ACEP’s Analysis on the 2017 Budget with Focus on the Energy Sector

Africa Centre for Energy Policy (ACEP’s) analysis of the 2017 budget is presented below, taking into consideration the power and petroleum sectors.

For the purpose of this analysis, the power sector focuses on government’s key interventions in tackling power sector challenges whilst the petroleum sector focuses on petroleum revenue allocation and investment. We have highlighted key issues of concern and made recommendations that will improve energy sector governance for sustainable development.

The Power Sector

The power sector priorities are directly linked to the growth of the Ghanaian economy. To that extent, ACEP was eagerly awaiting clear articulation of the urgent matters required to manage the power sector in a way that positively impacts on the health of the economy.

The budget shows in some detail, how government intends to clean up the ailing power sector to ensure reliable and affordable power supply in a way that significantly deviates from existing arrangements, which ACEP believes are weak. Notwithstanding, there are also some visible gaps which the budget should have captured.

Government Interventions

1. Restructuring of the energy sector debt

The current government is committed to continue the efforts of the previous government in restructuring the debt of the power sector. What is novel about the proposed arrangements is the raising of bonds to write off the debt of the utilities and accelerate the process of ensuring a clean balance sheet of the utilities on the back of the Energy Sector Levies Act (ESLA).

The use of the ESLA to pay GHS787.03 million of the debt of the utilities in 2016 is commendable. However, the fact that VRA still struggles to raise its own letters of credit is an indication that a new approach to dealing with the debts is important.

2. Electricity Tariff Reduction

The budget announced 50% reduction of levies on electricity; a reduction of National Electrification Levy from 5% to 3%, and Public Lighting Levy from 5% to 2%. This is in addition to budgeted lifeline subsidy of GHS83.8 million. This will provide some relief for consumers of electricity. We are however disappointed that the 17.5% VAT on industrial consumers was not removed. This could have freed up some cash flow for businesses to invest in expansion and improve production.

In fact, the VAT on industrial consumers is another nuisance tax because government eventually reimburses VAT to industry through the sale of their output. Since this has a neutralizing effect, it only makes sense for government to remove the 17.5% VAT on electricity to free up capital for investment. Otherwise, this becomes a lazy way of frontloading government revenue without considering its impact on the health of businesses.

3. Consolidation of all hydro generation under VRA

The government promises, in the budget, to bring all hydro generation under VRA and create a separate thermal entity to hold the thermal assets currently held by VRA. ACEP is happy about this decision, having advocated for this for so long. This will shift the burden of the highly mismanaged thermal component of VRA from the company and improve efficiency of operation and decision-making through private sector participation. What ACEP has also proposed in the past is for the prospective thermal company to remain a subsidiary of VRA with private sector participation through listing on the Ghana Stock Exchange. We recognize that a restructured thermal company could be beneficial to VRA to stabilize its cash flow when the water levels are low in the dams.

4. MCC Compact II

It was refreshing to note from the budget that the Millennium Challenge Corporation (MCC) Compact II will be continued. The Compact is recognized by the government to be in force, requiring urgent steps to resolve outstanding disagreements between stakeholders to allow for its implementation. Reforming ECG is important for the efficient management of the power sector and to ensure sustainability of plans to retire the huge energy sector debt. However, this must be done by building the necessary consensus, mindful of the timelines to comply with the Compact agreement.

5. Renewable Energy

The 2017 target of 2-3% of renewable energy generation promised in the budget is big on solar energy. In the short to medium term, we agree that solar can be deployed quicker than other forms of renewables.

However, the mode of deployment should account for the long term implications on other sectors of the economy. The impact of utility scale solar on agriculture and climate change, for example, will have to be assessed and properly contextualized. There is a bigger role of planning and zoning of potential areas where solar can be deployed, but this is currently not given the priority it deserves.

We encourage government to be more aggressive on rooftop deployment while the Energy Commission completes its consultation on the Renewable Energy Master Plan (REMP) with all stakeholders, which will set the priorities for all the options available to Ghana. The rooftop option helps to spread the investment requirement to many individuals and does not require further displacement of flora and fauna. Biomass and wind power are other options to explore.

6. Capacity Addition

The budget estimates additional installed capacity of 1,200 MW in 2017. This will result in a total capacity of 5,332 MW by end of year. Current demand peaks around 1900-2000 MW. By applying the 10% growth rate used by Energy Commission, demand is expected to grow to about 2,200 MW by end of 2017.

The total generation capacity required for 2017, accounting for reserve margin, will therefore be about 2,500 MW. The occurrence of power outages indicate that notwithstanding existing capacity of 4,132 MW, supply is unable to meet current demand.

A confluence of factors, including the low availability of TAPCO, the decreasing output from Akosombo, among others has resulted in current supply deficit. We therefore support the government’s plans to conduct a technical audit of existing power infrastructure.

We believe that this will form the basis to retire old, inefficient and expensive plants, and make way for low-cost efficient plants. We further support government’s intention to implement a comprehensive power sector master plan for the development of a resilient and reliable power sector that is capable of meeting our power needs.

Concerns

In spite of the positives in the budget, there are real concerns that need attention.

1. Fuel Supply

Security of the supply of fuel for power generation is a major hurdle for the sector. Sadly, not much was said about this. With high costs of electricity currently, cheaper sources of fuel are imperative to ensure some savings that can be passed on to consumers to whip up demand for the excess capacity in generation. Government needs to consolidate all plans for gas imports and ensure that all thermal plants run on gas. This is one way electricity tariff can come down. We expect Jubilee, TEN and Sankofa to provide significant relief for 2018 and beyond. However, with estimated total volume of about 380mmscf/d from these fields, about additional 100mmscf/d of gas is required to meet time-of-use demand.

2. Nigeria Gas

Government should have provided information on the plans underway for gas supply from Nigeria. The historically unreliable gas supply from Nigeria makes planning difficult given that we have a take or pay agreement with Nigeria Gas. Ghana needs to be able to adequately anticipate the level of gas supply from Nigeria to prevent glut or undersupply of gas. It is therefore important to bring to closure what the future scenario of gas supply from Nigeria will be.

3. Liquefied Natural Gas (LNG)

The decision to bring in LNG has been on the drawing board for more than 5 years. The Ministry of Energy confirms that three contracts have been signed with investors. However, the gas supply scenario shows that Ghana will need only one LNG to augment domestic sources. ACEP recognizes that at least one LNG is critical for gas supply stability, given our experience with gas from Jubilee and Nigeria.

Recommendations

ACEP therefore recommends the following:

1. The thermal company to be established should become a subsidiary of VRA Hydro with private sector participation through the stock market.
2. Government should consolidate fuel supply plans to ensure cost reduction. Some of the IPPs are divesting into providing alternative arrangement for fuel because planning for gas supply has been disjointed and unreliable. The reality is that all the separate investments by the IPPs into storage capacity and plant conversion for the use of Light Crude Oil (LCO) will be passed on to the consumer through the tariff.
3. Without further delays, government needs to review the Nigeria Gas agreement to establish a clear case for its reliability. This will help to properly plan gas supply sourcing and avoid the recurrent non-performance. It must also be said that debt owed for the supply of gas needs to be paid. We therefore urge government to develop a comprehensive plan to do so.
4. Government should fulfil its promise of reviewing all power agreements. This is relevant for renegotiation of expensive power plants procured in the past.

The Oil and Gas Sector

The budget statement on petroleum was limited to receivables for 2017. ACEP’s petroleum sector analysis was done within the context of compliance with the PRMA of revenue outflows from the PHF to the various funds, and ABFA allocation to the priority areas. Some areas of concern have been raised and recommendations proposed to improve upon petroleum revenue management and investment in the 2017 fiscal year.

1. Revision of benchmark price is a good initiative.

We wish to commend the Ministry of Finance for managing its own expectations and that of Ghanaians of the extent to which our oil resources can support the national budget and overall development finance. The Ministry’s decision to revise the benchmark revenue (BR) based on benchmark price of US$73.2264 per barrel, derived from applying PRMA’s seven year moving average formula, to US$56.142 per barrel based on market predictions by expert institutions is commendable. This is particularly important when the Ghana Stabilisation Fund (GSF) has been depleted in a manner that renders it irrelevant for the purpose of stabilising the ABFA. This also reveals the extent of unreliability of the Seven Year Moving Average proposed in the PRMA. Since 2014, the formula has missed the actual price by being either overly pessimistic (as was the case in 2014) or optimistic (as has been the case since 2015).

2. Distribution of petroleum revenues are consistent with the provisions of the PRMA.

The Finance Minister made it clear that the revenue distribution formulae in the PRMA will be followed. Section 16(1) of the PRMA (as amended) prioritizes allocation of oil revenues to the national oil company (NOC), the Annual Budget Funding Amount (ABFA), the Ghana Petroleum Funds (GPF) which comprises the Ghana Stabilization Fund (GHF) and the Ghana Heritage Fund (GHF) and for exceptional purposes according to the Act, in that order. This is precisely what was done in the budget.

We observe that allocation to GNPC in 2017 is below the 55% of net carried and participating interest ceiling prescribed by the PRMA in subsection 3a of section 16.

In accordance with Section 18(1) of the PRMA, exactly 70% of the BR (total petroleum receipts less allocation to GNPC), amounting to US$169,458,674.13 has been allocated to the ABFA for the 2017 financial year. Also, exactly 30% of the BR has been allocated to the GPF.

Table 1: 2017 Net Revenue Allocation to ABFA and the GSF (GSF and GHF)

Source: 2017 Budget Statement

3. Priority areas to receive support from the ABFA are very focused and clear.

Unlike the historical thin spreading of revenues to many sectors of the economy, the current budget choice of priority areas for ABFA investment are clear, much focused, and fall within the prescribed priority areas specified in Section 21(3) of the Petroleum Revenue Management (PRMA) Act, 2015 (as amended) Act 815. The priority areas reflect ACEP’s persistent advocacy for oil revenue investment in pro-poor sectors of agriculture, education and health. We take particular notice of the fact that about 53% of ABFA will be spent in the pro-poor sectors.

It is clear that government has moved away from using ABFA to finance expenditure and amortization of loans for oil and gas infrastructure. This was one of the priority areas until 2016. In 2016, Ghana Gas financed its loan obligations through the sale of the liquids (propane, etc) it processed. Overall, it appears that more money will be freed for specific sustainable development investments.

4. Goods and services expenditure of the ABFA is precise and trackable.

The education sector will receive about 26.5% of ABFA, constituting 88.6% of ABFA allocation to goods and service in 2017. This is the amount to be spent on the government’s flagship free SHS policy from oil revenue. For the first time there is greater clarity on what exactly the recurrent expenditures of the ABFA will go into. This helps to track impact of not just the portion that goes into physical infrastructure but also recurrent expenditures. Investing in education in particular, fits into the key objective of the PRMA in Article 21(2) (b) to promote equality of economic opportunity with a view to ensuring the wellbeing of citizens.

5. Funding for the Public Interest and Accountability Committee (PIAC) is commendable.

For the first time, PIAC received full disbursement of its budget from the ABFA to the tune of GHC960,000 in 2016 following the 2015 amendment to the PRMA to provide funding to support PIAC’s work. The funding allocation to PIAC has almost doubled to GHC1,900,000 in 2017. ACEP wishes to commend the previous and current governments for heeding civil society call for adequate funding for PIAC to strengthen its oversight responsibilities prescribed by law. This will help shift the focus from lack of funding to ensuring that PIAC delivers on its mandate.

6. The non-allocation of 25% of ABFA to Ghana Infrastructure Investment Fund (GIIF) is welcomed.

The GIIF Act and PRMA (as amended) prescribe that up to 25% of the ABFA earmarked for capital expenditure must be disbursed to the GIIF. This arrangement implies that 25% of the investment portion of the ABFA every year would be isolated from the governance framework established in the PRMA, thereby making it difficult to track petroleum revenue utilization. Also, ACEP’s concern has been that the ABFA is structured as an investment fund which had already been leveraged for loans. The GIIF allocation provision was therefore only an attempt to create multiple collateral security for the same money moving across different funds.

Concerns

1. Investment Attraction

Amidst price uncertainties in global petroleum market, Ghana can only sustain petroleum sector contribution to the budget by increasing upstream investments. Therefore, government should have shown how the new Petroleum Act will be operationalised to attract investment in the petroleum sector.

2. GNPC’s Focus on its Mandate

ACEP supports the allocation of adequate funds for GNPC’s growth. We are, however, concerned about how GNPC has utilized its share of petroleum revenues in the past on activities outside its core mandate. If this trend continues, GNPC will fail to be the vehicle for maximizing the value of Ghana’s oil and gas resources as envisioned by the current government. This is particularly an issue of concern because, per section 16(3) of the PRMA, GNPC will be weaned off its share of net carried and participating interest by 2026. We therefore call on the government to fulfil its commitment to restructure GNPC in a way that shields the NOC from political interference so that it can focus on its core mandate.

3. Clarity on capping the Stabilization Fund

The Stabilization Fund was capped at $100 million in the 2016 budget. What is not clear, however, is whether this government will maintain low cap or grow the fund to create a sustainable buffer that enables the fund to deliver on its purpose of stabilizing the ABFA in periods of low receipts. ACEP maintains its recommendation for the fund to grow to about 40% of the ABFA to provide strong buffer capable of absorbing shocks introduced by price volatility.

4. Compliance with Section 21(2) of the PRMA

Equitable distribution and investment of ABFA to achieve even and balanced development of the regions remains a challenge, but the Minister failed to highlight on these in the 2017 budget. Using 2015 as a case in point, ACEP observed that only 16 out of 172 capital projects under education infrastructure were located in all three regions in northern Ghana. None of these regions received health investments. Approximately 61% of region-specific capacity building expenditure went to four regions in Southern Ghana with Greater Accra alone receiving more investments than was utilized in all the three northern regions combined; a difference of GhS190,267.41. Oil revenues were heavily invested in Southern Ghana. This did not amplify the ABFA objective to undertake even and balanced development of the regions. ACEP urges the government of Ghana to take careful cognizance of Article 21(2) of the PRMA when selecting specific projects in 2017 under all the priority areas.

Recommendations

We therefore recommend the following:

1. The government should pay attention to investment attraction in the upstream sector. There are currently non-performing contracts which should be reviewed as a matter of urgency to get the contractors to be either active or vacate the blocks so they can be re-awarded to serious companies.
2. Government should focus investment in the priority areas on fewer projects to facilitate the achievement of the objectives of the PRMA as stated in Section 21(2).
3. The ministries of Agriculture, Education, Health, Roads and Highways, and Railways Development should publish the list of projects to benefit from the ABFA to allow civil society to track the projects. This will improve transparency and efficiency in ABFA utilization.
4. The government should ensure project continuity. Funds allocated to irrigation infrastructure should prioritize uncompleted irrigation projects that the previous government began. This will ensure that projects are completed on time to cut down on cost overruns and to serve our farming communities. Government must also ensure that monies allocated and disbursed can easily be tracked by civil society groups to assess impact. We further recommend that the government reviews existing road contracts and see to the completion of existing road infrastructure projects initiated by the previous government.
5. The government, in reviewing the GIIF law, should abolish allocation of portions of the ABFA to the GIIF, and review Section 21(4) of the PRMA to that effect.

Conclusion

ACEP believes that should the government respond positively to the concerns raised and heed to recommendations made, Ghana’s power and petroleum sectors will support the country’s sustainable development agenda beyond what the country has already experienced.

Signed

Mr. Benjamin Boakye

Deputy Executive Director

ACEP

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