank, 2006 and World Bank, 2008). These
practices revolve around three key concepts namely transparency, oversight and enforcement.
Transparency is paramount. If details about production, revenues and spending are publicly
available, interested parties can monitor what is happening and bring to light abuses or policy
failures (Humphreys, et al, 2007:326-327). With production, the government must, at a minimum
publish all production contracts it enters into with MNCs; ideally, it should auction off production
blocks through an open competitive bidding or application process that publicises all proposals
and final agreements (IMF, 2005). Once production begins, the law must require oil companies to
produce regular reports on production levels, revenues, and royalties paid, the government must
publish companion reports that detail royalties it received, where they were deposited and how
they were spent.
Transparency facilitates the second aspect of accountability, which is oversight.
Information permits concerned citizens to scrutinize oil activities, determine whether they support
69
national interests, and advocate for change where they do not. Simply disseminating information
to the public at large, however, might not engender sufficient oversight (Shultz, 2005: 7-8).
Individual citizens may not be motivated to pour through thousands of pages of government
report and civil society groups may not pick up the slack. This is especially true in developing
countries, where civil society is still consolidating and significant capacity constraints exist
(IDSA, 2007: 22-30). Therefore, effective oil governance frameworks also set up formal
oversight mechanism to review and evaluate government and industry activity. These include
annual internal and external audits, and independent committees comprised of government
officials, business representatives, and private citizens that oversee the production process or
monitor and even authorize spending (IMF, 2005:59-63).
Providing formal oversight of government spending is particularly important in
developing democracies. Ideally, spending oil revenues through the regular budgetary process
would provide sufficient oversight of government decision-making. In a perfectly democratic
world, these procedures should be transparent, easily monitored, and subject to legislative debate
and approval. Unfortunately, democracy is usually far from perfect and budget processes often
lack requisite accountability (Alexander and Gilbert, 2008). Independent committees charged
with reviewing or even authorizing spending provide an important additional layer of oversight.
Finally, even in the most robust democracies there will be times when public scrutiny and
press will be insufficient to change industry or official conduct. In such situations, strong
enforcement mechanisms are necessary to sanction wrongdoing and force action. This requires
building the capacity of existing legal institutions to investigate and prosecute oil industry
misconduct (IMF, 2005:60-63). Oversight committees should also have investigatory and
adjudicatory power in the areas they monitor, to create an independent layer of enforcement
(Gary and Reisch, 2005:58-64). Laws must establish clear channels through which the public can
bring problems to the attention of enforcement agencies, so that informal oversight feeds into the
legal system. Meaningful sanctions provide an accountability backstop that forces players to
respect national interests, even when the pressures to subvert them are exceptionally strong.
Many experts also promote oil funds as a means of moderating and monitoring spending
(World Bank, 2006). Oil funds are special accounts set up to receive all or a portion of oil
revenues. Most funds are created to save and invest part of the country’s oil wealth; this prevents
overheating and guarantees that future generations will benefit from the country’s resources. In
places where there are serious concerns about corruption or wasteful spending, funds are also
used to force the government to spend money on development priorities (Alexander and Gilbert,
2008). For a fund to work, however, it must meet the same standards of transparency, oversight
and enforcement as the rest of the oil sector (World Bank, 2006). There must be clear rules for
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depositing and withdrawing funds. Parliament might be allowed to request funds through the
regular budget process, but rules can also contain more substantial checks on withdrawals,
perhaps requiring multiple officials or an oversight committee to sign off on spending request.
Saving fund regulations should establish who will manage investments and set financial goals or
targets. And, of course, the law must set-up spending and investment oversight mechanism
including independent committees and audit.
Clearly, then there are many ideas about what countries should do to manage oil
revenues. Unfortunately, how to get countries to enact the right policies and ensure that they work
is more than a little murky (Carvnar, 2008:4).
Fig. 3: Oil Production Chain and Interventions
Source: Moss and Young, 2009:12
3.3 CASE STUDIES OF OIL GOVERNANCE
3.3.1 Case Study One: Alaska
Alaska became a major oil producer in 1969, when oil companies struck “gold” in
Prudhoe Bay. Within a year, the Prudhoe Bay find had flooded the state’s treasury with $900
million in new revenue and Alaska was pumping hundreds of thousands of barrels of oil a day.
Alaska production peaked in 1998 at two million barrels a day, today, it produces around one
million. Oil dominates Alaska’s economy, contributing 40 percent of annual revenues.
Laws and Regulations Covering Oil Production and Royalties
Alaska’s oil and gas laws contain strong standards on transparency accountability. The
state lease production blocks through a competitive bidding process where interested companies
submit licensing proposals to the Licensing Commissioners; who (the commissionr) makes all
proposals available to the public for analysis and comment (Alaska Statute, 2007). He awards the
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lease on the “best interest determining,” which must take into consideration public comment
(Alaska Statute, 2007). The final contract and the Commissioner’s decision-making process are
published (Alaska Statute, 2007). Affected groups or individuals can challenge the
Commissioner’s “best interest determination” in court if they believe he abused his authority
(Alaska Statute, 2007).
Once production is underway, the laws impose substantial reporting and auditing
requirements on oil companies and state agencies. Companies must submit monthly royalty
reports accounting for production, revenues received, and royalties paid to the government
(http://www.dog.dnr.state.ak.us/oil/product/publications/annual/report.htm). The Alaska Division
of Oil and Gas reports revenue received monthly. The public can demand review of these reports
by the Alaska Royalty Oil and Gas Development Advisory Board, which is comprised of
government commissioners and public members; the Board can sanction officials if it reveals
wrongdoing. The Oil and Gas Division also release annual reports providing details on all
exploration, leasing, revenues and expenditures for the year
(http://www.dog.dnr.state.ak.us/oil/production.publications/annual/report.htm). All reports are
subject to regular internal audits carried out by the Royalty Accounting Section, and the
legislature can order the state auditing agency to audit the entire Division
(http://www.dog.dnr.state.ak.us/oil/programs/royalty/royalty.htm).
Alaska law also sets up the Alaska Oil and Gas Conservation Commission (AOGCC),
responsible for overseeing the oil and gas production process. The AOGCC is an independent,
quasi-judicial body that is supposed to provide an independent check on relations between the
government and oil companies and ensure that all contracts comply with rules and regulations.
The Commissioners are from government and the private sector and are appointed by the
Governor.
Overall, Alaska’s regulatory framework permits significant monitoring of the oil
production and payment processes. In much of the world, such robust processes would be
exceptional. In the American context, however, Alaska’s focus on transparency is hardly unique.
Since the 1930s, when President Franklin Roosevelt launched the New Deal, state and federal
administrative agencies-such as the Alaskan Oil and Gas Division-have regulated or run vast
swaths of American economic and social life (Breyer, et al 2001). Over the decades, strong legal
and regulatory standards have developed to ensure accountability in these agencies. Soliciting
public comment, holding public hearings, and releasing information on decision-making criteria
is routine, as are legal challenges to agency decisions. These standards have developed, in part,
through the legal system-transparency, public participation, and legal reviews are anchored in
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Supreme Court and other legal precedent. Given this, it is unlikely that Alaska could, legally,
have created an oil regulatory regime without strong accountability.
Despite a high-level of transparency, however, Alaska has not been free of oil scandals,
most involving oil companies lobbying government officials. Most recently, from 2004 to 2006
several members of the AOGCC resigned after government investigations prompted by
complaints from one of the Commission members, Sarah Palin, now the Governor of Alaska
found that they were receiving bribes and other favours from oil companies (Rosen, 2007). In the
aftermath, the government changed the tax laws to eliminate a number of loopholes favouring oil
producer and tightened lobbying regulations. Unlike in other parts of the world, Alaska’s
government troubles have not resulted in the widespread theft of oil revenues or an explosion of
oil related violence. And the government’s reaction to them shows that strong laws can help root
out corruption, even if they cannot completely prevent it. Nonetheless, Alaska’s troubles server as
a reminder that effective oil governance is a difficult task, even in the most favourable
circumstances.
The Alaska Permanent Fund
Alaska’s oil fund, known as the Alaka Permanent Fund (APF), is one of the world’s
largest savings fund. It has assets of just under $35 billion and experts routinely cite it as one of
the best managed. The APF was established through an amendment to the Alaska Constitution
requiring the government to deposit 25 percent of all oil revenues into a permanent fund that
would channel it into income-producing investments (http://www/pdf.state.ak.us/). The principal
of the Fund is invested permanently; further spending requires the approval of a majority of
Alaskan voters. The APF’s investment earnings are distributed directly to Alaskans through an
annual dividend program (Alaska Statue, 2007). Every year around Christmas, the Permanent
Fund Division Program mails resident dividend checks for an amount based on a five-year
average of the Fund’s earnings. The dividend program is popular with Alaskan residents; many
rely on the checks to supplement their income.
The APF is managed by the Alaska Permanent Fund Corporation (APFC), a public
corporation that is responsible for the investment strategy and monitoring of the Fund’s
operations. A six-member independent board of trustees oversees the APFC’s. The Governor
appoints all board members. The board releases regular’s public reports on the Fund’s
investment, finances, and earnings. A group of the internal and external asset managers are
responsible for day-to-day investing
(http://www.apfc.org/home/Content/investments/managers/cfm). The APFC has a second layer of
investment advisors, the Investment Advisory Council, made up of the three private citizens with
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investment experience. It reviews report and advises on the APFC’s investment decisions. The
Corporation has an audit committee, and the Governor or legislature can order external audits.
The APF emerged in the decade following Alaska’ entry into commercial oil production
in 1969. when Alaska received its first injection of oil money, state legislators had no idea how to
deal with it. As quickly as the money flowed in, it flowed out – the legislature authorized $900
million of spending proposal in less than twelve months
(http://www.apfc.org/home/Content/reportpublications/tp5.cfm). The rapid disappearance of such
large sum startled Alaskan citizens, sparking inquiries into what the legislature was doing with its
new resource. Facing public anger over wasteful spending, legislators took up the idea of creating
a fund. The idea went nowhere for five years, however, ostensibly because legislators did not
know if Alaskan law permitted a permanent savings mechanism, but also because of resistance to
spending restriction. In 1976, to get the fund off the ground, the governor proposed a
constitutional amendment that would provide a clear legal basis for the fund; he carried out a
state-wide public education campaign on the fund and Amendment (Rasmussen, 1993 and World
Bank, 2006). The public embraced his proposal, and the Amendment passed over
overwhelmingly.
After the Amendment’s passage, the legislature was tasked with creating a legal
framework to manage and govern the fund. House and Senate committees studied the issue and
developed competing proposals; the committees included members of government, the business
community, civic groups, and the general public. The legislature and committees organised a
number of public hearing and debates on the fund throughout the state. In 1980, the legislature
passed a bill establishing the APF along the lines outlined above.
In the years since its creation, the APF has consistently accumulated capital; while voters
could approve expenditures from the fund’s capital, they never have (World Bank, 2006). This is
partly because after more than two decades of public education, discussion and debate over the
Fund, the Alaskan public appears to have fully embraced the need to prudently manage and save
revenues. More importantly, however, the dividend program has made residents extremely
reluctant to raid the APF’s coffers. Dividend payments are an important source of income for
many Alaskans and they are loath to approve spending that might lower the Fund’s capital and
thus its potential earnings and the size of their checks.
The dividend program is the most direct illustration of an important aspect of the APF;
the public is deeply invested in the Fund’s success. Dividends give Alaskans a direct stake in the
APF and are credited with increasing public interest in and scrutiny over how the Fund and oil
revenue in general are managed. But Alaskan’s stake in the APF goes beyond dividend checks.
Thanks to the constitutional amendment, the legislative committees, and public debates, they
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have been involved with the Fund’s operations from the beginning. Today, because capital
expenditures require voter approval, spending proposal result in public campaigns and debates
which help maintain interest in the Fund’s operations. Because of the dividend program, attempts
to change APF legislation also spark serious public discussion.
Experts who have studied the Fund often point to public involvement as one of the key
factors to its successes. Combined with the APF’s strong transparency provisions which, as
discussed, stem from basic U.S. legal and political principles, public investment has helped
promote effective management, minimize corruption, and ensure responsiveness to the needs and
interests of Alaskan residents. The Fund’s sound investment policies are most directly
responsible for the $35billion it currently has in the bank. Its high level of accountability however
has undoubtedly played a role in ensuring that that $35billion has not disappeared into a black
hole or wasteful spending or petty corruption.
3.3.2 Case Study Two: Norway
Norwegian oil production took off in the 1980s, and the country is now one of the world’s
top 10 oil producers and top three market suppliers. It produces close to three billion barrels per
day. Oil contributes hundreds of millions of dollars per year to the Norwegian treasury, but the
country has a strong and diversified economy so oil accounts for only about 20 percent of
government revenues.
Laws and Regulations Covering Oil Production And Royalties
Norway’s oil laws and regulations contain strong transparency provisions. They are very
similar to Alaska’s except that Norway does not have the same administrative law tradition as the
United States. Therefore, the laws contain fewer requirements of public notice-and-comment
periods and citizens cannot challenge all agency decisions in national courts. Nonetheless, the
country makes huge amounts of information on the oil industry available to the public and there
are many legal avenues for prosecuting official or private corruption.
The Ministry of Petroleum is responsible for leasing production blocks through a
competitive application process, and all applications, decisions, and justifications of decisions are
made public. Norwegian law imposes a number of “reasonableness” requirements on the
Ministry’s decision-making. Oil companies must publish regular, detailed reports on royalties,
taxes, and other fees paid to the government, and the government releases reports tracing the
receipt and deposit of those funds (see, Norway Act 29 No 72 and Royal Decree 27, Chapter 7).
Government auditing agencies conduct annual audit of the government’s and oil companies’
reports; Parliament or the President can order external audit.
Unfortunately, as with Alaska, there is little to say why Norway has adopted strong
transparency rules except that Norway has a long democratic history, and its citizens expect, and
75
its laws demand, that the government conduct business openly
(http://www.regjeringen.no/en/dep/ud/press/2007/Norway-at-the-forefront-ofextractive-
in.html?id=481866). Domestic civil society groups monitor the government’s actions and there is
significant public awareness of and interest in the oil industry. As Norway’s profile as an oil
producer has risen, it has also become something of a global transparency champion. The
government regularly consults with developing countries on formulating oil regulations
(http://www.norad.no.defualt.asp?v_ITEM_ID=10094). The country’s effort have garnered it
significant praise and raised it international profile, undoubtedly putting pressure on the country
to ensure that its own operations are truly open and accountable. Nonetheless, Norway was a
model oil producer before the world recognised it as such, and it is really the Norwegian political
tradition, and not international pressure, that has helped it remain one in the years since.
The Government Pension Fund of Norway
While Norway receives recognition for its general commitment to transparency, it is the
country’s oil fund the Government Pension Fund of Norway (GPF) that garners the lion’s share
of international attention, praise, and envy. With assets of nearly $350 billion dollars, the GPF is
the world’s second largest sovereign wealth fund. The laws establishing the GPF requires the
government to deposit all oil production revenues into the Fund each year (Norway, Act Relating
to the Government Petroleum Fund, art 1-2, 1990). From there, the funds are invested overseas;
investment earning are added to principal and reinvested.
Strictly, speaking, the GPF is not a saving fund. Every year the Norwegian Parliament
passes the country’s annual budget. If it exceeds government non-oil revenues, parliament
authorizes withdrawals from the GPF to cover the deficit (World Bank, 2006). This means that
Parliament could pass a budget authorizing spending large portions, or even all, of the GPF’s
principal. The fact that it has not compared to the Fund’s size annual withdrawals are very small
is a testament of an incredible self-restraint attributable to several factors. The Norwegian
economy is strong and annual budget deficits are low, so there is little pressure to use oil revenue
to cover needed spending. Further, there is deep-rooted public support for using the GPF as a
saving fund. Because the Fund is so well-known and popular, a move by Parliament to increase
spending would spark significant debate (Business Week, 2008). This is not to say that increased
future spending will never happen; the country is currently debating what to do with the Fund’s
ballooning assets. However, if spending does pick up, it is likely that public pressure and
government priorities will lead to reasonable and measured outlays.
The Ministry of Finance has overall control of the GPF and establishes all regulations
governing the Fund. The Ministry consults Parliament on this process, but retains ultimate
responsibility for their content and implementation. Financial managers at the Norwegian central
76
bank, Norges Bank are responsible for day-to-day asset management. The Fund also has external
asset managers responsible for a portion of its portfolio; this diversifies risk and provides a
benchmark against which to measure internal investment return.
The Ministry of Finance and Norges Bank are subject to significant reporting
requirements. The Ministry releases an annual report that details the Fund’s operations and
returns, movement of money into and out of accounts
(http://www/regjeringen.no/upload/FIN/Statens%20pensjonsfond/PF-summary-aug08.pdf).
Norges Bank publishes quarterly reports on the Fund’s return, market risk, investment
composition, and compliance with ethical investment guidelines. The ethical guidelines were
introduced in 2004 for The Fund. It has two instruments being used which are; the right of
ownership and the exclusion of companies from The Fund. The right of ownership being the
obligation to ensure that financial returns are such that future generations too, would benefit from
the oil wealth. The exclusion of companies from The Fund has to do with the obligation to
respect the fundamental rights of persons who might be affected by companies due to The Funds
investment in those companies. In addition, the exclusive mechanism is a defensive measure
aimed at avoiding situations where The Fund runs the risk of being complicit in ethically
unacceptable practices.
The benchmark for The Fund serves as a risk control mechanism for The Fund and also
assesses the performance of the Norges bank with regards to its management of „The Fund‟ by
comparing actual returns with the returns on the benchmark portfolio. Going by the benchmark,
The Fund is only invested in the international finance market spreading over various countries
and companies abroad. 60 percent of The Fund is invested in equities while the 40 percent is
invested in bonds. This allows the investment to be diversified thus reducing risk while
maximizing expected returns that accrues on The Funds investments. Investing The Fund abroad
also promotes exchange rate stability in the Norwegian economy. Figure 4 below shows the
benchmark of The Fund:
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Fig. 4: Benchmark for the Government Petroleum Fund-Global
Source: Norwegian Ministry of Finance
The government auditing agency conducts annual, publicly-available audits on all reports.
The Ministry can also order an external audit. It did so in 2002, and the audit found no problems
with the Fund’s regulatory compliance or management (Carvnar, 2008).
Fig 5: Governance Structure of the Norwegian Pension Fund –Global
Source: Norwegian Ministry of Finance
The fact that Norway’s oil fund structure gives considerable discretion and power to the
Ministry of Finance reflects a technocratic bent in the country’s original approach to revenue
management. During Norway’s first decade of oil production, there was no talk of an oil fund.
However, as revenue grew, the typical economic problems began to take hold inflation increased;
other sectors of the economy began to decline sparkling concern over oil impact. Separately, the
government began to worry about how to provide pensions for a rapidly aging population. In the
late 1980s, the President proposed to address both the pension issue and the mounting economic
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problems by setting up an oil fund to manage and save excess revenue. In 1990, Parliament
passed a broad law establishing the Pension Fund’s basic principles: It would safeguard long-term
use of oil revenues, manage the government’s net cash flow oil, and transfer money to the fiscal
budget to cover the non-oil deficit (Carvnar, 2008).
After passing the 1990 law, Parliament basically handed responsibility for the Fund to the
Ministry of Finance. As Parliament would return authority over spending oil money, there were
few worries about creating mechanisms to manage spending. Norway’s governmental institutions
do not suffer from excessive corruption. The Fund was only responsible for ensuring that oil
revenues were managed efficiently. As the Ministry of Finance had the most experience with
revenue management, it made sense to charge it with creating the Fund’s rules and regulations
and overseeing its operations (World Bank, 2006). The Ministry of Finance is a highly efficient
and professional operation.
In the years since the Fund’s creation, the Ministry has more than earned the trust placed
in it. Its initial regulations established strong reporting requirement and it has carried out its
operations with exemplary openness and transparency. There have been few, if any, serious
complaints about management or corruption. The Fund’s massive assets are a testament to the
Ministry and Norges Bank investment skills. Norway’s success at managing and growing its oil
wealth has made it an oil governance model and the envy of government around the world.
3.4 ACCOUNTABILITY AND TRASPARENCY ISSUES IN GHANA’S REVENUE
The growing international focus on transparency is amply demonstrated by the
proliferation in recent years of initiatives aimed at directly and indirectly promoting and
enforcing transparency practices. These include the United Nations (UN)’s Convention Against
Corruption, the International Monetary Fund (IMF)’s Code of Good Practices on Fiscal
Transparency, the Organization for Economic Cooperation and Development (OECD)’s Best
Practices for Budget Transparency, the Global Reporting Initiative, and the Global Transparency
Initiative. Other initiatives are engaged primarily in transparency in extractive industries and
include the Extractive Industries Transparency Initiative (EITI), the ‘Publish What You Pay’
NGO coalition (by Save the Children UK), the George Soros’ Open Society Institute, the Global
Witness, the Catholic Agency for Overseas Development (CAFOD), the OECD Project on
Revenue Transparency in the Democratic Republic of the Congo (DRC) and the IMF Guide on
Resource Revenue Transparency.
Furthermore, there are also country initiatives and benchmarks such as the UN Economic
Commission for Africa’s African Governance Project, the Democracy Index of the Institute for
Democracy in South Africa and the Worldwide Governance Indicators Dataset of the World Bank
(ECA, 2005).
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The transparency specificity hinges on ultimate objectives. Thus, on the one hand,
objectives aimed at eliminating corruption, money laundering and fighting the financing of
terrorism, such as those of the UN, tends to be stated in broad language incorporating a number of
other issues besides transparency, to achieve the ultimate objective. On the other hand, objectives
such as those of IMF, OECD and EITI that are aimed at promoting sound financial management
and accountability tend to contain narrower and more specific recommendations or prescriptions.
The IMF published a Manual on Fiscal Transparency as a guide to implementing the Code. Non-
country initiatives tend to be broadly articulated, allowing countries to generate specific
initiatives suited to their own individual circumstances in line with these broad initiatives (ECA,
2005).
The IFC acknowledges that the potential emergence of a large oil and gas sector does
pose new political, regulatory, and governance challenges for the country. These risks will have
to be carefully managed, and the World Bank Group and a number of other donors are actively
engaged in supporting the country (Ghana) in this process. It is in recognition of this that the
Economic Commission for Africa, ECA (2005) asserts that:
Against the backdrop of heightened realization that economic
development and the fight against poverty can effectively be
enhanced under an environment of good governance, and that
fiscal (inclusive of budget) transparency is one of the key
instruments for achieving good governance, a sharp focus is now
on fiscal transparency. For poorer countries, donors, international
financial institutions and civil society organizations (CSOs) are
demanding transparency in the budgeting processes of recipient
countries, emphasizing their right to know and, to some extent,
determine how public and donated funds are collected and spent.
Ghana is one of the most democratic and transparent countries in Sub-Saharan Africa.
While regulations and oversight continues to be improved on, Ghana has shown that lessons
learned from its mining experience make it well-prepared for additional revenues from oil and
gas development compared to its peers in the region, especially its oil rich neighbour to the east.
Ghana has made substantial strides in improving its democratic governance and transparency and
is currently one of the best performing countries on governance indicators in Africa; thus:
1. Ghana has witnessed two peaceful transitions of power in elections that have been
widely observed as fair.
2. On the World Bank’s Country Policy and Institutional Assessment (CPIA), Ghana
ranks 5th among IDA countries.
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3. The World Bank Group’s “Doing Business 2009” report ranks the country 6th in
Sub-Saharan Africa among 46 countries (3rd on protecting investors and 5th on
enforcing contracts).
4. According to the 2008 Transparency International Corruption Perception Index
(CPI), Ghana is ranked 67th
out of 180 countries, and is 6th
in Sub-Saharan Africa.
The country has been improving on the corruption perception ground, having gained
3 positions in the past 2 years.
5. Ghana was the first country to submit to the NEPAD African Peer Review
Mechanism process, and is an early signatory to EITI for mining revenues. The
country is also in the middle of an active debate about the use of revenues and is well
supported by advice from donors and others in this respect.
As a country that was producing about 6,000 barrels of oil per day (“bopd”), prior to the
Jubilee oil field discovery; Ghana has in place a basic legal and regulatory structure for the oil
and gas sector. However, the Jubilee discovery promises to be a precursor to the potential
establishment of a significant oil basin offshore Ghana as this initial discovery attracts further
investor interest, and as the potential of Ghana’s offshore blocks is further established. In its
preparation for a larger oil sector, Ghana took a number of concrete steps toward improved
governance, including preparation of the Ghana Petroleum Regulatory Authority (“GPRA”) bill,
expansion of EITI beyond mining to cover oil and gas, and consideration of other mechanisms
such as stabilization and heritage funds to help manage potential larger revenues from the oil and
gas sector.
Revenue Transparency
In 2003, Ghana signed on to the Extractive Industry Transparency Initiative (EITI), a
positive indicator of the country’s commitment to growth through transparent development of its
resource sectors. While initially applied only to the mining sector, the Mills government on
assumption of office stated an interest in extending the EITI process to the oil sector. Although
Ghana missed the initial March 2010 validation deadline, the EITI Board granted an extension
until September. With this extended deadline met, the EITI Board deemed Ghana an EITI
Compliant country at its October meeting in Dar es Salaam, Tanzania.
The first audited EITI report, covering Ghana's mining revenue from January to June
2004, was published in February 2007 and included sub-national reporting from district
assemblies. In 2008, two more EITI reports were published, which covered transactions between
July-December 2004 and January-December 2005 respectively.
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Ghana also published another report in September 2010 covering data from 2006, 2007
and 2008. This report reflected some improvements in the sector, for example in the tracking of
disbursements to the sub-national level. The Ghanaian government is at present considering the
introduction of a fiscal responsibility law to expand the existing Financial Administration Act of
2003. This would anchor fiscal expectations by crafting long-term strategic plans for resource
usage regardless of short-term political changes.
Expenditure Transparency
Ghanaian authorities are making progress in improving expenditure transparency, and the
country has introduced targeted legislation in recent years designed to ensure accountability,
transparency and efficiency in public resource management, including:
i. The Financial Management Act of 2003, which regulates the public sector to ensure
transparent and effective management of state revenues and expenditures
ii. The Public Procurement Act of 2003, which aims to foster competition, efficiency,
transparency and accountability in procurements
Further efforts in expenditure transparency include the 2007 launch of Public Expenditure
Tracking Surveys (PETS) in the education and health sectors, and Ghana’s inclusion of a
requirement in its EITI framework that district, municipal and metropolitan assemblies report
royalty receipts and how they are used. Ghana's Publish What You Pay (PWYP) coalition is
supporting an ongoing community capacity-building exercise to track these disbursements.
An evaluation conducted by Public Financial Management (PFM) in 2006 under the
auspices of the World Bank and the Department for International Development (DFID)
concluded that, "the PFM system in Ghana is based upon a solid legal and regulatory
framework." Thus, the civic engagement on the budget process has increased, and Ghana has
climbed higher on the Open Budget Survey in recent years, moving from 49% in 2008 to 54% as
of 2010.
Contract Transparency
As in many countries, secrecy surrounding mining and oil contracts is an issue in Ghana.
Before Ghana endorsed the EITI in 2003, all discussion of contract transparency was branded as
anti-business. The first EITI report, however, recommended that all of Ghana's mining contracts,
including investment agreements, be made public.
On the issue of contract transparency, the GNPC, which is the institutional agency that
represents the Government of Ghana in the bidding process and transaction in the nation’s oil
industry, has distinguished itself creditably through proactive publication of important summary
information regarding the petroleum sector in Ghanaian newspapers since 2008. A gesture that is
in tandem with the calls and demand made by the Ghana Catholic Bishop’s Conference: Dialogue
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and Advocacy Office for Good Governance in December 2008, in which they argued that “for
meaningful and constructive public oversight and input that the public has the right to know the
details of oil contracts, [but] such agreements are not placed in the public domain” (ISODEC,
2008:47).
Furthermore, the contracts are based on a model contract available on GNPC’s website
which is aimed at ensuring uniformity in the documents and facilitating both negotiation and
evaluation. IFC has reviewed both the model contract and the actual executed petroleum
agreements, and is satisfied with their conformity and that clauses of public interest have been
disclosed. Moreover, the Project’s executed petroleum agreements have been ratified by
parliament and as such are accessible to the public. Going forward, the draft GPRA bill contains
disclosure requirements which should further improve transparency.
It is IFC’s view, on balance, that Ghana’s fundamental building blocks for good governance are
in place and that our engagement at this point will improve implementation of this and future oil
and gas projects in Ghana (Republic of Ghana – proposed IFC investments in Kosmos & Tullow:
briefing on the jubilee project (n.d).
However, a key challenge for the government is to reconcile the gains and commitments
made through the EITI process for the traditional mineral industries with the euphoria
surrounding the Jubilee Field discovery. To this end, the government submitted two bills to
Parliament in 2010 with major implications for oil-sector governance. The first addresses
governance of petroleum exploration and production, including the relationship between the state
and international oil companies. The second sought to establish two transparently operated oil
funds to guard Ghana against economic volatility and provide a heritage for future generations.
Besides, the standard of the IFC, require the companies to disclose payments to the
government of Ghana on an annual basis. For “significant” extractive industries projects, the IFC
requires the disclosure of “relevant terms of key agreements that are of public concern” (IFC,
2006:4). The IFC deems an extractive industries project to be “significant” when a project is
expected to account for 10 percent or more of government revenues. It is likely that the Jubilee
field, when fully operational, will contribute over 10 percent of Ghana’s government revenues.
Similarly, the Ghana Petroleum Revenue Management Act (2011) in its effort at
entrenching and enhancing the fundamental principles of transparency through accountability,
and public oversight in the governance of country’s oil wealth provides under its section 49 as
follows that:
1. The management of petroleum revenue and savings shall always be carried out
with the highest internationally accepted standards of transparency and good
governance.
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2. The duties concerned with ancillary matters of petroleum revenues and savings
shall be discharged with the highest internationally accepted standards of
transparency and good governance.
3. Information or data, the disclosure of which could in particular "' prejudice
significantly the performance of the Ghana Petroleum Fund, may be declared by
the Minister as confidential, subject to the approval of Parliament.
4. The declaration of confidentiality shall provide a clear explanation of the reasons
for treating the information or data as classified, taking into account the principles
of transparency and the right of the public as regards access to information.
5. The declaration of confidentiality shall not limit access to information by
Parliament and the Public Interest Accountability Committee established under this
Act.
6. Any information that is classified at the time when it could have been published, as
well as the reason for it being treated as classified, shall he made available to the
public upon request three years after the date on which it could have been
published unless the reasons for it being classified are still valid.
7. Parliament, the government, the Minister, the Bank of Ghana and the Advisory
Committee in the performance of their functions and competencies under this Act,
shall take the necessary measures to entrench transparency mechanisms and free
access by the public to non-classified information.
8. The Minister shall ensure that this Act, the Regulations and any instructions related
to the Ghana Petroleum Funds, the Operations Management Agreement and the
annual reports are readily available to the public.
In order to ensure strict compliance to the words and letters of the Petroleum Revenue
Management Act, especially in relation to the issue of transparency and accountability. The Act
also outlined under its section 50 a number of penalty and punishment that awaits anyone; who
fails to or hinders the publication of information regarding to oil revenue and its management.
Thus:
A person who fails to comply with any obligation to publish
information provided for in this Act, or causes another person to
fail to comply with, or in any manner hinders or causes another
person to hinder the compliance with these obligations, commits
an offence and is liable on summary conviction to a fine not
exceeding two hundred and fifty penalty units.
The Ghana Petroleum Revenue Management Act, provides a strong framework for the
collection and management of the country's expected petroleum revenues is an improvement in
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several respects to the pre-existing laws in the sector and it established a clear system of controls
for the collection of oil revenues and their allocation to the budget and the proposed stabilization
and savings funds; a clear division of responsibilities among authorities; reasonable rules for
managing the investments of the funds and strong oversight and transparency provisions. It is for
this reason that the Act provides inter alia:
Petroleum revenue management legislation is necessary if
Ghana is to avoid the costs associated with the alternative
options of leaving the revenue to be collected and accounted
for as part of conventional revenue, or in the hands of the
national oil company. The lessons from oil producing
countries are that these options for the collection and
management of petroleum revenue risk excessive waste,
potential loss of control of public expenditure, and most
importantly, weaken the purpose of the national budget as the
primary instrument to manage all the resources of this
country. Most oil-producing countries have therefore seen it
fit to put in place a legislative framework to guide the
collection, use and management of their petroleum revenue.
International best practice is that the revenue management law
should be simple, transparent, and flexible yet rules-based
with the view to ensure greater fiscal discipline. (Ghana
Petroleum Revenue Management Act, 2011)
The bill (draft version of the Act) puts much more emphasis on deploying a larger portion
of current revenues for investment to promote long-term growth and economic diversification
rather than permanently holding such funds in foreign savings as part of the "Heritage" fund.
Such domestic investment could provide greater benefits to both present and future generations of
Ghanaians than the returns to the savings fund and improve the government's ability to respond to
market volatility or other economic changes (Revenue Watch Initiative, 2010).
In addition, Ghana has to date actively sought and received assistance on various facets of
its regulatory and sectoral development from such Development Partners as Norway (NORAD),
the UK (DFID & BHC), Germany (GTZ), Canada (CIDA), the Netherlands, International
Monetary Fund, the World Bank and others. These have included, among others, supporting the
review of the Plan of Development for the Jubilee field. The World Bank has been helping in
EITI implementation (including through support for an oil and gas-specific scoping paper) and
through the Natural Resources Environmental Governance Project. Ghana also undertook a
national dialogue and a series of regional consultations in the first half of 2008 to allow
discussion with stakeholders and other segments of society regarding the implications of its new-
found resource.
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3.5 CIVIL SOCIETY AND THE MANAGEMENT OF GHANA’S OIL REVENUE
The Ghanaian civil society has profound roles to play in sustaining democracy and good
governance in the country especially now that the country has entered the league of oil producers;
in order to help checkmate official corruption, money laundering and abuse of office by ensuring
that official transactions that relates to oil exploration, exploitation, production and contract
biddings are conducted within the public domain as well as within dictates of the rule of law.
These are roles that civil society has played historically in all societies, which have succeeded in
becoming mature democracies, as well as all societies which are striving to consolidate their
fledgling transition to democracy (Schmitter, 1997).
However, the concept of civil society, like most social science concepts, is highly
contentious; so it is important to, at the outset, state which notion one subscribes to. It is therefore
for this fact, that we adopt Schmitter (1997:240) view of the concept in which he perceived it as:
… a set or system of self-organised intermediary groups that:
1. are relatively independent of both public authorities and private units of production,
that is of firms and families;
2. are capable of deliberating about and taking collective actions in defense or
promotion of their interests or passions;
3. do not seek to replace either the state agents or private (re)produces or to accept
responsibility for governing the polity as a whole; and
4. agree to act within pre-established rules of a civil nature, that is, conveying mutual
respect.
But it should be noted that the extent to which civil society contributes to the
sustainability or consolidation of democracy is related to the extent to which its members have a
democratic conduct and practices. For, there is a wide range of all types of civil society groups;
and in particular, there are many ostensibly non-governmental civil society groups, which are
either manipulated by public or private vested interests, or are not inclined towards democracy in
any fundamental respect. Such groups cannot in any meaningful way contribute to democracy,
much less to democratic consolidation and sustainability. If anything, their roles may simply
facilitate authoritarian reversals or obstruct the evolution of a desirable political culture in the
context of a striving for democratic sustainability (Jega, 1998). That is to say that, civil society
can positively contribute to sustainability of democracy by legitimizing and entrenching
institutions, processes and the culture of democracy, as well as by contesting, de-legitimising and
opposing authoritarian, undemocratic and uncivil practices and dispositions. It is as result of this
that Seong (2000:95) observed that they play these roles either by practicing internal democracy
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or by ensuring that its formal institutions and processes operate optimally in accordance with the
established rules and best practices.
The Role of Civil Society in Ensuring Accountability in Ghana’s Oil Sector
Civil society is vibrant in Ghana. According to a 2008 European Commission study, there
are approximately 3,800 registered civil society organizations, with the largest concentration in
the capital of Accra (USAID, 2010: 1). Small rural organizations operate throughout the country
with varying degrees of effectiveness. The challenges facing civil society in Ghana include a lack
of technical capacity and inadequate financial resources. Civil society groups at the local level,
peer educators and others have been sensitizing and mobilizing the people over the years on a
number of issue of common concern.
Ezeala (2010:1) observed that the Ghanaian citizens have been insisting vehemently on
the entrenchment of transparency and accountability mechanisms that will serve as failsafe in the
country’s oil regime in order to ensure that the oil proceeds are efficiently managed. Thus under
the auspices of the Civil Society Platform on Oil and Gas; civil society organizations in Ghana
during the formation of the nations oil and gas bill raised serious concerns about Ghana’s ability
to ensure transparent, accountable, and sustainable management of its petroleum resources. In this
wise the civil society organizations are working to keep the expected economic boom from
pushing Ghana into poverty and corruption-- what is known as the “oil curse” of many
developing countries rich in resources yet suffering in poverty. This synchronized the views
expressed by the Conference of Catholic Bishops in the Congo, net-effect of ill-management and
administration of oil resource and revenue on the citizens thus:
How can one understand that during the last three
decades, the frequent startup of oil wells, always
important, has not been accompanied by any kind of
visible sign of economic transformation or rectification
of the social situation of our population? Our oil must be
an instrument for the life and not the death of our people.
Catholic Bishops of Congo (Brazzaville), 1999
Moreover, Oxfam America an international Non-governmental organization (NGOs) has
been supporting watchdog groups in Ghana to help ensure that Ghana’s recent democratic and
development gains are not threatened by a sudden influx of oil wealth. Since Ghana is set to
receive more than $1 billion in oil revenues in 2011.
The Civil Society Platform has been engaging with government to influence legislation
that ensures transparent management of Ghana’s new oil wealth; such that many of the civil
society recommendations were gainfully incorporated into the bill that was presented to the
Ghana’s parliament. Fearing that key provisions could be stripped out and during the
parliamentary debate and discussion on the bill; the civil society activists matched their words
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with actions by mounting an unprecedented petition campaign aimed at the parliament. Using text
messages, Facebook, email action alerts, radio and television advertisements and other tools,
activists in Ghana gathered over 41,000 names of Ghanaians within the country and abroad.
Armed with these names and signatories that resonate the democratic and Lockian
principle of popular sovereignty, the group on November 2010 marched to the parliament to
submit the petition. The convener of the groups, Mohammed Amin Adam, said that they are
particularly concerned with the proposed amendments to the law “that provide for a citizens-
based transparency and accountability framework for ensuring transparent management of
petroleum revenues,” he in addition assert that “they are equally disturbed about the absence of
transparency provisions in the bill which does not provide for competitive bidding process for oil
blocs”. However, the group welcomed a provision of the bill for a Public Interest and
Accountability Committee (PIAC) as serving as a big relief to many Ghanaians as it tends to
gives the citizens not just a say in the industry, but the much needed constituent capacity to
observe, monitor, analyse and equally demand changes and explanations on the activity in both
the oil sector and its revenue.
It is as a result of the provisions of the Act on Public Accountability Commission, that a
tribal Chief in the Western region of Ghana while availing himself of the opportunity teasingly
warned a GNPC official of what is to come, should they ever engage in corrupt and sharp
practices; in the following words:
I am going to have a man on the beach in Takoradi
watching the oil leave [western Ghana] and a man in
Tema [the location of an oil refinery in east Ghana]
watching it arrive. And if it doesn't, I'm going to come
looking for you. (Smith, 2010)
In early 2011 the civil society platform in Ghana insisted that the parliament must include
provision for disclosure of petroleum agreements in the proposed law, open and competitive
bidding process for acquiring oil licenses, and timelines for the establishment of an Independent
Petroleum Regulatory Authority as opposed to the limitless powers enjoyed by the minister of
energy, among others. Thus:
Only ‘commercially sensitive information’ shall be held
confidential. Further the determination of ‘commercial
sensitivity’ must be done with approval from parliament. The
bill should provide for the publication of contracts signed
between the state and contractors in respect of any petroleum
operations.
According to Richard Hato-Kuevor, an extractive industries advocacy officer for Oxfam
America, “the contribution of civil society organizations to the evolution of the oil industry in
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Ghana has been positive and significant.” He noted that, “had it not been for their intervention,
we would have had a very weak bill, which would have translated into a weak law and an oil
industry that has set off on the wrong footing.” (http://www.oxfamamerica.org/articles/civil-
society-groups-in-ghana-insist-on-transparency)
Moreover, the Civil Society Platform on Oil and Gas, that was formed in Ghana with the
objective of creating a forum for civil society engagement on oil and gas issues in the country
petitioned parliament on some provisions of the Petroleum (Exploration and Production) Bill, that
was presented to the house for consideration. On the grounds that many stakeholder inputs were
made into the bill before it was finally tabled before the Parliament. The platform, after its
examination of the bill concluded that though the bill is positive in many ways; it also has many
flaws that must be addressed if the purpose of the law is to be achieved (Kingson, 2010:1).
In the document, the platform complained about a number of things which such poor
transparency and accountability, the (dual) role of the Ghana National Petroleum Corporation
(GNPC), ministerial oversight responsibility, as well as the absence of a regulatory authority to
check spillage. Thus it opined that:
The bill does not address very important issues which are
fundamental to the sustainable management of petroleum
resources. These include ‘no gas flaring policy’, the allowable
flaring limits and penalty for violations; the issue of resource
ownership when a contractor exploring for crude oil discovers
natural gas instead; safeguard for incorporation of local companies
to discourage ‘fronting’ or ‘shadowing’; the status of Ghanaians in
the development of marginal fields; remedies for third party
financing of petroleum operations in the event of a default by
contractor during development phase; the issue of delayed rental
fees in the event of deliberate delay in exploration and
development; and the mortgage of the bill to too much ministerial
discretion, negotiations and bargaining in a country with little
experience in the petroleum industry (Kingson, 2010).
Arising from the above, it recommended that the bill should provide for an independent
regulatory authority to regulate petroleum operations and that timeliness must be defined for the
temporary responsibility of the minister of energy in the regulation of the petroleum industry.
They also sought for adequate protection to be provided for property owners whose social and
economic activities are ‘being or will be’ interfered with by petroleum operations, especially
when the state exercises the power of compulsory acquisition.
In order to ensure adequate response to emergency situations resulting from the
production activities of the oil companies, the Civil Society Platform stated that not-withstanding
that the polluter (Oil Company) pay principle provided for in the bill, there should be other
national level measures to deal with safety and environmental issues. It said the bill should
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provide for the establishment of Oil Spill Responsive and Advisory Group (OSRG) and National
Oil Spill Detection and Responsive Agency (NOSDRA).
It said, in line with the Extractive Industries Transparency Initiative (EITI), there should be
transparency about safety performance of the industry and vigilance of the public authorities.
“Payment terms of domestic supply of crude oil by contractors should be clearly stated to build
confidence in investors, and that oil backed transactions must be avoided in line with the
provisions of the Ghana Revenue Management Bill 2010” (Kingson, 2010).
The platform said penalties for violating the law and all other regulations as provided for in the
bill should constitute minimum penalties and the maximum could reach any levels to prevent rich
international oil companies from violating the laws of the country with impunity.
It maintained that the development of appropriate policies, legislations and institutional
mechanisms for managing the petroleum resources in its opinion are essential for transparent,
accountable and sustainable management of Ghana’s oil and gas for the benefit of citizens.
In the view of the Civil Society Platform on Oil and Gas, the Opacity that covered the
development of the bill until it was formerly laid before parliament has affected the quality of
debate and the participation of many citizens in the process. They claimed that in comparison to
that of the Petroleum Revenue Management Bill which was published and thoroughly debated by
a wider section of Ghanaians the process of the Exploration and Production Bill has been too
secretive.
The consortium of CSO’s in Ghana in early 2011 evaluated the government’s
performance in the 10 thematic areas of: Transparency, Independent Regulation of the Sector /
Role of GNPC, Licensing and Contracts, Citizen Participation / Public Oversight, Petroleum
Revenue Collection, Oil Revenue Management / Oil Funds, Linking Oil Revenue Spending to
Development Planning, Budget Openness and Public Financial Management, Social and
Environmental Issues and Local Content. It also evaluates the cumulative performance of
Ghana’s parliament, donors, oil companies and civil society itself. Performance is set against
recommendations made in the February 2009 report, issued by the Integrated Social Development
Centre (ISODEC) and Oxfam America.
Performance was also measured against urgent recommendations made by a broad range
of civil society groups and concerned citizens in a communiqué issued after the “Citizens Summit
on Oil and Gas” held at the Accra International Conference Centre in June 2010, wherein it
observed as follows:
We endorse these recommendations and observations,
convinced that, it is only through effective coordination of our
efforts, national consensus around the critical decision areas,
continuous vigilance by Ghanaians on the sustainable
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management of petroleum resources, revenues and the
environment, in pursuant of our rights as citizens to
participate in the governance processes of our country, as
enshrined in the constitution of Ghana, that the petroleum
resources of Ghana can be used for sustainable national
development and thereby avoid the temptations of following
the path of ‘resource management curse.
http://zotomelo.blogspot.com/2011/05/findings-and-
observations-in-ghanas-oil.html
The report was found that on the part of Government of Ghana, that significant efforts
have been made to entrench transparency with regards to petroleum management, a fact, the
report says is further re-enforced by the extension of the Extractive Industries Transparency
Initiative (EITI) to the oil and gas sector. The passing into law of the Petroleum Revenue
Management Bill according to the report is aimed at introducing a strong and clear legal
framework for managing petroleum revenues.
The Petroleum Commission Bill has also been laid before parliament in addition; it notes
that, government is developing the Petroleum (Exploration and Production) Bill and the Local
Content Bill to be laid before parliament. The report observes that, in developing the legal
framework, government allowed citizens’ participation through public forums and consultations.
On the account of this, Ahovi (2011) noted that the civil society organizations (CSOs) in
Ghana, contributed immensely to the development of the policies and legislation for the
petroleum sector. Their input, it notes, have led to very important provisions in the legislations
such as the Public Interest and Accountability Committee; a citizen based oversight body to
monitor petroleum revenue inflows and outflows. It underscores the need for continuous capacity
building of civil society actors to hold public officers accountable. As a veritable and
formidable means of integrating as well as empowering the capacity of the civil society
organizations role of monitoring oil revenue towards effective use, the EITI produces and
distributes its validation grid which, members of the civil societies uses in reporting the
government activities in relations the oil sector as presented in the figure below.
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Fig. 6: EITI Civil Society Validation Grid
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Source: Goldwyn, D. L. (2008:173-174)
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3.6 MAXIMISING TRANSPARENCY IN THE OIL SECTOR
In order to minimise leakages and wastage of oil revenues, it is important to take steps to
maximise transparency to increase opportunities for communication and checks and balances
between government agencies, as well as to provide an oversight role for parliamentarians, civil
society organisations, journalists and the public. To reiterate the issues, monitoring state revenues
from oil production is a difficult task for citizens and civil society groups to undertake in many
countries because of the lack of basic information on contracts and revenues, the complexity of
contract terms and the complexity of recipient institution arrangements. Such oversight, though,
is ultimately to the benefit of all if leakages of revenues can be minimised and useful spending for
development maximised.
Several steps can be taken by governments to maximise transparency, and there are
examples of this practice to draw on from around the world:
Disclose contract information – Since contracts are the basis for revenue generation from the
sale of a public resource, monitoring revenues is extremely difficult without contract disclosure.
Governments do, in some cases, publish model contracts, but most often in the developing world
these contracts are modified in secret negotiations and do not sufficiently correspond to the final
agreement.
According to the IMF:
…many important elements of contract language
are subject to case-by-case adjustment.
Publication of model contracts may thus be of
limited value in defining the fiscal regime, unless
governed by clear policy statements or limitations
in legislation regarding the variability of contracts.
Publication of actual contracts will provide more
definitive information… (IMF, Draft Guide on
Resource Revenue: 23).
While companies have concerns about proprietary information – such as proprietary
technology – general arguments against contract transparency cannot be sustained. Countries as
diverse as Azerbaijan and Congo-Brazzaville have published contracts on the Web, and in São
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Tomé and Bolivia, for example, contract publication is required by law. The IMF strongly
supports publication of signed contracts:
Good practice for transparency…would require publication of all
signed contracts. An often-expressed concern with regard to open
tendering processes is that both government and companies may
lose their competitive advantage by public disclosure of winning
contracts. For reasons of commercial confidentiality, therefore,
negotiated contracts with non-disclosure clauses are the practice in
a number of countries. The reason usually advanced by
governments (and to some extent by companies) is that disclosure
would erode their bargaining power for future contracts. In
practice, however, the contract terms are likely to be widely
known within the industry soon after signing. Little by way of
strategic advantage thus seems to be lost through publication of
contracts. Indeed, it could be argued that the obligation to publish
contracts should in fact strengthen the hand of the government in
negotiations, since the obligation to disclose the outcome to the
legislature and the general public increases pressure on the
government to negotiate a good deal (IMF, Guide on Resource
Revenue Transparency, 2007: 17).
Disclose determinants of revenues – In addition to disclosing contracts, disclosing determinants
of revenues would be important. This would include production figures, sales figures for crude
oil, and information on the marketing of government profit oil, for example. Nigeria has made
important steps on disclosing this information through audits conducted under the Extractive
Industries Transparency Initiative (EITI) (http://www.eitransparency.org).
3.7 ANALYSIS OF GHANA’S PETROLEUEM REVENUE MANAGMENT ACT
(LAW)
Ghana achieved a landmark success through the enactment of its Petroleum Revenue
Management Bill in spite of the delay and highly partisan debate on the bill. The bill which
received significant contributions from civil society particularly from the Civil Society Platform
on Oil and Gas, re-iterated the country’s extension of the EITI to the new oil and gas sector, and
further demonstrates the commitment of the people to make Ghana a model of sustained
democracy founded on transparency and accountability.
The Petroleum Holding Fund
The bill outlines clear rules for petroleum revenue inflows and outflows. It provides for
the establishment of a Petroleum Holding Fund to which all petroleum receipts will be deposited,
a Stabilization Fund to account for the effects of revenue volatility through expenditure
smoothing; and a Heritage Fund to ensure intergenerational equity and create an alternative
source of income for the future. Disbursements of the Holding fund are further provided in the
bill as:
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70% of benchmark annual revenues to the budget
21% to the Ghana Stabilization Fund and
9% to the Ghana Heritage Fund
This model is close to the ‘hand-to-mouth’ rule but also has a feature of the ‘bird-in-hand’
rule when the oil fields are depleted. However, the controversies that surround the law center on
two main provisions – the establishment of the Ghana Heritage Fund and the collateralization of
petroleum revenues.
What engaged the attention of most Ghanaians is the appropriateness of the Heritage
Fund at a time the country is faced with serious developmental challenges. The question that
remains unanswered in the literature on Future Generations Funds is whether the objective is
sustainable income or sustainable impacts. That is, if petroleum revenues were invested in
projects that would have sustainable impacts on future generations, could that be said to have
achieved intergenerational equity? Whiles this question remains unanswered, most citizens in
Ghana supported the establishment of the Heritage Fund because of the emotional attachment of
Ghanaians to their future generations; and also to give meaning to the sense of preparing oneself
against the future. Then comes clause 5, the most debated and politicized of all. The original
provision prohibited collateralization of petroleum revenues. The amendment to this clause which
has been passed however provides that the annual budget funding amount can be collateralized.
Both government and supporters of the collateralization argument cited reasons such as
the security of development financing and the need to finance the annual infrastructural finance
deficit of about US$1.6 billion. However, the proponents of this view forgot one thing – the
absorptive capacity of the Ghanaian economy, which in clause 19(2) of the bill constitutes an
important determinant of the annual budget support. The failure of the economy to absorb both
the petroleum revenues and loans contracted by the government on the back of collateralized
petroleum revenues could likely harm the economy.
The fear of heavy indebtedness associated with high appetite for borrowing in resource
rich countries, the weak public financial management system in the country and the persistent
large fiscal deficits may weaken the resilience of the economy under a collateralized petroleum
revenue regime. This perhaps is why Ghana needs a long-term national development plan to
guide spending priorities, the pace of spending and to match the economy’s absorptive capacity
with resource needs
(http://www.ghanaweb.com/GhanaHomePage/NewsArchive/artikel.php?ID=204394).
However, Ghana no doubt has laid one of the highest standards for transparency in the
management of her petroleum revenues as spelt out in the law. Some of the clauses that address
specific and broad transparency concerns are:
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1. Clause 8 requires the publication of records of petroleum receipts in the newspapers
and online.
2. Clause 16 requires the Minister of Finance to reconcile quarterly petroleum receipts
and expenditures and submit reports to Parliament as well as publish the reports in at
least two (2) national newspapers.
3. Clauses 46 to 48 provide for four different types of audits of the petroleum accounts–
internal audits, external audits, annual audits and special audits. The procurement of
the services of an independent auditor shall be in accordance with the Public
Procurement Act 2003 (Act 663).
4. Clause 50 requires the Minister of Finance to submit an annual report on the
Petroleum Account and the Ghana Petroleum Funds as part of the annual presentation
of the budget statement and economic policies to Parliament. The report shall also be
made ‘readily adaptable for dissemination to the public’ and shall contain:
(a) Audited and certified financial statements comprising;
i. the receipts and transfers to and from the Petroleum Account,
ii. the deposits and withdrawals to and from the Ghana Heritage Fund and the Ghana
Stabilization Fund, and
iii. a balance sheet, including a note listing the qualifying instruments of the Ghana
Petroleum Funds;
(b) A report signed by the Minister describing the activities of the Ghana Petroleum Funds in the
fiscal year of the report, including the advice provided by the Investment Committee, any reports
prepared by the Auditor-General drawing attention to particular issues or matters that may be of
concern or interest to Parliament;
(c) The income derived from the investment of the Ghana Heritage Fund and the Ghana
Stabilization Fund during the fiscal year compared with the income of the previous two fiscal
years;
(d) A comparison of the income in paragraph (c) with;
(i) the benchmark performance indices provided to the Minister, and
(ii) the income of the previous two fiscal years after adjusting for inflation;
(e) The liabilities of government borrowings shall be reflected in the presentation of the annual
report so as to give a true representation of the past and expected future development of the net
financial assets of government and the rate of savings; and
(f) A list of names of persons holding positions relevant for the operation and performance of the
Ghana Heritage Fund and the Ghana Stabilization Fund, including;
(i) the Minister,
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(ii) the chairperson and members of the Advisory Committee,
(iii) the Governor of the Bank of Ghana, and
(iv) the investment manager, if any.
5. Clause 51 provides that information or data, the disclosure of which could in
particular prejudice significantly the performance of the Ghana Petroleum Fund, may
be declared by the Minister as confidential, subject to the approval of Parliament. It
further requires detailed explanations on why the information should be held
confidential and that confidentiality shall not limit access to information by
Parliament and the Public Interest Accountability Committee.
6. Clause 52 criminalizes the failure by a person to comply with the obligation to
publish information under the bill.
7. Clause 53 provides for the establishment of a Public Interest and Accountability
Committee, a citizens’ based committee responsible for independent oversight of the
management of petroleum revenues as well as consulting the public on priority setting
for spending petroleum revenues.
These provisions no doubt put Ghana ahead of the requirements of the EITI, which in its
current state does not cover public expenditure transparency. Therefore, the bill provides a
stronger framework for public accountability through disclosures of public expenditures and the
regular scrutiny by the proposed Public Interest and Accountability Committee. The multiplicity
of audits of the petroleum accounts is expected to prevent abuse of the petroleum wealth and the
corruption of the institutions responsible for managing and investing petroleum funds. This is
necessary to ensure value for money in all petroleum revenue related investments, procurements
of fund managers and control of management costs (Amin, 2011).
3.8 ESTIMATED CONTRIBUTION OF OIL TO GHANA’S ECONOMY
Government revenue
Based on the fiscal regime in place, and a price assumption of US$ 75 per barrel, the
World Bank’s central estimate puts potential government revenue at US$ 1 billion on average per
year between 2011 and 2029. By way of comparison, government revenue in 2008 reached
US$3.7 billion (excluding grants) and GDP US$16.1 billion.
The oil revenue estimate is subject to a large sensitivity. A number of parameters could modify
this central estimate. Given fixed costs of extraction, higher/lower oil prices would
disproportionally affect revenue. At US$ 50 per barrel, government revenue would go down to an
average of US$ 0.4 billion per year; at US$ 100 per barrel, government revenue would conversely
go up to an average of US$ 1.6 billion per year. Besides, higher cost of extraction could also
significantly impact revenue. A 25 percent overrun in cumulated capital costs (estimated at
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US$3.4 billion over the period 2009-12) would reduce government revenue by 14 percent. A two-
year production peak (instead of a five-year peak) could also reduce government revenue to US$
0.4 billion per year (The World Bank Africa Region report, 2009).
Phase II of the Jubilee field development would be based on a higher proven reserve base
than Phase I and could be launched some two to three years after completion of Phase I. The
production rate could be double that of Phase I resulting in a peak level of gross revenues of
about US$ 7 billion over some five years from as early as 2015. No cost estimates have been
provided by the oil consortium but economies of scale and sunk appraisal costs would imply
higher pre-tax returns than for Phase I. Because of the progressive structure of the fiscal regime
for any price level, the Government share of net cash flow would be higher under Phase II than
Phase I (The World Bank Africa Region report, 2009).
With oil comes gas. Gas would be produced in association with oil at a rate of 1000 cubic
feet of gas per barrel of oil. Thus, at peak Phase 1 Jubilee production, Ghana could produce 120
million cubic feet of gas per day. Given Ghana’s non-flaring policy, Jubilee production facilities
include capacity to re-inject gas. However, plans underway to build pipelines and processing
facilities would result in streams of dry processed gas for use in power generation and natural gas
liquids (NGL) for export and domestic use. At current world market NGL prices and a dry gas
price of US$ 2 per thousand cubic feet, gross revenues would be roughly US$ 260 million per
year, that is, less than a tenth of oil gross revenue. In turn, the combination of corporate taxation
and an assumed 50 percent equity ownership for GNPC in the gas infrastructure would generate
US$ 120 million per year for the Government. To this figure could be added an implicit rent of
US$ 140 million originating from the difference between a dry gas market value of US$ 6 per
thousand cubic feet (as measured by the delivered price of gas from the West Africa Gas Pipeline,
WAGP) and that of US$ 2 reflecting the cost of extracting, transporting and processing the gas.
When all or about 80% of the expected revenue above is gained by the government of
Ghana and channeled into productive sectors of the economy with majority going to develop non-
oil sectors of the economy, a moderately sustainable long term economic development could be
achieved without ad hoc use and over-dependence on oil revenue to finance government budget
deficit, a phenomenon common with some African oil-rich countries.
In fact, gold and cocoa have been the mainstay of Ghana’s economy for more than a
century, but oil will soon surpass both of these commodities as a percentage of governments
revenue and export as indicated in the figure below:
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Fig.7: Ghana Exports, 1992-2015
Source: Moss and Young, 2009:15.
Capital flows and wealth accumulation
Partners to the oil exploration agreements commit capital mostly in relation to the share
of interest in a particular basin. The development of “Jubilee field” alone (phase I and II) is
expected to cost about US$ 6-8 billion. With the current composition of ownership interests in the
field, about 80% or more foreign capital will be invested in the country thus increasing FDI
inflows. The result however is that there is the risk of only 20% of returns on these investments
being retained in the country with 80% accruing to foreign investors. Recent agreements however
saw the proportion accruing to the state, represented by GNPC, increase marginally to about
12.50%.
According to the GNPC’s Jubilee field report, some local investors have also been given
the go-ahead to construct dedicated shore base facilities (offshore ports) to support all offshore
exploration and production operations. This will enable local investors to commit capital to such
investments with the hope of reaping returns later in the future leading to wealth accumulation.
More earning in the hands of local investors gives more room for further investments in same
sector or other sectors of the economy thereby ensuring economy-wide impact of oil related
earnings.
Fiscal
Ghana spent about US$ 1.3 billion at the end of October (only for 2009) to finance its oil
import bill. This, as we argued, has the potential of exposing the country to imported inflation in
times of price hikes in foreign oil markets. Another observation in Ghana is the disproportional
positive relationship between fuel prices and costs of goods and services. An increase of 1% in
fuel prices leads to a more than 1% increase in the prices of goods and services. This significantly
raises both the consumer (CPI) and producer (PPI) price indices thereby contributing to high
inflation rates. Ghana does not control international crude oil prices. However, the haulage and
other costs associated with the importation of crude oil could be significantly reduced with
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domestic exploration. This could (not necessarily) lead to reduced end-user prices since the
intermediaries would be able to recover costs at lower per unit prices. The effects would be lower
CPI and PPI thus providing better control over inflation rates.
Oil booms could lead to exchange rate appreciation and influence the strength of the
Ghana cedi in relation to other major foreign currencies. This has both positive and negative
effects. A positive effect could be an improvement in the country’s balance of trade and/or
balance of payment “ceteris paribus”. The appreciation could also negatively affect the
exportation of agricultural products which have been one of Ghana’s highest contributors to
export earnings.
Jobs and Infrastructural Development
The GNPC reports that there is a recruitment committee made up of GNPC and the unit
operators (Tullow in the case of Jubilee field) to recruit the staff for the operations. About 60-
70% of available places will be filled by Ghanaians. A plan is expected to be drawn up to
generally increase the Ghanaian component to about 90% in the next 5-10 years. Jobs will
provide incomes to local labour and thus improve living standards of citizens.
Takoradi, the coastal town serving as the host to some of the oil fields, has experienced
swift infrastructural developments in terms of roads to sites, office buildings, etc. Social and
economic benefits accompany infrastructural development and these are expected to have
positive impacts on the living standards of Ghanaians.
Social responsibility activities of firms operating in Ghana especially in the extractive
sector have come under strict public scrutiny because of the environmental impact of their
activities. The mining companies in Ghana have thus been actively involved in supporting
education, health, sanitation, etc especially in their local environment. Firms within the emerging
oil and gas sector are also expected to contribute their quota to social development in terms of
social responsibility activities.
Ghana has for some time been suffering from cyclical fluctuating power supply. This has
been as a result of the country’s over-reliance on the Akosombo hydro electric dam and Takoradi
thermal plant for its electricity needs. The thermal plant uses light crude or natural gas as fuel and
astronomical fuel prices significantly increase the cost of production and thus affect supply of
electricity. The production of oil and gas would mean that the plant, which is nearer to the oil
blocks in the Western region of Ghana, would receive a more consistent and cheaper supply of
crude and gas for its operations thus ensuring a more relatively sustainable power supply to
ensure regular flow to commercial (production) and domestic consumers.
According to The World Bank, recent drops in Ghana’s fiscal recurrent balance
undermines its ability to use oil revenue for financing investment. The report states that in the last
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four years, Ghana’s recurrent balance declined from 8.3 to 2.1 percent of GDP, mostly as a
consequence of increased public sector wages and energy subsidies. The promised single spine
payroll reform, pending issues related to payroll management, and the absence of cost-recovery
mechanism in the energy sector are all threatening to bring this balance further down. With a
recurrent balance at 2 percent and concessional borrowing historically at 5 percent of GDP,
Ghana with Development Partners can now finance 7 percent worth of investment expenditure,
far below the 10-11 percent needed to rapidly close its infrastructure gap.
Ghana’s reserves are relatively modest by international standards, and will thus not
radically transform Ghana’s economy into one where oil becomes the major sector. Nonetheless,
they are already large enough to deeply affect the future of the non-oil economy, positively or
negatively (The World Bank Africa Region Report on Ghana, 2009).
Fortunately, there is a sober awareness within Ghana that oil in itself will not shift the
core structure of the economy. Capturing the gas released with oil extraction, however, could
provide the necessary backbone to a sound industrial policy framework - one that will catalyse
economic diversification. Oil exports have a tendency to falsely inflate the value of a country’s
currency and so undermine the export competitiveness of other sectors (also known as ‘Dutch
Disease’). With agriculture as the primary export earner and the largest employer, the
implications of such a scenario are devastating. Thus, careful management is called for to ensure
that gas improves the yield of the agricultural sector and that economic diversification builds on
agri-business rather than undermining it.
Arising from our investigation and observation of the preparedness of Ghana towards the
effective and efficient management of its petroleum sector in addition to the proper utilization of
the oil windfall as a necessary strategy in ensuring that the country not only escapes the oil
induced conundrum of resource curse and Dutch disease but to foster transparency, good
governance and accountability; we discovered that the country had in place practical mechanisms
and institutions that are entrusted with these responsibilities in addition to the country being a
signatory to the international EITI programme that monitors and ensure transparency in the
extractive industries around the world; especially in the oil sector revenue management,
monitoring and evaluation. We also find that Ghana appears to have learnt from the mistakes of
other oil producing nations in the Gulf of Guinea, judging from the manner it has been adopting
and formulating oil production and revenue regulatory policies that are symptomatic of best
practices of governance initiatives of transparency, disclosure and accountability, which enabled
us to validate our first hypothesis.
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Our subsequent discussion will now, focus on the role of oil as driver and attractor of
Foreign Direct Investment into Ghana. Emphasis will be placed on the rate of increase on FDI
inflow into Ghana since oil discovery and its production in the country.
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CHAPTER FOUR
OIL AND FOREIGN DIRECT INVESTMENT IN GHANA
4.1 INTRODUCTION
Crude oil can attract a lot of investments and development into a country but when not
managed well, it could cause a lot of destruction and conflict. Foreign Direct Investment (FDI)
refers to an investment made to acquire lasting interest in enterprise operating outside of the
economy of the investor (IMF, 1993). FDI is playing an increasingly vital role in the development
efforts of most developing economies. Inflows to developing countries increased from 2002 to
2008 recording $114.30 per head for 2008 whilst that of developed countries amounted to
$944.89 per head. In percentage terms, the share of developing countries increased somewhat, to
37% of global FDI inflow. Africa received its largest ever share of world FDI inflows in this
same year amounting to US$ 87.65 billion (UNTAD, 2008). Global inflows of FDI fell by 39%
from US$ 1.7 trillion in 2008 to a little over US$ 1.0 trillion in 2009 (UNCTAD, 2009).
The decline in FDI was widespread across all major groups of economies. According to
the UNCTAD Report (2009), as a result of the global financial and economic crisis, FDI flows to
developing and transition economies, which had increased in 2008, declined in 2009 to 35% and
39%, respectively.
Although Africa has succeeded in attracting some percentage of total world FDI flows,
the continent’s share still lags behind that of other developing economies. For instance, in 2008,
developing economies in Africa received about 14.12% of total FDI inflows to developing
economies worldwide compared with 23.26% for developing economies in America and 62.48%
for developing economies from Asia (UNCTAD, 2008). Even when African states do attract
Multinational Companies (MNCs), it is principally because of their (abundant) natural resources
and the size of their domestic market. According to UNCTAD (2008) figures, four natural
resource endowed countries namely Angola, Egypt, Nigeria and South Africa accounted for more
than half (61.99%) of total FDI inflows to Africa in 2008.
Until the mid 1990s, Sub-Saharan Africa (SSA) received only a small share of FDI
relative to other developing regions of the world. Nigeria and Angola have been two of the most
successful countries because of their comparative locational attraction in oil. The role of natural
resources in the location decision of Transnational Companies (TNCs) is apparent through the
sectoral allocation of FDI inflows within the region. Traditionally, about 60 per cent of FDI in
Africa is allocated to oil and natural resources (UNCTAD, 1999). The strong reliance of African
countries on their natural resources and market size as a means of attracting FDI has been well
evidenced by many studies (Pigato, 2000).
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African states have in the recent years, taken initiatives other than just relying on natural
resources and size of market to attract FDI. Initiatives such as Fiscal Incentives, Financial
Incentives, Rules-based incentives, Investment treaties and other Investment Promotion activities
such as the establishment of Investment Promotion Agencies (IPAs) to serve as a one stop centre
for investors to deal with regulatory and administrative requirements, etc all aimed at boosting the
image of the countries as well maintaining an investor friendly environment.
Ghana is no exception when it comes to the implementation of initiatives to attract FDI
into the country. FDI inflows constituted about 36% (US$ 5,755 billion) of the country’s GDP
(US$ 16,004 billion) for the 2008 fiscal year (UNCTAD report, 2009), an increase of 115 per
cent from 2002. Ghana discovered oil in 2007 and the country expects about 1 billion US dollars
as revenue from the oil and gas exploration in respect of royalties, income tax and interest
payment with an anticipated unit price of 60 US dollars a barrel per day. According to the
Ministry of Energy’s estimate, 120,000 barrels per day is expected in the first phase of the
exploration until 2015 (Anticipated Volume of Production-AVP).
A country can attract as much FDI with its natural resources, and can accumulate as much
revenue as possible from the exploration of these resources but when the revenue is not well
utilised, it becomes a curse rather than a blessing to the country (i.e. resource curse). Even in
some cases, especially in Africa, a perceived disproportionate allocation of oil wealth results in
armed conflicts. Government policies go a long way to ensure the future economic success of a
resource endowed country. This is particularly important when the resource is exhaustible (e.g.
oil, gold, etc). Appropriate government policies and the establishment of relevant institutional
structures (as in the case of Norway) could ensure the appropriate utilization of resource revenues
for a sustained economic growth. There are many fiscal policy choices available to oil-producing
countries to choose from in an attempt to make the best use of oil revenues for sustained growth.
Over the past decades, there has been a significant increase in Foreign Direct Investment
(FDI) to developing countries. The role of FDI as a source of private external finance to
developing countries has become increasingly important. This stems from the fact that income
levels (revenues) and domestic savings in these countries are very low and negligible. Therefore,
external capital is needed to supplement domestic savings so as to spur and growth development.
Again, most of these developing countries do not have access to the international capital market.
They therefore have to fall back on other sources of foreign finance like official loans from
multinational organizations such as the IMF/ World Bank, portfolio investment and FDI.
However, official lending to most developing nations especially in Sub Saharan Africa
(SSA) has considerably declined over the years (Asiedu, 2002). Foreign aid per capita declined
from an average of $35 over 1989-92 to about $28 over 1993-97 (World Bank, 2000b) and even
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further down in the 21st century. As a result of this, developing countries find it very necessary to
attract and increase their share of FDI in order to compensate for the decline in official lending
(Foreign direct investment in the developing world is on the rise, with flows excluding portfolio
investment and private bank lending) reaching $238 billion in 2005 (UNCTAD, 2002).
4.2 THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT: A
CURSORY GLIMPSE
A number of studies examine the determinants of capital flows to developing countries.
These studies tend to look first at capital flows generally and then to focus specifically on foreign
direct investment. In general, the studies divide the factors influencing capital flows into
developing countries into push and pull factors. The push factors, which are external to
developing countries, focus on growth and financial market conditions in industrial countries.
Looking at these factors, Calvo et al. (1993) concluded for emerging markets that total
flows are driven primarily by push factors, mainly growth and interest rates in industrial
countries.
Mody and Murshid (2001) found that developments within an individual developing
country tend to raise capital to that country by increasing the share of total flows allocated to that
country. These studies suggest that the push (external) factors determine the pool of funds
available to LDC, while the pull factors determine their allocation among less developed
countries (Collins, 2002).
The pull factors depend on a long list of domestic policies and characteristics of potential
host countries. Among the various indicators are:
a. Macroeconomic policy and performance (growth, the external balance, real exchange rate
over-valuation and exchange rate regime, financial market development).
b. Indicators of current and capital account openness.
c. Tax levels and existence of incentives to encourage capital inflows.
d. Measures of the quality of legal and other institutions (including corruption).
e. Conflict measures.
f. Political regime.
g. Size of domestic markets and natural resource base.
In the literature on FDI there are four main motives for seeking to invest abroad. These
are broadly described as resource seeking, market seeking, strategic asset seeking and efficiency
seeking. In the case of resource seeking, investors locate abroad in order to secure cheaper
supplies of raw materials or inputs that are not available at home. Such resources may be natural
resources like oil and gas or low-cost input such as labour. The basic reason is to lower
production costs and enhance competitiveness in both local and foreign markets. Most resource
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seeking FDIs are usually export-oriented. Market-seeking FDI opens up new markets in the host
country or neighbouring countries. The main motive is to bring about a reduction in the cost of
supplying a market. Efficiency-seeking FDI attempts to produce in as few countries as possible,
with each one having advantages in terms of location, endowment and government incentives.
Strategic-asset-seeking FDI, on the other hand, locates in a place in order to take advantages of
what is available in terms of research and development and other benefits.
What Then Are the Major Determinants of FDI in General?
There is no unanimously accepted single factor determining the flow of investment. The
literature is replete with information on the full range of factors that are likely to induce the flow
of foreign direct investment anywhere. It is often claimed that those factors that are favourable to
domestic investments are also likely to propel foreign direct investment.
These are the various factors that propel the flow of FDI into a given geographical
location, say a country or a region. In making decisions to invest abroad, firms are influenced by
a wide constellation of economic, political, geographic, social and cultural issues
(http://www.asiapacificresearch.ca/caprn/FDI_and_Economic_Growth-CEA-May_2002.pdf). It
is important to note that while the list of factors is fairly long, not all determinants are equally
important to every investor in every location at all times. It is also true that some determinants
may be more important to a given investor at a given time than to another investor.
While it is difficult to determine the exact quantity and quality of FDI determinants that
should be present in a location for it to attract a given level of inflows, it is nevertheless clear that
a critical minimum of these determinants must be present before FDI inflows begin to occur
(Ngowi, 2001). One would rationally expect that investors would choose a location in accordance
with the profitability of that location. The profitability of investment is expected to be affected by
specific factors, however, including country characteristics as well as the types of investment
motives. As pointed out by Campos and Kinoshita (2003) market-seeking investors, for example,
will be attracted to a country that has a large but fast growing market, while resource-seeking
investors will search for a country with abundant natural resources.
The factors influencing the flow of FDI thus range from the size of markets to the quality
of labour, infrastructure and institutions, to the availability of resources. These and others are
discussed below.
• A number of studies emphasize the importance of the size of the market and growth in attracting
FDI. Market size and growth have proved to be the most prominent determinants of FDI,
particularly for those FDI flows that are market seeking. In countries with large markets, the
stock of FDI is expected to be large since market size is a measure of market demand in the
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country. This is particularly true when the host country allows the exploitation of economies of
scale for import-substituting investment.
• The costs as well as the skills of labour are identified as the major attractions for FDI. The cost
of labour is important in location considerations, especially when investment is export oriented
(see Wheeler and Mody, 1992; Mody and Srinivasan, 1998). Lower labour cost reduces the cost
of production, all other factors remaining unchanged. Sometimes, the availability of cheap labour
justifies the relocation of a part of the production process in foreign countries. Recent studies,
however, have shown that with FDI moving towards technologically intensive activities, low cost
unskilled labour is not in vogue. Rather, there is demand for qualified human capital (Pigato,
2001). Thus, the investing firm is also concerned about the quality of the labour force. It is
generally believed that highly educated personnel are able to learn and adopt new technology
faster, and the cost of retraining is also less. As a result of the need for high quality labour,
investors are most likely to target countries where the government maintains a liberal policy on
the employment of expatriate staff. This is to enable investors to bring in foreigners to their
operation in order to bridge the gap in the skill of local personnel wherever it exists.
• That the availability of good infrastructure as crucial for attracting FDI is well documented in
the literature, regardless of the type of FDI. It is often stated that good infrastructure increases the
productivity of investment and therefore stimulates FDI flows (Asiedu, 2002).
A study by Wheeler and Mody (1992) found infrastructure to be very important and
dominant for developing countries. In talking about infrastructure, it should be noted that this is
not limited to roads alone, but includes telecommunications. Availability and efficiency of
telephones, for example, is necessary to facilitate communication between the host and home
countries. In addition to physical infrastructure, financial infrastructure is important for FDI
inflow. A well-developed financial market is known from available evidence to enable a country
to tap the full benefits of FDI. Alfaro et al. (2001), using cross-section data, find that poorly
developed financial infrastructure can adversely affect an economy’s ability to take advantage of
the potential benefits of FDI.
• Country risk is very important to FDI. Several studies have found FDI in developing countries
to be affected negatively by economic and political uncertainty. There is abundant evidence to
show the negative relationship between FDI and political and economic stability.
In a study on foreign owned firms in Africa, Sachs and Sievers (1998) conclude that the
greatest concern is political and macroeconomic stability, while Lehman (1999) and Jaspersen et
al. (2000) find that countries that are less risky attract more FDI. Perception of risk in Africa is
still very high and continues to hinder foreign direct investment.
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• Openness of an economy is also known to foster the inflows of FDI. The more open an
economy is, the more likely it is that it would follow appropriate trade and exchange rate regimes
and the more it would attract FDI.
• The institutional environment is an important factor because it directly affects business
operations. In this category is a wide array of factors that can promote or deter investment.
The first of these is the existence of corruption and bribery. Corruption deters the inflow of FDI
because it is an additional cost and because wherever it exists, it creates uncertainty, which
inhibits the flow of FDI. The second is the level of bureaucracy involved in establishing a
business in a country. Complex and time-consuming procedures deter investment. The third
institutional factor is the existence of incentives in the form of fiscal and financial attractions.
This last factor is only useful to the extent that other favourable factors are already in place.
Fourth, there is also the institution of the judiciary, which is key to protecting property rights and
law enforcement regulations. A frequent measure of this is the rule of law, which is a composite
of three indicators (Campos and Kinoshita, 2003): sound political institutions and a strong court
system; fairness of the judicial system; and the substance of the law itself. It is expected that
countries with better legal infrastructure will be able to attract more FDI. Related here is the
enforceability of contracts: The lack of enforceability in many African countries raises risk of
capital loss and hinders FDI.
• The availability of natural resources is a critical factor in attracting FDI. This is particularly so
in Africa where a large share of FDI has been in countries with abundant natural resources.
In some cases, the abundance of natural resources has been combined with a large
domestic market. African countries that have been able to attract most FDI have been those with
natural and mineral resources as well as large domestic markets. Traditionally about 60% of
Africa’s FDI is allocated to oil and natural resources (UNCTAD, 1999a/b). The Africa region
possesses not only large reserves of oil, gold, diamonds and copper, but also more than half of the
world’s cobalt and manganese, one-third of bauxite, and more than 80% of chromium and
platinum. A number of countries, including Angola, Nigeria, Côte d’Ivoire, Botswana and
Namibia, have been host to FDI because of this advantage.
• Foreign investors may be attracted to countries with an existing concentration of other foreign
investors. In this case, the investment decision by others is seen as a good signal of favourable
conditions. The term “agglomeration economies” is often applied to this situation (Campos and
Kinoshita, 2003). The clustering of investors leads to positive externalities.
Three types of such externalities have been identified in the literature. The first is that
technological spillovers can be shared among foreign investors. Second, they can draw on a
shared pool of skilled labour and specialized input suppliers. Third, users and suppliers of inputs
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cluster near each other because of the greater demand for a good and the supply of inputs, which
is provided by the large market.
• Return of investment is another major determinant of FDI flows. In general, FDI will go to
countries that pay a higher return on capital. For developing countries, testing the rate of return
on capital is difficult because most developing countries do not have a well functioning capital
market (Asiedu, 2002). What is often done is to use the inverse of real GDP per capita to measure
the return on capital. The implication of this is that all things being equal, investments in
countries with higher per capita income should yield lower return and therefore real GDP per
capita should be inversely related to FDI (Asiedu, 2002).
The empirical result of the relationship between real GDP per capita and FDI is mixed. In
works by Edwards (1990) and Jaspersen et al. (2000), using the inverse of income per capita as
proxy for the return on capital, they conclude that real GDP per capita and FDI/GDP are
negatively related. Results of studies by Schneider and Frey (1985) and Tsai (1994) are different
as they find a positive relationship between the two variables. This is based on the argument that
a higher GDP per capita implies better prospects for FDI in the host country.
• Macroeconomic and other policies also play a role. Macroeconomic policy errors resulting in
exchange rate misalignment and the lack of convertible currencies constrain FDI flows.
In cases where policies are not sustainable, FDI flows are hindered. A look at Africa
reveals compelling evidence that FDI may have been attracted by one or more of the following
four categories of considerations (Basu and Srinivasan, 2002):
• Investment that is intensive in natural resources: Given the abundance of natural resources in
Africa, a large share – almost 40% – has been in the primary sector. For a number of countries,
including Angola, Botswana, Namibia and Nigeria, the oil and mineral sectors have been
targeted.
• Investment driven by “specific” locational advantages: During the apartheid era, a number of
investors wishing to capture the large market in South Africa located in Lesotho and Swaziland.
These countries therefore at that time benefited from inflows of FDI.
• Investment driven by host country policies that actively target foreign investment: A few
countries have tailored their policies to target foreign direct investment by ensuring political and
economic stability. Such policies provided specific tax incentives and created export-processing
zones. These countries include Mauritius and Seychelles.
• Investment in response to recent economic and structural reforms: A few countries that were
shunned by investors in the past are now the darlings of investors in response to the far-reaching
economic and structural reforms. Uganda and Mozambique, whose economic reforms have been
fairly successful, have attracted FDI inflows.
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4.3 FACTORS THAT DETERMINES FOREIGN DIRECT INVESTMENT IN
GHANA
A study by Tsikata, Asante and Gyasi (2000) showed that the following factors were
significant determinants of FDI to Ghana; trade regime, democratic governance, investment
climate, economic uncertainty and raw material availability (because the mining sector is over
dependent). The relative influence of the various determinants of FDI will also vary with the type
of FDI.
Ghana, being a small developing African country, has attracted the non-market seeking
type of FDI. The major categories of FDI attracted into Ghana have been lured by natural
resources and active promotional campaigns, plus structural reforms and privatizations.
Investments to Exploit Natural Resources
The mining sector, mainly gold, has become almost synonymous with FDI in Ghana, but
it had gradually deteriorated prior to the Economic Recovery Programme (ERP). The several
reasons identified for this include shortages of foreign exchange to maintain and rehabilitate the
mines; lack of capital investments for exploration and development; poor management and lack
of mining skills; infrastructure deterioration, particularly shortage of rail capacity for manganese
and bauxite; mining company financial problems due to the over-valued currency and spiraling
inflation; a declining grade of gold ore; and smuggling of gold and diamonds (Tsikata et al.,
2000). FDI could therefore have played a major role in arresting several of the problems
identified, especially the dual problems of foreign exchange strangulation and shortage of the
requisite mining expertise. For example, in the gold mining industry, long distances had to be
travelled underground to reach work sites due to lack of investment in existing and new shafts.
But it was the fiscal policy regime that imposed the severest strain on the development of
investment flow to the sector, in particular the gold mining subsector. Three main fiscal changes
affecting the sector were implemented during the ERP era: reduction in minimum royalties from
6% to 3%; reduction in corporate tax from 55% to 35%; and tax exemption for imported plant
and equipment. The privatization of AGC by the government was also presumably aimed at
sending signals that it was prepared to encourage the participation of the private (including
foreign) sector. There is no doubt that policies and funding under the ERP have enabled a strong
upturn in the mining sector.
Investments Resulting from Ghana’s Active Policies to attract FDI
A number of measures have been taken to improve the investment climate. These include
investment incentives spelled out in a range of investment codes. The first was the Pioneer and
Companies Act of 1959. This was followed by the Capital Investment Act of 1963 (Act 172),
which sought to encourage foreign investment. The 1973 Investment Decree (NRCD 141) and
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Investment Policy Decree NRCD 329 of 1975, unlike the 1963 Act, was to encourage both local
and foreign investors. The 1981 Investment Code (Act 437) sought to centralize investment
promotion functions at the Capital Investment Board and consolidate all investment legislation.
The 1985 Investment Code (PNDCL 116) established the Ghana Investment Centre as the
Central Investment Promotion Agency. All these investment codes attempted to provide a
favourable investment climate by offering incentives to boost private investment. The incentives
generally provided included tax holidays, accelerated depreciation allowances, exemption for
import duties on machinery and equipment, investment allowances, and arrangements for profit
repatriation. The need for constant review of the codes reflects the lack of the expected response
to the various codes. Inflows remained sluggish, averaging US$4 million per annum between
1983 and 1988.
Other measures taken in recent years to improve the investment climate include gradual
removal of administrative and other bottlenecks and review of the tax structure as it relates to
private investment, e.g., reduction of corporate tax to 45% maximum (1991) from 55%
previously, for some enterprises. Retention accounts (and foreign accounts) were established for
individual companies for retention of a portion of revenues earned from exports to finance
imports of essential spare parts and raw materials or machinery, while credit expansion in 1987
and 1988 aimed to ensure adequate financial support for the priority sectors of the economy.
Finally, a major step was the liberalization of the financial system. On 29 April 1988,
Ghana ratified the convention establishing the Multilateral Investment Guarantee Agency
(MIGA) of the World Bank. MIGA intends to encourage equity investment and other forms of
foreign direct investment (FDI) in developing countries by reducing noncommercial risk. In
effect, the MIGA Convention seeks to provide an insurance cover for foreign investors who
participate in eligible investments in the productive sectors of the economy of developing
countries. Despite the assurance of Ghana’s investment guarantee under the Investment Code and
the MIGA Convention, some countries still insist on bilateral investment promotion and
protection agreements (IPPAs) with Ghana. Thus, the government has entered into bilateral
IPPAs with a number of countries to further enhance the protection and security of the investment
regime. (see Ghana Investments Centre, 1991). Ghana has also expanded the scope for FDI by
reducing the number of industries closed to foreign investors.
The Ghana Investments Promotion Centre (GIPC) was set up under the GIPC Act of 1994
with the main objective of encouraging and promoting investment. The Act revised and
consolidated the 1985 Investment Code to place more emphasis on private sector investments as
an important element of accelerated economic growth. According to the Act, the existing code
was oriented towards regulation and did not encourage the investment centre to engage in
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promotional activities. Also, the attitude of government has changed over time with a more
favourable climate now than in the early 1980s. As part of the measures taken to make credit
more readily available to the private sector, Ghana began a process of liberalizing its financial
system. Specifically, a financial sector adjustment programme (FINSAP), was initiated and a
number of institutional and policy reforms were carried out that culminated in the liberalization
of the financial sector by the beginning of 1989. The response was a moderate inflow between
1989 and 1992 and a significant inflow between 1993 and 1996 – with the inflow reaching
US$233 million in 1994 when the GIPC was set up and the Government put Ashanti Goldfields
(AGC) on the market (partial sale of AGC to the South African mining company, Lonmin).
The Free Zones Scheme and FDI Flows
In September 1995, the Ghanaian Parliament promulgated the Free Zones Act in order to
accelerate the exploitation of the country’s general export potential. The Ghana Free Zones Board
(GFZB) was accordingly established to assist and monitor the activities of export processing
zones (EPZs) to be set up in the country. EPZs provide buildings and services for manufacturing,
i.e., transformation of imported raw and intermediate materials into finished product, usually for
export but sometimes partly for domestic sale subject to the normal duty. The EPZ is thus a
specialized industrial estate located physically and/or administratively outside the customs
barrier, oriented to export production. Its facilities serve as a showcase to attract investors, and as
a convenience for their getting established, and are usually associated with other incentives.
A key objective of the Act was the attraction of FDI. To this end, an extensive package of
incentives was offered, including the following:
• Exemption of free zone developers from income or profit tax for 10 years;
• Income tax after ten-year tax holiday, not to exceed a maximum of 8%;
• Exemption from withholding taxes on dividends emanating from free zone investments;
• Freedom for a foreign investor to hold a 100% share in any free zone enterprise; and
• Various guarantees in respect of repatriation of profits and against unreasonable nationalization
of assets.
Since 1995, the non-traditional exports (NTEs) have increased from US$159.7 million in
1995 to US$417.5 million in 2001. This could be partly attributable to establishment of the EPZs.
Given the importance of increasing market size and providing scale to attract FDI to Africa,
efforts at regional integration continue to be important. The New Partnership for Africa’s
Development (NEPAD) could be important in this direction. Since the new government assumed
power in 2001, Ghana has set up a Ministry for Regional Integration and NEPAD.
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4.4 GHANA’S POLICY ENVIRONMENT FOR FDI
Ghana began courting FDI long before it moved towards a market economy. As far back
as 1963 the importance of FDI was recognized, as demonstrated by the Capital Investment Act of
1963. However the wide range of fiscal and other concessions offered to potential foreign
investors was accompanied by various conditions that served as deterrents to investment.
Subsequent revisions to the investment code have substantially improved the climate for foreign
investment. Attracting FDI remains a key objective of Ghana’s economic recovery programme,
which started in 1983 under the auspices of the World Bank and the IMF. The Ghana Investment
Promotion Centre Act of 1994 set up the GIPC as a promotional agency providing a wide range
of investment incentives. In addition to these incentives, ongoing privatization of State owned
enterprises provide profitable investment opportunities. A number of other policy developments,
such as those relating to SMEs, international trade, the exchange rate and infrastructure linkages
with other West African countries, have also favourably influenced the environment for FDI in
the country.
1. FDI Policies
Responsibility for investments in various sectors has been divided up among different
agencies of the Government of Ghana. The five main agencies are the Minerals Commission and
the Ghana National Petroleum Corporation for investments in the mining and petroleum sectors,
respectively; the Divestiture Implementation Committee for investments in companies sold by the
Government; the Ghana Free Zones Board (GFZB), for investments exporting 70 per cent or
more of their products, and the GIPC, which deals with all other investments. All these
institutions offer generous incentives to prospective investors.
(a) The Ghana Investment Promotion Centre Act
Under the GIPC Act 1994 investors are entitled to tax holidays, accelerated depreciation
allowances, exemptions from import duties on machinery and equipment, investment allowances
and remittance of dividends. Tax holidays of up to five years are applicable for investments in
general farming, fisheries, aquaculture, livestock and real estate, and up to 10 years for rural
banking and cattle ranching. Firms exporting non-traditional exports are entitled to a reduced tax
rate of 8 per cent, and licensed hotels to a reduced tax rate of 25 per cent. Besides the import-duty
exemptions on machinery and equipment, the GIPC is empowered to grant additional incentives
or special investments, with approval from the President.
The GIPC Act accords national treatment to foreign investors and reserves only a few
activities for Ghanaians, such as petty trading, operation of taxi-fleet services of less than 10,
pool betting, lotteries, beauty salons and barber shops. Furthermore, Ghana does not impose
performance and local content requirements on foreign investors.
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Last, but not least, foreign investors with paid-up capital of $10,000 but less than
$100,000 or its equivalent in cedis, shall be entitled to an initial automatic maximum immigrant
quota of one person.
With the creation of the GIPC, the Government of Ghana has greatly eased the
administrative requirements for foreign investments and facilitated processes for investors.
Registering with the GIPC takes a maximum of five days, is inexpensive, and offers companies
registered with it exemption from an approval process. There is little doubt that the GIPC is a
serious and dedicated promotion agency. Even though the Government has not spelt out specific
policies in the Act for Asian FDI, encouraging these investors to take advantage of Ghana’s
investment incentives seems to be high on the agenda of its promotional activities.
(b) Incentives in the minerals sector
Similarly, generous incentives are offered to FDI in the minerals sector via the Minerals
and Mining Law of 1986 and the Amendment of the 1994 Act 475. These seek to provide a more
conducive environment for private investment in the mining sector. Ghana has abundant mineral
resources, including gold, bauxite, manganese, diamonds and limestone, which are governed by
the Mining and Minerals Act. Incentives provided under the revised Minerals Act include a
reduction in the minimum royalties payable and in the corporate tax (from 55 per cent to 35 per
cent), as well as tax exemptions for imported plant and equipment. Companies are allowed to
capitalize all expenditures during the reconnaissance, prospecting and development stages. Since
reforms, the mining sector has been rejuvenated, with gold exports currently overtaking cocoa as
Ghana’s leading export earner. The inflow of private investment through these improved
incentives has undoubtedly played a role.
(c) Ghana Free Zones Programme
One of the key initiatives to attract FDI into non-traditional exports (i.e. excluding
minerals, cocoa and timber) has been the promulgation of the Free Zones Act in September 1995.
The Act offers even more generous incentives than the GIPC Act, 1994. The incentives package
includes exemptions for free zone developers from revenue or profit tax for 10 years, income tax
after the 10-year holiday is not to exceed 8 per cent, and there is an exemption from withholding
tax on dividends.
Under the Free Zones Act, investors are spared various bureaucratic restrictions and other
statutory requirements. There is an expedited investment approval process (not exceeding 28
days), unimpeded issue of expatriate work and residence permits, and accelerated on-site customs
inspection. Furthermore, a policy of free ports and open skies is in place to further reduce
bureaucratic impediments. The Gateway Project complements the Free Zones Programme as it
seeks to improve upon Ghana’s infrastructure facilities at the ports,
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With a view to making Ghana the trading hub for West Africa. The Free Zones
Programme adopts an innovative approach through the establishment of enclaves and single
factory zones. This enables access to a vast array of resources around the country as well as
providing focused enclaves, within which firms can benefit from agglomeration economies.
(d) Investment guarantees
Guarantees against expropriation and nationalization are enshrined in the provisions of
Ghana’s constitution and investment legislation. Ghana has also ratified the convention
establishing the Multilateral Investment Guarantee Agency (MIGA) of the World Bank, which
reduces noncommercial risks of FDI in developing countries.
The State may only acquire an enterprise if it is in the national interest for a public
purpose, on payment of fair and adequate compensation. Disputes are to be resolved by reference
to the rules of arbitration of the United Nations Commission on International Trade Law or,
where relevant, to bilateral investment agreements. Asian countries with which Ghana currently
has bilateral agreements are China, India and Malaysia.
2. Other related policies
(a) Privatization
An important component of Ghana’s economic reforms has been the divestiture of State
owned enterprises, which commenced in 1988. The privatization programme has resulted in the
sale of more than 300 of approximately 350 State-owned enterprises.40 It has been carried out
through sales of shares, joint ventures, leases, sales of assets and liquidations. Major divestitures
have included selling government shares in the Ashanti Goldfields ($462 million), various State-
owned banks ($65.2 million), and Ghana Telecom ($38 million) which was purchased by
Malaysian investors.
The privatization timetable until 2003 included four wholly-owned large and strategic
enterprises and several medium-sized enterprises. The divestiture process is open to foreign
investors, and deferred payments for up to three years may be negotiated. The Divestiture
Implementation Committee cites several success stories, including West African Mills and
GAFCO, but there have also been some failures such as Ghana Telecom.
(b) Small and medium-sized Enterprises
Currently, there is no comprehensive policy on SMEs in Ghana. However, over the years
various Governments have initiated projects to support the SME sector, recognizing it as an
important employer and producer in the domestic economy. There has thus been both financial
support – via the recently terminated Businesses Assistance Fund – and through various training
programmes organized by government and quasigovernment institutions, such as the National
Board for Small Scale Industries and EMPRETEC Ghana.
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The most recent initiative, implemented by the Export Development and Investment
Fund, seeks to encourage the SME sector to venture into exports. Specifically, the Ghana
Investment Fund was established to help finance small and medium scale agro-processing and
export-oriented companies in Ghana.41 Since these initiatives are non-discriminatory, both
indigenous and foreign SMEs can access these funds, including Asian SMEs investing in Ghana.
(c) Trade policy
Liberalization of the trade regime has been pursued through substitution of quantitative
instruments with price instruments, increased transparency and a gradual reduction of import
tariff rates. Thus by 1989, the import-quota system had been abolished, and by 2000, tariff levels
had fallen to 0, 5, 10 and 20 per cent from their 1982 levels of 35, 60 and 100 per cent. The
simple average tariff rate has been levied at 14.7 per cent since February 2000, reduced from over
30 per cent.
It is noteworthy that companies in the free trade zones enjoy a ten-year tax holiday and a
zero duty on imports (United States, Department of State, 2006). Ghana’s liberalized trade regime
thus affords opportunities for both existing and potential investors, including Asian investors, to
access essential materials at competitive prices. These benefits are even greater for firms
registered in the EPZs, since they are exempt from duty and enjoy various tax breaks.
Ghana is party to several multilateral and regional institutions and agreements on
international trade. These include the WTO, the Cotonou Agreement and ECOWAS. Bilateral
agreements also exist with the Czech Republic, Egypt, Malaysia, South Africa, Trinidad and
Tobago, Turkey and the United States, among others. The current focus of trade policy is
continued liberalization of the trade regime, and, more importantly, a higher degree of economic
integration within the West African sub-region. To this end, there is a Ghana/Nigeria fast-track
approach to sub-regional economic integration, which offers market opportunities in both
countries and in others in the sub-region. By intensifying efforts towards sub-regional integration,
Ghana hopes to become the gateway for Asian investors interested in accessing the West African
market.
(d) Exchange rate policy
The ostensible objectives of exchange rate policy reforms in Ghana have been to increase
the overall availability of foreign exchange and to improve foreign exchange allocation
mechanisms.
This has been pursued through gradual liberalization of the foreign exchange market,
from a system of export bonuses financed by import surcharges and systematic quarterly
devaluations in the early 1980s, to the current free-floating exchange rate regime with the
operation of foreign exchange bureaus and the inter-bank market. These policies have enabled the
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Ghanaian currency, the cedi, to depreciate in value from 30 cedis per dollar in 1983 to 9,073
cedis per dollar in 2005.
While there are concerns about its rate of depreciation and the impact this has on
macroeconomic stability, the current administration is committed to a floating exchange rate as
well as preventing nominal depreciation that induces macro-instability. These objectives are
being pursued through continued adoption of a flexible exchange rate regime and a tight fiscal
and monetary policy stance. Increased liberalization of the exchange rate regime within a stable
macroeconomic environment offers Asian investors attractive possibilities to establish export-
oriented units of production in Ghana. All the more so since Ghana’s liberalized regime enables
its exports to be more competitive on world markets, barring other domestic capacity and external
market access constraints.
4.5 FDI AND ITS RELATIONSHIP WITH NATURAL RESOURCES (OIL)
Countries that can offer a large domestic market and/or natural resources have inevitably
attracted foreign investors in Africa. South Africa, Nigeria, Ivory Cost, and Angola have been
traditionally the main recipients of FDI within the region (Morisset, 2000). For instance, Chevron
Texaco, a California based oil and natural gas company, has invested about US$ 4 billion in
Angolan development projects as at 2008 (mBendi).
Over the years, Nigeria and Angola have been two of the most successful countries
receiving FDI because of their comparative locational attraction in oil despite their unstable
political and economic environments. The 1999 World Development Report of the World Bank
ranked Angola as fourth among African countries with the highest average FDI inflows for the
years 1996 and 1997. In 2008, as per UNCTAD records, Angola is the second largest recipient of
FDI inflow in Africa. On average, resource endowed countries in Africa ceteris paribus have
attracted more FDI inflows than their counterparts with less natural resources. The table below
samples the distribution of FDI flows among abundant natural resource-endowed and less
resource endowed countries in Africa.
Empirical evidence of distribution of investments (in different provinces) in Angola as
reported by Banco de Desenvolvimento de Angola’s, Boletim de Conjuntura, (2009) shows that
on average, provinces near the oil blocks register higher rates of investment than other provinces.
Luanda, which doubles as the capital as well as a province with vibrant oil activities such as oil
refinery etc recorded about US$ 10.59 million investments with more than 50% accruing to the
oil and gas sector.
Dunning (1981) argues that natural resources and market size are components in the
locational attraction that attract FDI into a country. Our sample of eight countries, four well-
endowed in natural resources (e.g. oil, gold, etc) and four less-endowed in natural resources
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reveals that average FDI inflows per head to the four resource endowed countries amounted to
US$ 193.83 in 2008 compared with that of less resource-endowed countries at US$ 4.67 per
head. The same disparity in the distribution of FDI inflow can be observed for the entire periods
under consideration. In fact, the growth in FDI distribution per head grew on average by about
1,117% for the four resource-endowed countries and by only 2.41% for the four less-resource
endowed countries from 2000 to 2008. It was also realised that among the four resource endowed
countries, the countries with oil wealth (Nigeria and Angola) on average recorded higher FDI
inflows than those without oil (Ghana and South Africa. Note: Ghana classified under countries
without oil in this context because it is yet to start oil production by the time the study was
conducted).
Although both groups of countries have recorded growth in FDI inflows per head, the gap
between resource-endowed and less resource-endowed countries widened with the former
experiencing growth about 463 times more than the latter. The distribution among only resource-
endowed countries does not represent a normal distribution either. In 2008, Angola recorded the
highest inflow per head at US$ 862.77 with US$ 181.38, US$ 134.11 and US$ 90.79 accruing to
South Africa, Nigeria and Ghana respectively.
Table4: Distribution of FDI inflows among selected (well and less natural resource endowed)
African Countries in billion US$
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Another trend that could be realised from the inflow figures is the level of influence that
the two components within Dunning’s locational attraction factor (i.e. natural resources and
market size) have on the distribution of FDI inflows among the two groups of countries. From our
observations, a more positive relationship could be established between natural resources and FDI
inflows than between market size and FDI inflow. The more natural resources available in a
country, the more FDI it is able to attract “ceteris paribus”. A comparison among resource-
endowed as well as between resource-endowed and less resource-endowed countries with varying
population sizes confirms this assertion. Among the four resource-endowed countries, Angola
recorded higher inflows relatively per head throughout the observed period. In 2008 for instance,
Nigeria with a population 8.39 times more than Angola received FDI inflows only 1.30 times
more than Angola. Ghana and South Africa, all with populations more than Angola and with
relatively stable economic and political environments received lower shares of FDI inflows for
the observed period.
The same trend can be observed between Kenya (less resource-endowed) and Angola
(resource-endowed). Kenya’s population in 2008 was about double that of Angola but the country
attracted FDI inflows 161.96 times less than Angola did for the same year. Similar trends can be
observed during the entire period under observation. Our observation does not attempt to
establish causality because a host of other factors such as political and economic environment,
among others, all play a role in attracting FDI.
It must also be noted that although market size is a subset of a country’s population, other
factors such as purchasing power, determined by factors such as income levels, inflation and
interest rates among others are the actual determinants of market size. A country with a large
population size but with low income levels (e.g. Kenya) might provide a smaller market size for
products than another with small population size but with higher income levels (e.g. Sweden).
4.6 APPLYING FINDINGS IN CASE STUDIES TO GHANA FDI
Evidence emanating from the link between natural resources and FDI and FDI literature
(e.g. Morisset, 2000) suggest that in Africa, countries with abundant natural resources attract
more FDI than those with fewer natural resources. Ghana already possesses a lot of natural
wealth which have served as bait for foreign investments. Watts, (2006) states that U.S. oil
companies alone have invested more than $40 billion in Africa over the last decade (with another
$30 billion expected between 2005 and 2010). Oil investment now represents over 50 percent of
all foreign direct investment (FDI) in the continent (and over 60 percent of all FDI in the top four
FDI recipient countries), and almost 90 percent of all cross-border mergers and acquisition
activity since 2003 has been in the mining and petroleum sector.
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With the oil discovery and exploration, FDI is expected to rise in the oil and gas industry
and other related sectors of Ghana’s economy. For instance, two multi-national oil field service
providers namely Africa Oilfields Service Limited (AOS) and Orwell International (Oil & Gas)
Limited, have committed US$ 5 million worth of equipment to Ghana’s oil and gas industry. The
two corporate entities plan to grow the investment to US$ 15 million, subject to demand
expansion in Ghana.
Ghana’s oil potential is relatively small. Analysts have quoted varying oil reserves in
Ghana ranging from 1.8 to 5 billion barrels. Putting Ghana’s estimated reserve at an average of
2.5 billion barrels, the benefits accruing to Ghana in terms of FDI inflows and economic
development will be 3.6 times less than that accruing to Angola ceteris paribus. What this means
is that, if US$ 3.6 is invested in Angola as a result of its oil wealth, only US$ 1 worth of
investment will accrue to Ghana in that regard. The implication is this;
If quantity of oil reserves would be a major determinant of the amount of FDI inflows to
the oil sector, a 50% or so would mean that, about 14% of all FDI inflows in Ghana would accrue
to the oil sector. This would mean that the current average growth of 130% in FDI from 2000 to
2008 (as per UNTAD records) is expected to increase to about 144% for the coming years as a
result of the extra 14% oil led investments expected.
Ghana’s positions on the IFC and The World Bank’s “ease of doing business rankings”
from 2006 to 2010 are 102nd, 94th, 87th, 87th and 92nd respectively. A simple interpretation of
the trend observed in these rankings is that it is relatively easier to do business in Ghana in 2010
than in 2006. This may be as a result of Ghana improving its business environment compared
with other countries or as a result of business environments in other countries getting worse.
Ghana’s rankings have been consistently lower than that of most other Sub-Saharan African
countries for the same period. This means that it is relatively easier to conduct business in Ghana.
It is therefore expected that more FDI flows will be received by Ghana “ceteris paribus” as a
result of the oil exploration.
Accra and Tema have traditionally been the recipients of most FDIs in Ghana because
Accra is the capital city and Tema is an industrial city and also hosts one of the country’s two
major habours. This trend is however expected to change in favour of the towns near the oil
blocks. The twin cities of the Western region of Ghana, Sekondi and Takoradi, are the nearest
cities to most of the oil blocks and are thus expected to play host to a lot of oil related
investments. Accra on the other hand is the commercial and administrative nerve centre of Ghana
and is also expected to benefit directly and indirectly from oil led FDI inflows.
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TRENDS IN FDI FLOWS TO GHANA
Since the 1970s, Ghana has had a long, though modest, history of FDI. In the 1970s, FDI
was mainly in import-substitution manufacturing. In 1970, annual inflows were as high as US$68
million but declined to US$11.5 million in 1972. The decline in 1972 was probably due to the
negative economic growth rate of 2.1% in 1972 from a positive growth rate of 5.6% in 1971. FDI
increased from then to US$71 million in 1975 only to sink to -US$18.3 million in 1976 (a decline
of 125.8%). This decline followed the world FDI downturn of 21% (UNCTAD, 2003). An
important feature of FDI is the three-way nexus of economic growth, investment and political
stability that has emerged since 1972.
Fig.8: FDI Inflow into Ghana
In 1979, when Rawlings first seized power and adopted a radical and anti-business stance,
economic growth fell to -3.2% and there was an FDI outflow of US$2.8 million. Since the advent
of the Economic Recovery Programme (ERP) in 1983, four phases of FDI flows can be
distinguished:
• 1983–1988 was a period of sluggish inflows, averaging US$4 million per annum, the highest
and lowest inflows being US$5.6 million in 1985 and US$2 million in 1984, respectively.
• 1989–1992 recorded moderate inflows averaging US$18 million per annum, the highest and
lowest being US$22.5 million in 1992 and US$14.8 million in 1990, respectively.
• 1993–1996 was a period of significant (remaining in three digits) inflows, which reached
US$233 million in 1994 (with the privatization of Ashanti Goldfields Company – AGC), but slid
to US$106.5 million in 1995 before coming back to US$120 million in 1996.
• 1997–2003 saw flows oscillating, decreasing from US$82 million in 1997 to US$56 million in
1998 (the lowest over the 1993–2003 period), then peaking at US$267 million in 1999 before
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falling to US$115 million the following year. FDI dropped further to US$89 million and US$50
million, respectively, in 2001 and 2002 owing to the effect of the September 2001 attack on the
United States (and the consequent global FDI drop of 41% in 2001 and 21% in 2002; UNCTAD,
2003). In 2003, the FDI recovery to US$137 million was due to a massive boost in FDI with the
merger of Ashanti Goldfields and Anglogold and the beginning of a US$400 million gold mine
investment by the US firm, Newmont (ISSER, 2004).
The growth remained positive throughout the rest of the period (i.e. 2003-2008) with the
highest annual growth of about 338.62% in 2006 compared with 2005. Ghana received its highest
FDI inflow in 2008 with US$ 2.120 billion and received its lowest flow in 2002 with US$ 59
million. From 2000 to 2008, Ghana’s share of total world FDI inflow remained inconsistent. The
figure below presents a graphical representation of Ghana’s share of total world FDI and FDI as a
percentage of GDP.
Fig.9: Ghana’s FDI inflow as percentage of GDP and total world FDI inflow
Source: Dah, K. F. and Khadijah, M. S. (2010:47)
4.7 OIL AND FOREIGN DIRECT INVESTMENT INFLOW INTO GHANA
Ever since oil was discovered in Ghana in June 2007, there has been a steady and
consistent increase in the inflow of foreign capital and investments injections into the economy of
the nations, especially since oil production started during December 2010. In fact, according to
Quandzie (2010:1) Foreign Direct Investments (FDIs) into Africa as at the end of 2010 stood at
$32 billion. While the World Bank, asserts that inflows of FDIs into the continent increased by
6% from 2008 due to price increases of commodities such as metal, oil and mineral exports. It is
in response to this that Okonjo-Iweala, Managing Director, World Bank said in a speech she
delivered at the MIT-Sloan School Africa Business Conference, in the US recently stated that:
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The external drivers of growth in 2010 included increased
commodity prices — particularly for metal, mineral and oil
exporters; increased inflows of foreign direct investment – the
region (Africa) attracted $32billion in FDI in 2010, a 6
percent increase from 2008
For Ghana, it was recorded that the inflows of FDIs as at early December 2010, at a time
the country was gearing up for the commencement of its oil production in the middle of the
month; were estimated at over $1.3 billion of which the oil sector accounted for a significant
portion of $550 million, reported the Bank of Ghana at its Monetary Policy Committee (MPC)
meeting on December 10, 2010 (http://ghanaoilonline.org/2011/04/fdis-into-africa-rise-32b-on-
oil-metals-exports-%E2%80%93-world-bank/).
Moreover, the Ghana Investment Promotion Centre (GIPC), reported that Foreign Direct
Investment (FDI) into Ghana in the first quarter of 2011 grew by over 100% compared to what it
was in 2010 (Quartey, 2011:1).
On average, Ghana’s Foreign Direct Investment (FDI) increased considerably by
approximately 70 percent annually between 2009 and 2010. For the first quarter of 2011, the
Centre, which coordinates and monitors investment activities in the west African country,
registered a total of 109 projects with an estimated value of GH¢567.66 million (US$378.44
million).
Compared to the corresponding quarter of 2010, the estimated value of registered projects
grew by 101.31%, while FDI component of the projects shot up by 118.02%. The initial capital
transfer also increased significantly by 363.66%. In addition, jobs expected for Ghanaians
increased by 18.80% whereas that for non-Ghanaians decreased by 22.36%.
Launching this year’s “Invest in Ghana, 2011” Seminar and the Ghana Club 100, 2010
edition in the country’s capital, Accra, Aboagye, the Chief Executive Officer of GOPC, said the
event would create the platform to bring investors and projects together to explore public private
partnerships. The event, which opens under the theme: “Partnerships for Sustained Economic
Growth: The Role of the Domestic Investor”, according to Aboagye, will “…facilitate business
partnerships, which support the economic growth required to enable Ghana prosper in the
emerging global economy of the 21st century.” In furtherance, he maintained that “Partnering
domestic investments with FDI, is one of the major interventions by which the country can build
the capacity and grow its domestic investors”.
(http://www.theafricareport.com/archives2/business/5141660-ghanas-fdi-inflow-registers-70-
percent-increase.html).
In a separate and more detailed study, Sarpong (2011) opined that The Ghana Investment
Promotion Centre (GIPC) recorded an increase of 92.95% in Foreign Direct Investment (FDI)
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inflows into the country between January to March of 2011. He said that during the period, the
centre had GH¢527.63 million in FDI inflows into the country compared to GH¢225.88 million
recorded for the same period in 2010.
The local currency component also amounted to GH¢40.02 million, representing an
increase of 6.61% over the local component of GH¢37.54 million recorded in 2010.
The total number of projects registered by the GIPC for the three months period this year was 109
with a total estimated value of GH¢567.66million compared to 108 projects registered for the
same period in 2010 with a total estimated value of GH¢263.42 million. The initial capital
transfer for the newly registered projects during the quarter under review amounted to
GH¢103.35 million as against GH¢20.81 million, representing a 360% increase.
Out of the 109 registered projects, 66 (60.55%), were wholly-owned foreign enterprises
valued at GH¢175.07 million and the remaining 43 (39.45%) being joint ventures between
Ghanaians and foreign partner valued at GH¢392.58 million. A further breakdown of the FDI
inflow into Ghana within the period in terms of country of origin indicated that India, with 19
projects, topped the list of countries with the highest number of projects registered in Ghana for
the first three months of 2011. Britain/Belize, with a US$70.50 million investment, also topped
the list of countries with the largest value of investments registered in the country within the same
period. Lebanon followed with US$59.94 million and Mauritania with US$56.00 million.
Arising from this increase in the inflow of FDI into Ghana, it was expected that a total of
7,004 jobs will be created from these registered projects, an increase of 14.41% compared to the
6,122 expected jobs to be created in the corresponding quarter of 2010. About 6,497 of the total
jobs will be for Ghanaians and the remaining 507, for expatriates (Sarpong, 2011).
Projecting the oil sector as the single major determinant of FDI into Ghana in the recent
past, the 2011 World Investment report, indicated that Ghana is both at present and for the first
time the 7th largest recipient of foreign direct investments (FDIs) in Africa, in which investors
brought into the country, an amount of $2.5 billion (Quandzie, 2011:1). The report, prepared by
the United Nations Conference on Trade and Development (UNCTAD) and released on July 26,
2011, proved that FDIs inflow into Ghana increased largely because of Trans-National
Corporations’ (TNCs) attraction to the oil discovery in the country. The report went on to proffer
reasons for such a trend, thus:
As for Ghana, the start of major oil production has
attracted the interest of TNCs, some of which are
seeking an alternative sub-regional source of oil to
Nigeria
(http://www.ghanabusinessnews.com/2011/07/27/ghan
125
a-receives-2-5b-becomes-7th-largest-recipient-of-fdis-
in-africa-as-oil-attracts-investors/ ).
The report notes that Ghana as an alternative for these TNCs for FDIs is due to Nigeria’s
uncertainty over the “Petroleum Industry Bill-1 which is perceived as unfavourable for TNCs,
and the unresolved political problem in the Niger Delta discouraging foreign investors which
allegedly led Shell to sell a number of its onshore licences” in the country. It accounted for the
rise of Ghana as a major FDI host country, as well as for the declines of inflows to Angola and
Nigeria. Though Angola was the largest earner of inflows in Africa with an amount of $9.9
billion, followed by Egypt, Nigeria and Libya all earning $6.4 billion, $6.1 billion and $3.8
billion respectively. While DR Congo had $2.9 billion, Congo Brazzaville $2.8 billion; Ghana
received $2.5 billion while Algeria, Sudan and South Africa received $2.3 billion, $1.6 billion
and $1.6 billion from the continent’s FDI inflows share.
4.8 IMPACT OF THE OIL INDUCED FDI IN GHANA
As earlier on mentioned in this study, Ghana’s portion of FDI inflows is almost
negligible, although it has risen in recent years. Ghana, like many other African countries, relies
heavily on natural resources in its attraction of FDI inflows and is thus able to attract flows to
only few sectors within the economy. The impact of FDI is therefore felt in those specific sectors
and in few other areas, mostly in the areas of capital formation, employment generation and
technology transfer (GIPC, 2007).
Capital Formation
FDI contribution to Ghana in terms of capital formation has been about 5 per cent from
1996-1999 (UNCTAD, 2002), still low compared to the average for SSA. By and large, ODA
inflows formed about 50 per cent of the formation of capital in Ghana between the periods 1990-
1999 (UNCTAD, 2002). Most of these ODAs were linked to FDI projects as long term loans and
grants. These funds also contributed to infrastructural development and not only that but also the
establishment of FTZs and customs rehabilitation. Then came a period, 1993-1998, when there
was a rise in portfolio investment complementing FDI flows in the area of privatization in the
formation of capital (UNCTAD, 2002).
Local industry
Local industries will equally receive a boost as a result of these expected oil led
investments. Firms in the transport and haulage sector, energy, building and construction,
hospitality, food and beverage, etc sectors will provide complementary services to the
multinational oil companies. This is expected to revamp some sections of the dormant local
energy industry.
126
Banking and insurance activities are also expected to see a major boost since oil related
investments involve huge amounts of financial (capital) transfers and risks. The Bank of Ghana
raised the capital requirement of banks in Ghana in order to provide them with the necessary
capital base to deal in huge financial transactions. The Ghana National Insurance Commission
has followed suit by increasing the capital requirement of insurance companies. Insurance is a
vital component of the oil industry due to the risks associated with exploration, production and
transportation. International insurance companies have started opening up in Ghana and local
insurance companies are expected to compete with as well as learn best international practices
from these international insurance companies.
GDP
Taking that about 50% of all FDIs accrue to the oil sector in Ghana, then about 3% of
Ghana’s nominal GDP could as well accrue from oil related investments if such investments
would make up about 50% of future FDI inflows.
With average growth rate of nominal GDP (from 2000-2008) being approximately
24.81% as per UNCTAD records, an additional 3% from oil related FDI inflows would result to
about 27.81% growth in nominal GDP for future periods. With government of Ghana’s
determination to keep inflation rates low, average inflation rate of 18% (i.e. average inflation rate
for Ghana as per IMF records from 2000-2008) would in simple terms mean that real GDP
growth would amount to about 9.81% as against the current average of about 5.63% from 2001-
2008 as per IMF 2009 World Economic Outlook figures.
The IMF however estimates that real GDP growth is expected to be about 5.8 by 2014. As
a compromise between our estimated real GDP growth rate figure of 9.81% and the 5.63% of the
IMF (using simple average), we postulate that real GDP growth by 2014 would amount to about
7.8% taking into consideration the expectation that domestic oil production would reduce (to
some extent) imported inflation associated with Ghana’s oil import bill and also on condition that
the government would work assiduously towards maintaining low inflation rates.
However, as per our analysis using simple proportion based on oil reserves, about only
14% of total FDI to Ghana is expected to accrue to the oil sector. If total FDI inflow as a
percentage of nominal GDP is 13.25% in 2008, then oil related FDI inflows as a percentage of
nominal GDP would be about 1.86%. With average rate of nominal GDP growth of 24.81 as
quoted above, an additional 1.86% would result to about 26.67% for future periods. With an
average inflation rate of 18% (as quoted above) would in simple terms result to about 8.67%
growth in real GDP. A simple average of this growth rate and that estimated by the World Bank
(5.63%) for 2014 would amount to 7.15% expected real GDP growth rate by 2014 “ceteris
paribus”.
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Employment generation, technology and skills transfer
In terms of job creation, technology and skills transfer, FDI has played an enormous role
in Ghana and this also has a multiplier effect in the economy. According to the GIPC estimates of
registered projects, FDI has generated about 72,384 jobs for the Ghanaian population and about
4,652 for non-Ghanaians between the periods of 1994-2002. An UNCTAD survey of small and
medium sized enterprises (SMEs) with linkages to foreign firms or export activity shows that
firm size has increased in the last five years (2003-2008). Out of 83 projects registered during the
second quarter 0f 2009 alone, 56 (67.47%), were wholly-owned foreign enterprises and 27
(32.53%) were joint ventures between Ghanaians and their foreign partners with about 4,457 jobs
believed to have been created. 92.15% (4,107) of the total jobs to be created will be for
Ghanaians and the remaining 7.85% (350) for expatriates (GIPC, 2009).
FDI has also aided significantly to the increase in the stock of technology in Ghana by
providing machinery and equipment and at the same time helped in the build-up of local
industrial capabilities by contributing to skills formation. This is particularly evident in the area
of natural resources exploration such as mining, where the use of capital-intensive technology has
developed a pool of trained labour. Product improvement, constituted the most relevant support to
local firms, followed by training, provision of machinery and equipment together with
information on market opportunities (UNCTAD).
Our observation and findings in this chapter on the trends and trajectories in the rate of
inflow of inward Foreign Direct Investment (FDI) into Ghana indicated that the discovery in oil
in Ghana in June 2007 and its subsequent production in December, 2010 has led to an increase in
the rate of inflow of Foreign Direct Investment into the country. We therefore on the basis of this,
validate our second hypothesis.
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CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 SUMMARY
The study examined the expected role of oil (that is, oil windfall and/or revenue) towards
the development of the Ghanaian economy. We were basically concerned with the effects of the
oil production (natural resources) towards instigating national development of the country by
being more of a blessing than a curse to the nation. To carry out this study, two specific issues
were selected and empirically studied so as to determine the actual implication of the oil find and
production on the country.
In more specific terms, the study sought to determine the strategies, methods, ways and
practices that can help Ghana to avert the resource curse syndrome and place it on the right path
to development, through the effective and efficient management and regulation of its oil industry
and the revenue that comes therefrom, for the betterment of every Ghanaian both in the present
and in the future. This becomes necessary in view of the fact that oil exploration and production
in most of the Third World countries (Africa to be precise) has been more of a curse than
blessing, a phenomena that is usually described by social scientist as Dutch disease, resource
curse and paradox of plenty; all of which is known for their negative and anti-developmental
effects on the economies of these oil producing states. When in fact, oil and the numerous
opportunities it brings are considered to be among the economically near-omnipotent resources,
of which adequate management such as in the case of Norway and some other countries have
enhanced and promoted the development of the country. Thus, the study sought to provide
plausible and valid answers to the questions stated below:
1. Given the experiences of other Sub-Saharan African oil producing countries, is it possible
for Ghana to avoid the resource curse conundrum?
2. Has oil discovery and production led to an increase in the rate of Foreign Direct
Investment (FDI) into Ghana?
The above questions enabled us to arrive at the hypotheses stated below:
1 Ghana can avoid the resource curse conundrum through the formulation of strong oil
sector policies and the adoption of oil governance best practices.
2 There is a positive relationship between Oil discovery and production and the rate of
Foreign Direct Investment (FDI) inflow into Ghana.
Meanwhile, to adequately address the above, we focused our study on the effects of oil
find on the developmental quest of Ghana; the challenges that its exploration, extraction and
production is likely to bring upon the country and the managerial institutions and mechanisms
129
that the country need to put in place and adopt towards the effective and efficient control,
regulation and management of the petroleum sector of the economy (revenue and proceeds) to
ensure that every citizen of the country benefits from the oil windfall. The study was divided into
five chapters.
Chapter one concentrated on introduction. We articulated the general socio-economic
atmosphere in Ghana especially since the discovery of oil offshore of the country’s western
region in relations to the expectations and fears that public opinions both within and outside the
country reflects as to whether the oil will be a blessing or curse to the country’s developmental
quest and subsequently, we arrived at some viable problems. We equally reviewed relevant
literatures and finally dwelt on methodological issues. These enable us to articulate an
appropriate framework of analysis, which was derived from the resource curse theory.
Specifically, the framework analysed the relationship between a country’s natural
resource endowment and the institutional arrangements and processes (policies and fiscal
regimes) that the nation put in place for the control and management of both the activities that is
going on in the sector (hereunder refers to oil) and the likely revenues that it will generate
towards the betterment of every member of the society; that determines the outcome and
implication of the natural resources on the economy.
Moreover, chapter two assessed the historical development of oil exploration in Ghana.
Efforts were made to study and understand the history of the Ghanaian state. In addition we
studied and identified the various ways through which the oil sector contributes to the economic
development of the oil producing states, which strategically comes in form of linkages both
forward and backward as well as the historical trajectories of oil exploration in Ghana. We also
analysed the structure and functions of the Ghana National Petroleum Corporation that oversees
the activities of the oil industry and/or sector on behalf of the Ghanaian Government. In chapter
three, we evaluated the issue oil governance best practices and equally conducted case study
samples it with Alaska and Norway as resource success stories due to their respective oil
governance best practices. The issue of accountability and transparency in the management of
the Ghana’s resources were equally evaluated; through stylized sub-themes on transparency. The
role of Civil Society Organisations (NGO’s) towards the efficient, transparent and accountable
management and use of Ghana’s oil revenues were equally elucidated and analysed. Mentioned
were also made of the attempts of the Ghanaian government at instilling transparency in the oil
revenue by extending the platform to the oil sector. Finally we assessed and analysed Ghana’s
Petroleum Revenue Management Act (law) in terms of its provisions on oil governance best
practices in addition to the expected contribution of oil to towards the development of Ghana’s
economy.
130
In chapter four, we focused on the relationship between the oil discovery, its production
and exploitation and the inflow of FDI into Ghana. In doing, this considered the determinants of
FDI in developing countries. Ghana’s policies on FDI were at the same time evaluated and
commented upon. In order to understand the if whether there will be a link between the flow of
FDI and oil while controlling for other variables, we assessed the relationship between FDI and
natural resources. Arising from our study of the said relationship we applied the finding to Ghana,
from where we studied the trend of FDI inflow into Ghana. In furtherance, we interrogated the
synergy between the discovery and production of oil and inflow of FDI into Ghana. finally, we
analysed the impact of FDI inflow on the Ghana’s economy.
The above, not only validated our hypotheses but opens new vistas in the study of oil and
the socio-economic development in the Ghana and the problems associated therein.
5.2 CONCLUSIONS
Lessons through the analysis have revealed that Ghana stands to overcome the ‘curse of
natural resource’ that comes from oil if it strengthens its institutional –capacity, pursue growth-
led policies and remain unwavering in its democratic governance. Empirical evidence has pointed
out that the development of strong institutions and policies that are in tandem with the
international acclaimed oil governance best practices will determine the extent to which political
ideology and effective policies translate into economic growth and development.
The political economy of oil and the oil sector play pivotal role in the social, political an
economic transformation of the Ghanaian economy. The oil sector contribute to the economic
development of Ghana through five linkages of; fiscal, forward, backward, consumption and
socio-political. The oil revenue that is to accrue to the state will enable the public sector to make
expenditures and investment outlays. Besides the exhaustibility of oil and state ownership of the
resource make the allocation and use of oil revenues across generations, state intervention in the
economy, andthe latters response to government initiatives and policies, central to economic
growth and development.
From the findings of the study, we conclude that the new found oil in Ghana will
contribute positively towards the development of the Ghanaian economy. Furthermore, the
discovery, exploitation and revenue which will the marketing of the oil will go a long way in
correcting and reversing the trends in the country’s external debt profile.
Moreover, Ghana unlike many other oil producing African states has through its policy on
local content and public participation bill and the Petroleum Revenue Management Act proved
that it is ready and capable of managing its oil windfall for greater benefit of every Ghanaian
citizen through transparency and accountability in the utilization of the oil proceeds and
agreement. A situation that will ensure the prompt and adequate deployment of the oil windfall
131
through the fiscal instruments, most especially the national budgets to areas of needs and
priorities that will place Ghana on the right path of development rather than the debilitating twin
effects resource curse and Dutch disease. Hence Ghana’s oil find will be more of a blessing than
a curse as the experiences of some other oil producing African states such as Angola, Sudan and
Nigeria have proved.
Deriving from the above is the fact that the puzzle which necessitated the study has been
addressed.
5.3 RECOMMENDATIONS
Institutionalizing Accountability and Transparency: Ghana should ensure that it goes beyond
the rhetoric’s by subjecting the oil sector to EITI scrutiny and provide it with legal codes to make
it mandatory for public disclosure. There should be regular publication and disclosure of all
transactions, agreements and petroleum – gas payment. The Freedom of Information Act should
be given operational wing, such that it will offer the public access to government information and
bolster public confidence in the state. Institutions of transparency and accountability should be
resourced and strengthened to function independent of government.
Improving the Capacity of Anti-Corruption Institution: Anti-corporation institutions in
Ghana such as CHRAC, Serious Fraud Office, the BNI, the Police and the Judiciary should be
financially and humanly resourced and independent to be effective in the discharge of their
duties. The Judiciary should perform their duties impartially and the legislative laws should
provide appropriate punishment for corruption. The Whistle Blower Bill should be passed into
law to allow individuals to report cases of corruption to appropriate institutions for action to be
taken on them. The media should monitor and actively report on government activities. The anti-
corruption institutions should possess more powers to prosecute corrupt practices.
Establishing Legal and Regulatory Framework: Ghana must move away from the ad-hoc and
piecemeal legal and regulatory laws on the petroleum sector. It should develop robust legal and
regulatory laws to fill the gaps in upstream and midstream sectors and govern production and
exploration. A moratorium on new exploration licenses should be enacted as government
strengthens it legal and regulatory laws. GNPC should be an autonomous entity to enhance its
functions and duties.
Strengthening Civil Society and Other Third-State Actors: Civil society groups and other
third-state actors should actively monitor and engage the government by promoting national
dialogue. It should criticize, suggest, publish government dealing and activities and keep the
public updated on events in the oil sector. Civil society groups should build capacity and develop
expert knowledge to effectively functions well in the oil sector.
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Deepening Governance and Building State-Capacity: Government should sustain the current
multi-party democratic gains and strengthen the process of governance. The capacity of
government agencies, ministries and departments should be developed through periodic
workshops and seminars to keep them updated to the task. Parliament should be institutionally
enhanced to have sufficient oversight responsibility over government spending and expenditure.
It should develop expertise in the appropriate oil committees to keep the House well-informed
and activity plays their role well.
Trade Liberalization and Diversification Policies: Ghana should adopt better policies that
minimize the concentration of Dutch disease, and crowding out effect and contract other sectors
of the economy. Such policies should improve competition and avoid trade restrictions, fight
exchange rate appreciation and accumulate budget surpluses, reduce the number of days for
setting up business and divert investors and FDIs into non-oil sector. It should sustain its
diversification programme and improve on its investment laws to attract private investment and
donor funds. In this regard, Ghana Investment Promotion Centre (GIPC) should be institutionally
equipped and resourced to play an active role.
Public Financial Reforms and Re-inventing State Revenue Agencies: Ghanaian Government’s
attempt to computerize the Public Financial System through the public Financial Management
Reform (PFMR) has been lying ideal for over decades. The reform however, is urgent in the
advent of the oil boom to inject fiscal and monetary discipline into the public financial system. It
will strengthen revenue collection agencies, promotes transparency and accountability, improves
public expenditures and avoid wasteful spending. Government should therefore be committed to
these reforms to build the capacity of state agencies to meet the demand of the commercial
market.
133
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