Legislative Review 2010-09

CONSOLIDATEDREPORTONPROPOSEDPETROLEUMBILLSAND LOCALCONTENTPOLICYFORTHEPETROLEUMSECTOR
By: Dr.DominicAyine FacultyofLaw UniversityofGhana Submittedto: TheGhanaResearchandAdvocacyProgramme(GRAP) Accra Email:dominic.ayine@ayineandfelli.com;akuritinga@gmail.com

September2010
ReviewofPetroleumBillsandLocalContentPolicy
Sept.2010
TableofContents
I. II.
A. B.
INTRODUCTION...................................................................................................................................3 BACKGROUNDANDCONTEXTSOFTHELEGISLATIVEANDPOLICYPROPOSALS......................................4 THECONSTITUTIONALCONTEXT.......................................................................................................................4 LEGALANDREGULATORYCONTEXTS .................................................................................................................6 . i. DomesticLegalandRegulatoryContext .............................................................................................6 . II. INTERNATIONALLAWCONTEXT........................................................................................................................8 C. THEPOLITICALECONOMYCONTEXT..................................................................................................................9
III. THEPETROLEUMREVENUEMANAGEMENTBILL.................................................................................10
A.
INTRODUCTION............................................................................................................................................10 B. LEGISLATIVEOBJECTANDPURPOSE.................................................................................................................10 C. NATUREANDSCOPEOFTHEOILFUNDS...........................................................................................................11 D. ACCUMULATION,WITHDRAWALANDSPENDINGREGIME...................................................................................12 E. INVESTMENTSTRATEGY ................................................................................................................................17 . F. GOVERNANCEFRAMEWORK...........................................................................................................................19 G. RELATIONSHIPOFTHEBILLTOTHEEXISTINGLAW .............................................................................................23 . H. INTERNATIONALBESTPRACTICEREVIEW.........................................................................................................24 Box2:AlaskaLawArticle01:AlaskaPermanentFund..............................................................................26 Sec.37.13.120.Investmentresponsibilities................................................................................................26 I. RECOMMENDATIONS....................................................................................................................................27 IV. THEGHANAPETROLEUMREGULATORYAUTHORITYBILLANDTHEPETROLEUM(EXPLORATIONAND PRODUCTION)BILL.....................................................................................................................................29
A. B.
INTRODUCTION............................................................................................................................................29 OVERVIEWOFTHEBILLS................................................................................................................................29 i. TheGhanaPetroleumRegulatoryAuthorityBill...............................................................................29 ii. ThePetroleum(ExplorationandProduction)Bill..............................................................................31 C. RELATIONSHIPWITHEXISTINGLAW ................................................................................................................32 . D. BESTPRACTICEREVIEW................................................................................................................................32 E. CONCLUSIONANDRECOMMENDATIONS..........................................................................................................36 V.

A. B.
LOCALCONTENTPOLICYPROPOSAL...................................................................................................37
INTRODUCTION............................................................................................................................................37 OVERVIEWOFTHELOCALCONTENTPOLICYFRAMEWORK...................................................................................38 C. EVALUATIONOFTHELOCALCONTENTPOLICYFRAMEWORK................................................................................40 D. INTERNATIONALBESTPRACTICEREVIEW .........................................................................................................42 . i. CanadasBenefitsPlanModelinOilandGas....................................................................................42 III. WTOCOMPATIBILITYANALYSIS....................................................................................................................45 C. RECOMMENDATIONS....................................................................................................................................51
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I.
Introduction
BytheTermsofReferencecontainedintheconsultancycontractbetweentheGhana Research and Advocacy Programme (GRAP) and me, I am required to undertake a comprehensivereviewofthe(a)DraftPetroleumRevenueManagementBill(PRMB); (b)DraftPetroleumRegulatoryAuthorityBill(PRAB);(c)thePetroleum(Exploration andProduction)Billand(d)DraftLocalContentandParticipationPolicyFramework (LCPPF).Foreachoftheforegoingdocuments,Iamrequiredunderthesaidcontract to conduct a thorough assessment of the key provisions and to comment on their suitability, appropriateness and compliance in light of internationally accepted best practice in the petroleum industry. The review of the documents is required to be accompanied by suggestions for their modification, if necessary, and recommendations as to how the draft legislative and policy proposals could be re engineeredtoenhancetheattainmentofpropoorandpeacefuloutcomes. In accordance with the above Terms of Reference, this report provides a comprehensiveanalysisofthethreedocuments.Thereportisdividedintofiveparts, inclusive of this introduction. Part II discusses the background and contexts of the legislative and policy proposals, including the constitutional, legal and political economy contexts within which they are being put forth. The Petroleum Revenue ManagementBillisanalyzedinPartIII,followedbytheGhanaPetroleumRegulatory Authority Bill in Part IV. The report concludes with an analysis of the Local Content PolicyProposalsinPartV. In view of the disparate policy objectives that animate each of the legislative and policyproposals,thereportdoesnotcontainglobalrecommendations.Insteadeach section of the report contains its own set of recommendations for improving the designandimplementationoftheproposalswhentheyareeventuallyenactedinto law or otherwise transformed into actual policy directives. These recommendations are made against the backdrop of the key objective of the report, which is to determine the extent to which these proposals will, in the long run, ensure the attainmentofpropoorandpeacefuloutcomes.Thisobjectiveisinterpretedinbroad terms to mean that the report should draw attention to either the presence or absence of legislative and policy proposals that are responsive to the needs, rights andinterestsofthepoor(howeverdefined)andthataredesignedtominimizefuture conflictsarisingoutofeithertheresourceallocationdecisionsofpublicagencies(in thecaseforinstanceofthePetroleumRevenueManagementBill)ortheexerciseof regulatorypower(inthecaseofthePetroleumRegulatoryAuthorityBill)orboth. In addition to the focus on the principal objective of the report, attention is also drawntolegaltechnicaldeficienciesoftheproposalsinlightoftheexistinglawand theprinciplesoflegislativedrafting.Regardingthelatter,thereporthighlightsissues of textual clarity and simplicity, legislative coherence (i.e. the extent which the internal structure and provisions of the draft proposals display substantial level of consistency)andsensitivitytocontext.
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II.
BackgroundandContextsoftheLegislativeandPolicyProposals
a. TheConstitutionalContext
Alllegislationandpoliciesofanykinddealingwiththeexploitationofnaturalresourcesin general must take account of the constitutional regime dealing with the ownership and governanceofnaturalresources.ThisisbecausetheConstitutionisthesupremelawofthe country and by its own internal logic, any law or policy, or even actions and omission of stateagenciesandofficials,thatareinconsistentwithorincontraventionofitsprovisions are emptied of their legal effect. In analyzing the proposed legislation and policies on petroleum, it is therefore important to take account of the Constitution as the most important background legal framework, especially its provisions dealing with the governanceofnaturalresources. Intermsofarticle267(6)oftheConstitution,theownershipofallmineralresourcesintheir natural state is vested in the President on behalf of and in trust for the people of Ghana. Thusmineralresourcesfoundin,underoruponanylandinGhana,rivers,streams,water courses,theexclusiveeconomiczone,anareacoveredbytheterritorialseaorcontinental shelfarepubliclyowned.ThoughtheConstitutiondoesnotdefinethetermnaturalstate, theMineralsandMiningActdefinesamineralasanysubstanceinsolidorliquidformthat occurs naturally in or on the earth, or on or under the seabed, formed by or subject to geological processes... This does not however include petroleum which is defined under thePetroleum(ExplorationandProduction)Law,1984(PNDCLaw84)tomeancrudeoilor naturalgasoracombinationofboth.1Thesearebasicallyhydrocarbonsoccurringintheir natural state. Both the Minerals and Mining Act and the Petroleum (Exploration and Production) Law vest ownership of mineral and petroleum resources occurring in their naturalstateinthePresidentintrustforthepeopleofGhana.2 The regime of public ownership established by and under the Constitution has significant implicationsforthegovernanceofnaturalresources.Notonlydoesitstrengthenthehand ofthestateinrespectoftheallocationofpropertyrightsinnaturalresourcesintheexercise of its ownership rights but also in relation to state supervision of how such rights are exercisedbythosetowhomtheyhavebeenallocated.Consequently,itisonlythestatethat cangrantrightsofexploitationofnaturalresourcessuchasoilandgas.Inthisvein,article 268(1)oftheConstitutionsubjectssuchgrantstoparliamentaryoversightbyprovidingthat thegrantofanyrightorconcessionfortheexploitationofanynaturalresourceissubjectto theratificationbyParliament,whichalonehastheprerogativetoexemptsuchgrantsand concessionsfromtheprocessofratification.
1 2
SeeSection33ofPNDCLaw84 Section2,MineralsandMiningAct,2006(Act703)andSection1,PNDCLaw84.
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As the overarching legal regime for the conduct of public affairs, the Constitution also contains a number of general principles of public conduct that impact significantly on the allocationandregulationofresourcerights.Oneofsuchgeneralprinciplesiscontainedin Article1whichenshrinestheprincipleofpopularsovereigntyandrequiresthatthepowers ofgovernmentbeexercisedinthenameofandforthewelfareofthepeopleofGhana.The Constitutionleavestothegovernmentthetaskofdefiningwelfarethroughtheexerciseof itspolicyandlawmakingpowers.Butwhatthismeansinessenceisthateverylegislative proposal has to take account of this welfare principle. Consequently, legislative proposals such as the ones under review must be welfareenhancing if they are to meet the constitutional litmus test set by the welfare principle of article 1. In concrete terms, for example,apetroleumagreementshouldideallycompeloperatorstointernalizethesocial costsofenvironmentalpollutionortoaccountfortheirbreachesofthepropertyrightsof otherpersons(e.g.landownersinthecaseofonshoreoperations).Thisisbecausefailureto internalizesuchcostscouldpotentiallyreduceoverallsocialwelfare. Other general constitutional principles of significance to this review exercise are the directive principles of state policy contained in Chapter 6 of the Constitution, the fundamentalhumanrightsprinciplesoftheBillofRightsinChapter5andtheprincipleson theexerciseofdiscretionarypowerbypublicofficialscontainedinarticle296.Thedirective principlesaremeanttoserveasguidepoststodecisionmakingbypublicoffices,especially intheformulationandimplementationofpublicpolicy.Theseprinciplesarejusticiableand canbeenforcedagainstanypublicorprivateentitywhoseconductisinconsistentwithorin contraventionoftheirletterandspirit.3Inthesamevein,thehumanrightsprinciplesserve asbenchmarksnotonlyforpurposesoftheformulationandimplementationofpublicpolicy butfortheconductofpublicaffairsgenerally.Forinstanceapolicyofdiscriminationinthe allocation of natural resource rights or in the exercise of regulatory power in the natural resourcessectormaybechallengedifanyofthesuspectcriteriafordecisionmaking(e.g. ethnicity, political affiliation, gender etc) can be proved to have constituted the basis for such allocation. Also the exercise of discretionary power in the award of natural resource rights or in the regulation of the natural resources sectormay be challenged on the basis thatthepowerhasbeenexercisedinamannerthatisarbitrary,capriciousorbiasedinany mannerorthattheconstitutionaldutytobefairandcandidinpublicdecisionmakingwas notobservedinbreachofarticle296oftheConstitution. Finally, there are a number of constitutional bodies whose functions are critical to the realization of the core objectives of some of the legislative proposals under review. With respectinparticulartothePetroleumRevenueManagementBill,therolesoftheBankof GhanaandtheAuditorGeneralareimportant.ThemandateoftheBankofGhanaderives from article 183 of the Constitution. As the Central Bank, the Bank of Ghana has a constitutional responsibility to, among others, encourage and promote economic development and the efficient utilisation of the resources of Ghana through the effective and efficient operation of the banking and credit system. As shall be pointed out in due course,thisfunctioniscriticaltotheBanksroleinthemanagementofpetroleumrevenue as envisaged under the PetroleumRevenue ManagementBill. The AuditorGeneral on the otherhandderiveshismandatefromarticle187andhasthefundamentaldutytoauditall government and public accounts of Ghana. This certainly includes revenues derived from
SeethecaseofRepublicv.NationalLottoOperatorsAssociation,SupremeCourt(2009)
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theoilandgassectorandtheroleoftheAuditorGeneraliscriticaltotherealizationoftwo of the core objectives of the Petroleum Revenue Management Bill transparency and accountabilityinthemanagementofpetroleumfinancialresources. b. LegalandRegulatoryContexts i. DomesticLegalandRegulatoryContext The current legislative proposals are not being crafted in a legal vacuum but are being formulatedagainstthebackdropofanumberofexistinglegalarrangementsgoverningthe oil and gas sector. There are laws and regulations in force that have either a direct or indirect bearing on the sector and these cover a wide spectrum of issues upstream and downstreamregulation(includinglocalcontentaspectsofoperationsinthesesubsectors), taxationandthecollectionandreceiptofrevenue. TheprincipalpiecesoflegislationdirectlygoverningtheoilandgassectorarethePetroleum (Exploration and Production Law, 1984 (PNDC Law 84), the Ghana National Petroleum CorporationLaw(PNDCLaw64),thePetroleumIncomeTaxLaw,(P.N.D.C.L188),theEnergy Commission Act, the National Petroleum Authority Act, the Environmental Protection AgencyActandtheOilinNavigableWatersAct. P.N.D.C.L84wasenactedin1984toregulatethegrantofexplorationandproductionrights topetroleum.Inbroadterms,thisLawsetsout,amongotherthings,thelicensingregimefor the exploration, development and production of petroleum, the mandatory terms and conditionsofpetroleumagreementsnegotiatedbetweenthecontractorandGNPCandthe Government,developmentandproductionofpetroleum,thebasisforthegrantofrightsto petroleum and the suspension and termination of such grants, the fiscal requirements of petroleum operations and the general statutory framework for oversight of the upstream petroleum sector. Principal responsibility for such oversight is placed on the Minister for Energy but a critical role is assigned to the GNPC which operates both as a commercial entity and a regulatory agency. The GNPC was established as a stateowned entity under PNDCLaw64withadualmandate"toundertaketheexploration,development,production and disposal of petroleum" and also to ensure compliance with petroleum agreements it entersintowithoperatorsinthesector.Overtheyears,theGNPChasservedandcontinues to serve as the frontline public agency dealing with petroleum law and policy in the upstream subsector due to this dual commercial and regulatory mandate under its establishmentstatute. The regulation of the downstream petroleum subsector is shared between the National Petroleum Authority and the Energy Commission under their respective establishment legislation(theNationalPetroleumAuthorityActandtheEnergyCommissionAct).TheNPA is charged with the regulation, oversight and monitoring of activities in the petroleum downstreamindustryandtheadministrationoftheUniformPetroleumPriceFundwhich,as thenamesuggests,seekstoprovidethebasisfortheuniformpricingofpetroleumproducts throughoutthecountry.Theimportation,supply,marketinganddistributionofpetroleum products are within the regulatory jurisdiction of the NPA. The NPA Act has established a
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complaints settlement committee to hear and determine complaints from the general public (especially from consumers of petroleum products) regarding services and pricing. TheActalsoprohibitsanticompetitivepracticessuchasmonopolizationandcollusiveprice fixingbyoilservicecompanies. The EnergyCommission, on the other hand, was established to regulate the management and utilization of energy resources and its regulatory remit extends to the licensing of companiesinvolvedintheoperationofpetroleumrefineries,bulkstorageofcrudeoil,the operationofliquefiedpetroleumgasstationsandbulktransportationofpetroleum. In some ways, there are clear overlaps of functions between the NPA and the Energy Commission. Forexample,theregulatoryreachofbothagenciesextendsallthewaytothe pointofsaleofpetroleumproductsanditisnotexactlyclearwhichagencyhasthemandate toregulatesuchactivitiesaspricing.4 The regulation of the environmental aspects of oil and gas exploration, development, production and transportation (shipment by water) is covered by the Environmental Protection Agency Act (Act 490) and the Oil in Navigable Waters Act, 1964 (Act 235). The EPAActcreatestheEnvironmentalProtectionAgencyandprovidestheframeworkforthe general regulation of activities with potential adverse effects on the natural environment. The Environmental Impact Assessment Regulations, 1999 (LI 1652) have listed oil and gas operations as having potential adverse impacts on the environment and require that personsinvolvedinsuchoperationsobtainenvironmentalimpactclearancebeforeengaging inthem.Thisimpliescompliancewiththeproceduresandsubstantiveobligationsimposed inrespectofenvironmentalimpactassessment. TheOilinNavigableWatersActisthemainlegislativetoolthatguidestheshipmentofoil resourcesbyseainGhana.TheActhasthepurposeofpreventingthepollutionofthesea and other navigable waters by oil. It was passed pursuant to the 1954 International Convention for the Prevention of Pollution of the Sea by Oil (the MARPOL Convention). TheActprohibitsthedischargeofcrudeoil,fueloil,heavydieselandlubricatingoilintothe prohibited areas of the sea by a ship registered in Ghana.5 The Minister responsible for Shippinghaspowerbylegislativeinstrumenttodesignateanyareasoftheseaasprohibited areas of the sea.6 Where the oil is discharged, into the territorial waters of Ghana or its inlandwaters,fromavesseloraplaceonlandoranapparatususedfortransferringoilfrom ortoavesseltheownerormaster,orpersoninchargeoftheapparatuswillbeliablefor thepollution.7Theownerormasterifheisabletoprovethattheoilormixtureinquestion wasdischargedforthepurposeofensuringthesafetyofthevesselorpreventingdamageto anyvesselorcargoorofsavinglifewillnotbeliableforthepollution.8Thelawrestrictsthe transferofoilatnightunlessthereistherequirednoticetothateffect.9Incaseswhereoilis dischargedfromavesselintowatersorfoundtobeescapingorhasescaped,theowneror
4 5
Seeforinstancesection39oftheEnergyCommissionAct(Act541)andsection.oftheNPAAct. Section1ofAct235 6 Section2ofAct235 7 Section3ofAct235 8 Section4ofAct235 9 Section12ofAct235
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master of the vessel or occupier of the land is to report to the harbour master or port authority.Failuretoreportmayleadtoaconvictionandfine.10 ii. InternationalLawContext Apart from the above domestic legal and regulatory regime, the proposed legislative and policy measures are being formulated and will be eventually implemented within the contextofdevelopmentsintheinternationallegalenvironmentthatsignificantlyimpactthe waytheoilandgassectorisregulated.Giventhepreponderanceofforeignparticipationin thesector,theinternationallegalregimeontheregulationofforeigndirectinvestmentis particularly important. The World Trade Organization (WTO) Agreement on TradeRelated InvestmentMeasures(TRIMS)andtheinvestorprotectionjurisprudencearoundChapter11 oftheNorthAmericanFreeTradeAgreement(NAFTA)arecriticalbenchmarksforavoiding challengesofthesemeasuresattheinternationallevelbeforearbitraltribunals. TheTRIMSAgreementcameintoforcein1995aspartofthemultilateralagreementsofthe WTOanditsobjectandpurposeistodisciplineinvestmentmeasuresthathavearestrictive impactonthefreeflowofgoodsacrossnationalboundaries.Policiessuchaslocalcontent requirements and trade balancing rules that have traditionally been used to promote the interests of domestic industries and combat restrictive business practices are now prohibited under the Agreement. As shall be pointed out in the segment of this report dealing with the Local Content Policy Framework, the TRIMS Agreement has nontrivial consequences for the enactment and implementation of the proposed local content policies. Chapter 11 of NAFTA was designed to protect the interests of foreign investors,with the continuing goal of liberalizing international investment. This chapter establishes a mechanism for the settlement of investment disputes that attempts to achieve equal treatmentofinvestorsinaccordancewiththeprinciplesofinternationalreciprocityanddue process before an impartial tribunal. However, the use of its provisions to trump governmentalpoliciesandactionsthatconcernforeigninvestmenthasraisedanumberof concerns.Criticshavearguednotablythat: Chapter11couldundermineeffortstoenactnewlawsandregulationsinthe public interest, in particular those that would protect the environment and humanhealth; Chapter 11 could require governments to pay compensation to polluters to stop polluting, even if the continuation of their activities would adversely affectpublichealthandwelfare; Chapter 11 is counter to the Rio Declarations polluter pays principle and maycauseregulatorychillintheareaofenvironmentalprotection.
NAFTA ARTICLE1110:EXPROPRIATIONANDCOMPENSATION
1.NoPartymaydirectlyorindirectlynationalizeorexpropriateaninvestmentofaninvestorofanotherPartyinitsterritoryortakea measuretantamounttonationalizationorexpropriationofsuchaninvestment(expropriation),except: (a)forapublicpurpose;
10
Section13ofAct235
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(b)onanondiscriminatorybasis; (c)inaccordancewithdueprocessoflawandArticle1105(1);and (d)onpaymentofcompensationinaccordancewithparagraphs2through6.
Sept.2010
The main issue with respect to this article is what exactly tantamount to expropriation means.Whatconstitutesthelegitimateexerciseofgovernmentalpowerwhichmaycause economic pressures for selected companies and/or sectors, as opposed to a situation warrantingthepaymentofcompensation?Iftantamounttoexpropriationistoobroadly defined,thenitmaybecomedifficultforgovernmentstointroduceregulationwithoutbeing suedbycompanieswhobelievetheirabilitytomakeaprofithasbeenseverelyhampered by such regulations as was the situation Ethyl Corporation v. Canada and Metalclad v. UnitedMexicoStates.11 AlthoughGhanaisnotasignatorytoNAFTA,theprovisionsofChapter11arefastbecoming customary international law in that the decisions of the NAFTA Panels on investment disputes are fast gaining significance in international investment dispute resolution. Moreover,theprovisionsarebeingadoptedandincorporatedintoimportantinternational investment codes such as the World Bank Guidelines on Foreign Investment, the Energy Charterandotherinternationalinvestmentcodes. c. ThePoliticalEconomyContext Thelegislativeproposalsunderreviewmustalsobeanalyzedwithinthepoliticaleconomy context of the country. Lawmaking is an essentially political process and the resultant legislative outcomes usually, but not always, represent negotiated settlements by various political factions within and, in some cases, outside of the country. These negotiated settlements often portend substantial economic costs and benefits for various groups in society. Thus the process of their formulation and implementation often generates consequential interestgroup pressures on the lawmaking process. A key challenge is therefore how to carefully balance the interests of these groups with the larger public interestandtoensurethatthisbalanceisdulyreflectedinthefinallegislativeoutcome. Fromthepoliticaleconomyperspective,thediscoveryofoilincommercialquantitiesposes a number of challenges that must be addressed by the proposed pieces of legislation. A major challenge is the institutional capacity to manage an oil economy. From the above analysisoftheexistinglegalandinstitutionalframeworksgoverningtheoilandgassector,it isveryclearthatthereisnoshortageofinstitutionstohandlemattersofpublicpolicyand regulation; the challenge is whether these institutions possess the requisite expertise to implementpoliciesandmonitorandenforcelawsthatwouldensurethattheoperationsof oilandgascompaniesarecarriedoutinawelfareenhancingmannerinconformitywiththe welfareprincipleinarticle1oftheConstitution.Further,thelegislativeproposalsmustthe perverseincentiveonthepartofpoliticianstoengageinunprofitableexpenditureinorder to be ahead of the political competition and to sustain power. Relatedto this issue is the needtoprovideaclearandpredictableframeworkforinteragencycooperationinorderto minimizeagencyconflictsoverresourcerents.
11
SeeEthylCorporationv.Canada[1997]andMetalcladv.UnitedMexicanStates[2000]
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Theproposedlegislativeframeworkreviewedheremustalsoaddresscriticalissuesofpublic governance,suchaspublicparticipationinkeydecisionmakingontheoilandgasindustry including environmental impact assessment and compensation for the use of land for oil andgasoperations,corruptionandrentseekingwithingovernment,conflictofinterestand transparency and accountability in the management of resources flowing from the sector. Part of the reasons for the socalled resource curse is the absence of or noncompliance withmechanismstodealwiththesepressingissuesoftheinterrelationshipbetweenpolitics andtheeconomy.Corruptionandrentseekingareparticularlyinsidiousinanemergingoil economy12 and must be addressed in order to assure welfareenhancing use of revenue from oil. As shall be shown later in this report, the Petroleum Revenue Management Bill doesnotadequatelyaddresstheseissues.
III.
ThePetroleumRevenueManagementBill
a. Introduction
The discovery of oil in commercial quantities has raised concerns about the prudent managementofrevenuesthatwillaccruetothecountryfromtheoilandgassector.Within civilsocietyinparticular,therehasbeencallsfortheenactmentoflawsandregulationsto ensure effective, efficient, equitable, transparent and accountable management and utilizationoffinancialresourcesfromoilandgas.Thebasicargumentisthattheabsenceof suchlegislationhasbeenthecauseofabysmalmanagementofoilwealthelsewhereonthe Continentwhichhasresultedincostlysocialconflicts,entrenchedpovertyandwidespread gapsbetweentherichandthepoor.13Legislativeframeworksofthekinddescribedabove areconsequentlybecomingstandardpracticeintheoilandgassectorsofmanydeveloping countries,followingthebestpracticeexamplesofdevelopedcountriessuchasNorwayand theStateofAlaskaintheUnitedStatesofAmerica. The Petroleum Revenue Management Bill is Ghanas answer to the challenge posed by suddenoilwealthflowingintoanonoileconomy.ThequestionhoweveriswhethertheBill, in its current form, adequately addresses the concerns relating to the efficient, effective, equitable,transparentandaccountablemanagementoffutureoilandgasfunds.Ifnot,how can the Bill be improved before it is promulgated into law? Also, a related question is to whatextentdoestheBillmeasureuptointernationalbestpracticeincomparisontosimilar legislationinothercountrieswithatrackrecordofmanagingoilfunds?Andlastly,howpro pooristheBill? b. LegislativeObjectandPurpose The long title to the Bill sets out in broad terms its legislative object and purpose. The primarypurposeoftheBillistoprovideaframeworkfortheresponsible,transparentand accountable collection, allocation and management of petroleum revenue. Petroleum
SeeforinstancethecaseofFWOilInterests,Inc.v.TheRepublicofTrinidadandTobago,ICSIDCaseNo. ARB/01/14,inwhichallegationsofcorruptionwerelevelledagainstofficialsofTrinidadandTobagoconcerning abotchedoilexplorationdeal.Thecaseisdiscussedinfraatp..... 13 SeeCoulombeetal,1995

12
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revenue includes royalties (both in cash and in kind), corporate income taxes, amounts receivedfromdirectorindirectparticipationofthegovernmentinpetroleumoperations,all additionaloilentitlements,dividendspayabletogovernmentfromitsequityinterestandall investmentincomederivedfromaccumulatedpetroleumfunds.14Thisframeworkincludes the establishment of the Ghana Petroleum Account and Ghana Petroleum Funds (i.e. the Ghana Heritage Fund and the Ghana Stabilization Fund) as well as the setting up of quantitativemechanismsforthetransparentandaccountablemovementoffundsfromthe main petroleum revenue account to the subsidiary funds established by law. The overall objective is to ensure that petroleum revenue is managed in a transparent and equitable mannerandinaccordancewiththenationalinterest. c. NatureandScopeoftheOilFunds The Bill proposes the creation of a central custodial account (the Ghana Petroleum Account)attheBankofGhanaintowhichallpetroleumrevenuemustbepaid.TheGhana RevenueAuthority(GRA)hastheprimaryresponsibilityfortheassessment,collectionand accountingofallpetroleumrevenueforpaymentintotheGhanaPetroleumAccount.15Out of this Account, it is proposed to create two subsidiary accounts or funds known as the GhanaHeritageFundandtheGhanaStabilizationFund.Thelatterisdesignedtosafeguard against the impact of the petroleum revenue and production downturns on public expenditureaswellasthemacroeconomicstabilityofthecountry.Theformerismeantto provide a heritage for future generations of citizens from savings and investment income derivedfrompetroleumrevenue. TheGhanaPetroleumAccountisthusanextrabudgetaryarrangementtobeputinplaceto receiveallpetroleumrevenueoutofwhichthespecialoilfundsareestablished.Thesefunds are designed to achieve different purposes. The purpose of the Stabilization Fund is to shieldtheeconomyfromtheadverseeffectsofvolatilityduethefluctuationintaxrevenues generallyandmorespecificallytoreducetheuncertaintythatarisesfromfluctuationinoil revenue as a result of volatile world market prices.16 The Stabilization Fund, when accompanied by ex ante rules on accumulation and withdrawal, can instil fiscal discipline within the economy in that it accumulates financial resources when prices exceed a predetermined threshold level and releases funds to shore up government expenditure whentheyfallbelowapredeterminedthresholdlevel. The Heritage Fund on the other hand serves the purpose of saving a portion of the oil revenueforthebenefitoffuturegenerations.17Thatis,itscoreobjectiveistoensurethat there is intergenerational equity because of the finite character of natural resource wealth.18Itthushasalongtermobjectiveasopposedtotheusuallyshorttermcharacterof thestabilizationfundtheuseofwhichdependsonthevagariesoftheeconomiccycle. TheBilldoesnotexplicitlystatethebasisforthechoiceofthetwotypesoffunds;whatis clear is that the intent is to follow the practice in most countries with natural resource
14 15
Section6(1)ofBill(onwhatconstitutespetroleumreceipts)andsection64(onwhatispetroleumrevenue) Section 3 of PRM Bill 16 Section 10 of PRM Bill 17 Section11ofPRMBill 18 InKuwaitthistypeoffundgoesbythenameofReserveFundforFutureGenerations.
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funds.Acommonfeatureofsuchfundsisthattheyserveasbothstabilizationandsavings funds, safeguarding the economy from current shocks while reservinga proportion of the naturalresourcewealthforusebyfuturegenerations.Thefunctionaleffectivenessofsuch fundsoftendependsonanumberoffactors,includingthelevelofpoliticalandeconomic developmentofthecountry,thepoliticalwillandcapacitytoefficientlyutilizethefinancial resources for social and economic development, and the legal regime for accumulation, withdrawalandspendingofaccruedfinancialresources.CountriesasdiverseasNorwayand TimorLestehavealladoptedthistwoprongedapproachtotheuseofpetroleumrevenue. d. Accumulation,WithdrawalandSpendingRegime Asnotedearlier,theBillsetsthebasicrulethatallpetroleumrevenuebedepositedintothe custodial account at the Bank of Ghana from where allocations and disbursements are made.Transfersarepermittedoutofthiscustodialaccountto(a)thenationalbudget,(b) theHeritageFundand(c)theStabilizationFund.19 Transferstothenationalbudgetaredoneinaccordancewithasetformulaknownasthe Annual Budget Funding Amount (ABFA) the calculation of which is supervised by the MinisterofFinanceandEconomicPlanning.TransfersbasedupontheABFAaremeantfor budget support for the fiscal year of the transfer. The ABFA must be determined in accordancewithalegislativeformulaandshouldnotexceedthetotalamountapprovedby ParliamentintheAppropriationsActforthatfiscalyear.Actualtransferstothebudgetcan only occur after the publication of the gazette notification confirming the appropriation amountapprovedbyParliament.20 Adifferentformuladeterminestransfersintothetwopetroleumfunds,thatis,theHeritage FundandtheStabilizationFund.Asafundamentalrule,whereoilrevenueforeachquarter of the financial year exceeds onequarter of the ABFA for a particular fiscal year, the US DollarvalueofallexcessrevenuemustbetransferredfromtheGhanaPetroleumAccount intothetwopetroleumfundsintheratiosof70%fortheStabilizationFundand30%forthe Heritage Fund.21 The ratios are to be reviewed every three years beginning from 2014. In theeventthattheaccumulatedresourcesoftheStabilizationFundexceedapredetermined amountrecommendedbytheMinisterofFinanceandapprovedbyParliament,subsequent transfersintothatFundmustbeearmarkedasadditionaltransfersintotheHeritageFundor fordebtrepayment.22 Outflows from the two petroleum accounts are governed by a different set of rules. For bothfunds,transferscanbemadeonlywhereoilrevenueforeachquarterofthefinancial yearfallsbelowonehalfoftheABFAforthatfinancial.Inthatcircumstance,thelesserof either 70% of the estimated amount of the shortfall for that financial year or 25% of the balance standing to the credit of the Stabilization Fund may be withdrawn into the ConsolidatedFund.ThesameconditionsgovernoutflowsfromtheHeritageFund.23
19 20
Section 17 of PRM Bill Section 20 of PRM Bill 21 Section 24 of PRM Bill 22 Id. 23 Sections 13 and 14 of PRM Bill
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With respect to spending, the Bill provides that the use and expenditure of petroleum revenuemustbeintegratedintothenationalbudgetinordertoensureefficientallocation andmonitoring.Spendingmustbetiedtotheobjectivesofmaximizingnationaleconomic developmentandthepromotionofanequitabledistributionofwealthandequalityamong Ghanaians. Further, spending decisions must be in accordance with a longterm national developmentstrategyandmustaccordprioritytospecificareasofdevelopment,including agriculture and agroprocessing, human resource development, the development of infrastructure,waterandsanitation,ruraldevelopmentandso.24Aminimumof70percent oftheABFAmaybeusedforpublicinvestmentexpenditureconsistentwiththelongterm nationaldevelopmentplanandrelatedpurposes. InviewofthefactthatthesolepurposeofthePetroleumAccountistoreceiveoilrevenue for subsequent transfers to the national budget and to the two petroleum funds, the Bill prohibitsanyuseotherthantheexpenditurerulessetoutabove.Henceanyotherusageof the Petroleum Account including the provision of credit to the central government, state enterprisesorprivatesectorentitiesisproscribed.25ThePetroleumAccountmayhowever be debited with the allowable marketing costs of GNPC arising from the sale of crude oil received in lieu of cash payments (e.g. additional oil entitlements or royalty) from petroleumoperations26andfortherefundofoverpaymentstooilcompanies.27 Furthermore,theBillplacesrestrictionsontheuseofpetroleumrevenuebyprohibitingthe useoftheassetsoftheGhanaPetroleumAccountsasasourceofcredittogovernmental andprivatesectorentitiesorascollateralfordebtsofanysuchentities.Oilbackedforward borrowing28 and statutory earmarking of oil funds are also prohibited.29 Theserestrictions areintended,forgoodreason,topreventwastefulexpenditurethroughindirectuseofthe funds.Withoutsuchrestrictions,theprohibitedusescouldeasilyendupasextrabudgetary meansofspendingoilfunds. Consequently, it is safe to conclude that the accumulation, withdrawal and expenditure rulessetoutintheBillare,toalargeextent,consistentwithinternationalbestpracticein the regulation of oil revenue management. The Bill provides for substantial institutional checks on decisions to accumulate, withdraw and spend. In particular, the integration of expenditure of petroleum revenue into the national budget process makes for easy monitoring and public scrutiny and reinforces the role of Parliament as a watchdog over government spending decisions. It is also in line with practices relating to oil revenue managementincountriessuchasNorway,theStateofAlaskaandtheProvinceofAlbertain Canada. The drafters of the Bill must also be commended for tightening the latitude of discretionavailabletotheMinisterofFinanceinrelationtothedeterminationofhowmuch to spend and what to spend oil funds on. This is evident in the tightening of the rules relating to the determination of the ABFA and the Benchmark Revenue. In contrast to earlierversionsoftheBill,botharedeterminedinaccordancewithasetlegislativeformula
24 25
Section 22 of PRM Bill Section 5 of PRM Bill 26 Section4(3)ofPRMBill 27 Section25ofPRMBill 28 Section 5(2) of PRM Bill 29 Section 23 of PRM Bill
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and must eventually be approved by Parliament, thus leaving little room for discretion by theMinister. Therearehoweveranumberofdeficienciesinthewithdrawalandspendingrulesthatmust berevisitedwithaviewtoensuringthatdiscretionarydecisionsbypublicofficeholdersare not made for purely political reasons without due regard to the developmental impact of suchdecisions. One of such deficiencies is the absence of provisions on the mandate to authorise disbursementsandtransfersfromthePetroleumAccount.Eventhoughsuchtransfersand disbursementsarecontrolledinthesensethattheyaresubjecttoparliamentaryapproval,it would seem that the authority to withdraw funds can still be abused after the grant of parliamentaryapprovaltospendaspecifiedamount.Toavoidorminimizesuchabuse,the oil revenue laws of other countries require more than one signature to authorize a withdrawal. For instance in Sao Tome and Principe, the Oil Management Revenue Law requiresthatanytransferfromtheNationalOilAccountshouldbeeffectedbyatransfer requestandauthorizationdocumentdulysignedbythePrimeMinister,thegovernorofthe Central Bank and the President of the Republic By signing, each of these public officeholders certifies that the amount stated in the transfer request has been duly approvedinaccordancewiththerulesfordeterminingtheannualfundingamountforthe national budget. Obviously, such a provision serves as a mechanism for controlling and protectingthepetroleumfundsfromabusebyinstitutionalizingaformalsystemofchecks and balances.30 It is suggested that even though such a requirement does not completely eliminate the possibility of abuse, it should be made part of the law in the abundance of caution. The provision dealing with the uses to which the ABFA may be put should be revisited or reviewed to inject greater clarity and certainty into the Bill and to take account of constitutional obligations. First of all, the principles governing the allocation of ABFA are laudablebutvague.Forinstancewhatrepresentsafairdistributionofnationalwealthor equality among citizens as provided for in section 22(2)? Such vague political objectives may be troubling from a legal standpoint for several reasons. One of such reasons is the possibility of future litigation over the fairness of alternative decisions or failure to attain the equality objectives of the law. Whatever their merits, it is important that these principlesshouldbeclarifiedand,inthisregard,thedraftersoftheBillshouldhavedrawn inspiration from the Economic Objectives of the Directive Principles of State Policy in ChapterSixoftheConstitutionespeciallyarticle36(2)(b)and(d)whichprovidesasfollows: 36(2) The State shall, in particular, take all necessary steps to establish a soundandhealthyeconomywhoseunderlyingprinciplesshallinclude: (b) affording ample opportunity for individual initiative and creativity in economicactivitiesandfosteringanenablingenvironmentforapronounced roleoftheprivatesectorintheeconomy; ..
30
SeeforexampleBellandFaria(2007),p.290
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(d) undertaking even and balanced development of all regions and every partofeachregionofGhana,and,inparticular,improvingtheconditionof life in the rural areas, and generally, redressing any imbalances in developmentbetweenruralandurbanareas; TheprovisionsoftheBillcouldbestreamlinedtotakeaccountoftheaboveconstitutional objectives. In this vein, attention should also be drawn to the Bills requirement that expenditureshouldbeinlinewithalongtermnationaldevelopmentstrategyalignedwith a mediumterm expenditure framework as approved by Parliament. Article 36(5) of the Constitution imposes an obligation on the President to present to Parliament a coordinatedprogrammeofeconomicandsocialdevelopmentpolicies,includingagricultural and industrial programmes at all levels and in all regions in Ghana, within two years of assuming office. This has been honoured more in the breach than in the observance. Consequently compliance with this constitutional obligation should be made a mandatory conditionforexpenditureofoilfunds.Inotherwords,theBillshouldberevisedtorequire that a program of the kind described in article 36(5) be presented to Parliament by the Presidentasapreconditionfortheuseofoilfunds. WhilethismayleavethePresidentfreetosethisownpriorities,theBillcouldseektolimit thisfreedomsomewhatbyrevisingSection22(3)asfollows: 16.(3)Withoutprejudicetothegeneralityoftheforegoing,thePresidents programofeconomicandsocialdevelopmentshallaccordpriorityto: agricultureandagrobusiness; humanresourcedevelopmentineducationandhealth; physicalinfrastructureineducationandhealth; waterandsanitation; roadandrailinfrastructure; ruraldevelopment; thestrengtheningofthestatesinstitutionalcapacityingovernance,maintaining lawandorder,andenhancingpublicsafetyandsecurity; (h) alternativeenergysources;and (i) environment,forestmanagementandprotectionofwaterbodies. Secondly,someofthepriorityareasofexpenditurearevague.InparticularSection22(3)(g) needstobereviewedtoensuregreaterspecificity.Thescopeofthatprovisionispotentially indeterminate because much as there may be little disagreement that strengthening the states institutional capacity is clearly a laudable objective, the provision leaves open the possibility for wasteful expenditure, including high spending on defense in the name of national security.31 As it stands now, the purchase of luxury vehicles for use by public officeholders will certainly qualify as a legitimate expenditure. In the same vein, Section 16(4) must also be revised to remove some of the vague expenditure objectives such as spendingtoenhancegoodgovernanceandcivicresponsibility.Thesecouldeasilybeused by a government that enjoys a parliamentary majority to engage in politically inspired
31
(a) (b) (c) (d) (e) (f) (g)
Part of the reason for the failure of the Chadian oil revenue management law was the amendment of the law to allow for spending on national security, especially the procurement of defense equipment.
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spending. For example, the making of grants to civil society groups that support the governmentwouldeasilyqualifyasexpendituretoencouragecivicresponsibility. Acriticalareaofpossibleexpenditurethatcouldbecapturedundersection22isinrelation tocompensationforcommunitiesimpactedbyoiloperations.Giventheexperienceinother countries,especiallytheNigerDeltaBasinofNigeria,itwouldbenecessaryinthelongterm and for reasons of poverty reduction, to institutionalize a scheme of compensation under the Petroleum Revenue Management Act forcommunities directly affected byoilandgas operations.Thecompensatorycharacterofthefundwillmeanthatcommunitiesseekingto access funds must first show that they have suffered (legally defined) injury as a consequenceofoiloperations.Anexampleofsuchdamagewouldbeasignificantdisruption of livelihood in the case of funding for socioeconomic activities and or injury to their naturalenvironmentresultingdirectlyorindirectlyfromoiloperations.Individualaccessto grants would therefore be made possible only upon prove of communal impact which should be independently assessed. Consequently, a Community Development and Environmental Compensation Fund into which a predetermined portion of the ABFA is transferredeachfiscalyear,andwhichisstrictlyregulated,couldproveabetterlongterm mechanismforredressingthesocial,economicandenvironmentalimpactsofoiloperations. Box 1 contains a useful example of statutory provision on transfers to communities impactedbyoilandgasoperationsdrawnfromtheAlaskaSpecialReserveFundlaw. Box1:AlaskaSpecialRevenueFundAvailabilityofFundstoImpactedMunicipalities (d)It is the intent of the legislature that each year all of the money in the National PetroleumReserveAlaskaspecialrevenuefundbemadeavailableforappropriationbythe legislature to municipalities that demonstrate under (c) of this section present impact, or the need to determine or plan for future impact, from oil and gas development under 42 U.S.C. 6506a or former 42 U.S.C. 6508. It is the intent of the legislature that an initial appropriation be made to the Department of Commerce, Community and Economic Development to cover anticipated impact grants, and that additional funds be made availablethroughsupplementalappropriationsiftheimpactisgreaterthananticipatedand the legislature considers the additional grants proposed by the department to be meritorious. (e)Amunicipalitymayusethefundsreceivedunder(d)ofthissectiononlyforthefollowing activitiesandservicestoalleviatetheimpactoftheoilandgasdevelopmentunder42U.S.C. 6506aorformer42U.S.C.6508withintheNationalPetroleumReserveAlaska: (1)planning; (2)construction, maintenance, and operation of essential public facilities by the municipality;and (3)othernecessarypublicservicesprovidedbythemunicipality. (f)Fundsappropriatedunder(d)ofthissectionmaynotbeusedfortheretirement ofmunicipaldebt. The final observation on the withdrawal and spending provisions of the Bill relates to Section13whichseekstogovernwithdrawalfromtheGhanaStabilizationFund.Underthis provision a withdrawal from the Ghana Stabilization Fund is triggered by a shortfall in petroleumrevenuebelowonequarteroftheABFAinagivenfinancialyear.Tomakeupfor
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thisshortfall,thegovernmentmaywithdrawthelesserof70%oftheprojectedshortfallin oilrevenueforthatquarteror25%ofthecreditbalanceoftheStabilizationFundintothe Consolidated Fund. Where the shortfall in petroleum revenue recurs for three successive quarters,thenanamounttwicethevalueofthethirdquartershortfallorupto40%ofthe creditbalanceoftheStabilizationFundcanbewithdrawn. Itisnotclearfromareadingoftheprovisionwhethersuchawithdrawalissubjecttothe budgetapprovalregimefortheABFA.Thiswouldhoweverseemtohavebeenremediedby the provisions of section 16 dealing with adjustment and reconciliation of petroleum receipts. These require that the Minister of Finance present a report to Parliament at the endofthefirstquarterofeachyearthatreconcilestheactualpetroleumreceiptsandthe ABFA. In order to place the matter beyond doubt, the provisions on withdrawal from the petroleumfundsintheeventofashortfallinpetroleumrevenueshoulddefinitelybemade explicitlysubjecttothoseofsection16.Again,itwould beprudenttorequirethatwhere the trigger conditions for a transfer out of the Stabilization Fund have been met, then a transfer authorization signed by the Minister of Finance and two others, preferably the ChairmanoftheFinanceCommitteeofParliamentandtheGovernoroftheBankofGhana, beexecutedtoeffectthewithdrawal. e. InvestmentStrategy Intermsofinvestmentstrategy,theBillprovidesfortheinvestmentofpetroleumfundsin qualifyinginvestmentinstruments.Investmentinqualifyinginstrumentsmustbeineither debtinstrumentsorfixeddepositsdenominatedinconvertiblecurrency.Aqualifyingdebt instrumentdenominatedinconvertiblecurrencymustbeaninterestbearinginstrumentor must attract a fixed amount equivalent to an interest and must be (a) of an investment gradesecurityandor(b)issuedorguaranteedbytheWorldBankorasovereignstateother thanGhana.Acurrencydepositontheotherhandmustbeinterestbearingorbecapableof attracting a fixed amount equivalent to an interest and must be issued by the Bank for International Settlements, the European Central Bank or the central bank of a sovereign stateotherthanGhanawithalongterminvestmentgraderating.Theinvestmentmanagers ofthepetroleumfundsareempoweredtodisposeofanyinvestmentinstrumentwherea changeinitsinvestmentratingorintheissueraffectsitsstatusasaqualifyinginstrument.A decisiontodisposeofaninstrumentmustbetakenimmediatelyorassoonaspracticable whenthechangeinratingorthechangeintheissueroccurs.32 DecisionsoninvestmentstrategyaretakenbytheMinisterofFinanceontheadviceofan Investment Advisory Committee comprising of professionals in finance, investment, economics, business management and law. Members of the Committee are appointed by thePresidentforfixedperiodsoftime.TheCommitteehasbothadvisoryandmanagement functions.Ithastheresponsibilityofdevelopingbenchmarkportfoliosofreturnsandrisksin theinvestmentofpetroleumfundsfortheguidanceoftheMinister,advisingtheMinister on investment guidelines to be provided by the Minister to the Governor of the Bank of Ghana and on necessary changes to the investment strategy of petroleum funds. The Committeeisalsotaskedwiththereviewofreportsandauditsandthemonitoringofthe performanceofpetroleumfunds.
32
Section 29 of PRM Bill
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Intheperformanceofitsfunctions,theCommitteeistobeguidedbytheprinciplethatthe petroleum funds are for the benefit of current and future generations and must take accountofthecurrentconditionsunderwhichinstitutionaldecisionmakers(e.g.theCentral Bank)operateaswellastheopportunitiesforandconstraintsoninvestment.33 ItisclearfromtheforegoingsummaryoftheinvestmentstrategyprovisionsofBillthatit takesahighlyconservativeapproachtoinvestmentoffundsfromthePetroleumAccounts. For instance, by limiting the qualifying investment instruments to only those that have a sovereignguarantee,iteliminatesthepossibilityofdiversifyingtheinvestmentportfolioto includeinvestmentinstrumentssuchascorporatesecurities.Eventhoughthisisdesignedto minimize risk, it also tends to limit the profitmaking opportunities that may arise as a consequence of the assumption of some (higher) measure of risk. A review of experience and practices from various oil producing economies shows that petroleum funds have tended to operate by investing assets in different instruments, markets and currencies in ordertominimizeandincreaseprofitability.TheAlbertaHeritageSavingsFundforexample, invested in a diversified number of investment instruments including fixed income and moneymarketdepositsandbonds,publicandprivateequities,andinflationsensitiveand alternative investments. The Alaska Permanent Fund is also divided into more than 40 financialassetportfoliosmanagedbymorethan20investmentmanagers.34 In line with existing practice in some countries, the drafters of the Bill have discarded altogether the possibility of investing some of the petroleum funds domestically. In the analysisofpetroleumrevenuemanagementindevelopingcountries,itisoftenarguedthat domesticinvestmentofoilrevenuebeavoidedfortwoprincipalreasons.Thefirstrelatesto theuncertaintyofthedomesticeconomicenvironmentsofthesecountries.Weaknessesin theireconomiescanoftenresultininvestmentlossesthatmaynotoccurinmoreresilient economicenvironments.Thesecondreasonoftengivenforavoidingdomesticinvestmentis the spectre of political interference in investment decisionmaking, that is, the possibility that oil funds will be invested in projects and ventures for reasons other than their economicviability. The investment strategy adopted under the Bill is therefore highly conservative. This is understandablebecauseofthenatureofGhanaseconomyandthehighlyvolatilecharacter of global financial markets. However, there is still the need to diversify the investment portfolio and thus spread the risk inherent in the investment of funds between lowrisk instruments such as sovereign bonds that have lower rates of return and highrisk instruments. Thepossibilityofdomesticinvestmentshouldhowevernotberuledoutcompletelyforat leasttworeasons.First,suchinvestmentwouldprovidemuchneededcapitalfordomestic entrepreneurs, especially where it is provided at slightly below market rates of interest. Secondly, the economic spillover of such investment in terms of job creation and wealth transfercouldbesubstantial.However,anyprovisionsondomesticinvestmentmustclarify the nature and scope of domestic investment that could be undertaken petroleum funds. Possiblecandidatesfordomesticinvestmentshouldincludeequitiesofbanksandfinancial
33 34
Sections 31-32 of PRM Bill See Bell and Faria, supra note...p. 294?
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institutionswithasoundtrackrecordofperformanceovertime,mobiletelecommunication companiesandventurecapitalforstartupswithatimelimitforthestatetoexit.Thefunds couldalsobeinvestedinmanufacturingconcernsindirectlythroughselectedbanksbutin that case they should be required to enter into secured lending or collateralized lending agreementswiththebanksusingtheirinventoriesand/oraccountsreceivableascollateral. The scheme would be more or less similar to that of the Export Development and Investment Fund (EDIF) but without the establishment of a government bureaucracy to overseeit. f. GovernanceFramework An assessment of the overall governance framework of the Bill must address two broad concerns. The first relates to the rules and institutions that establish the framework for exercisingpowerandauthorityinthemanagementofpetroleumrevenuewhilethesecond relatestothefunctioningandcapacitiesoftheactorsvestedwithsuchpowerandauthority. In general, the rules and institutions must address governance concerns relating to accountability for the use of petroleum revenues, transparency in how such funds are managed and utilized, conflict of interest by those charged with managing and utilizing petroleumrevenueandthelevelofpublicparticipationpermittedbylawonthegovernance of petroleum revenues. An evaluation of the mechanisms for ensuring accountability, transparencyandeffectivepublicparticipationinthemanagementoftheGhanaPetroleum Fundsisthereforeclearlyapposite. Accountability is about requiring a person to explain and justify against criteriaof some kindtheirdecisionsoracts,andthentomakeamendsforanyfaultorerror,whetherby reversing the decision or by paying compensation for any resultant injury35. Public accountability as a concept embraces the examination of the conduct of individuals, institutionsandindeedevenoftheactsandomissionsoftheadministrativeandexecutive authorities of state in cases of complaints that such conduct, acts and omissions do not complywiththelaw.Thepurposeofsuchexaminationistosubjectimproperandunlawful conducttosomeformofsanctionsorcorrectivemeasures.36Thismeansthatasageneral rule,decisionmakerstakeresponsibilityfortheirdecisionsandtheconsequencesthereof. In the context of public decisionmaking this does not mean that public decisionmakers mustfullyinternalizethecostsandbenefitsoftheirdecisions,thoughthismaybethecase inspecificcircumstances. Transparency on the other hand refers to the extent to which information regarding decisionsandactionsofpublicofficialsandinstitutionsarereadilyaccessibletothepublic. Transparency may facilitate accountable decisionmaking and the exercise of public oversightoverthedecisionsandactionsofofficials. Conflictofinterestrelatestowhetherthoseinvestedwithpowertomanagepublicaffairs dohavepersonalorprivateinterests,pecuniaryorotherwise,thatconflictwiththeirduties tothepublicoffice.Suchconflictcanunderminetheeffectiveandimpartialperformanceof
SeeOliver,Dawn,Law,PoliticsandPublicAccountability:TheSearchforaNewEquilibrium,PublicLaw,1994, p.238at246. 36 SeeJusticeJ.N.KTaylor,TheConceptandProblemsofPublicAccountabilityUnderGhanaLaw,17Reviewof GhanaLaw,pp.7094at70.

35
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public duties and may in fact occasion loss of public confidence in decision outcomes becauseofpublicperceptionthatthedecisionsareselfserving. Public participation concerns the level of access by the public to institutions and agencies that exercise power in the management of public affairs. Where it exists in fact or is required by law (e.g. in the conduct of environmental impact assessment) it provides an opportunityforpublicinputintodecisionmakingandmayimprovethequalityofdecision outcomesandenhancetheownershipandacceptabilityoftheseoutcomes.Insomecasesit alsoincreasesaccountability. Thefourissueareasofpublicgovernanceraisedabovehavebeenaddressedbythedrafters of the Bill even though they have not done so adequately. Several provisions of the Bill directly address the issue of accountability for petroleum revenue both in relation to payment obligations as well as the withdrawal and spending obligations of Government. Horizontal accountability is guaranteed by the reporting and auditing requirements. The Minister is required to present an adjustment and reconciliation report to Parliament (section 16) and the Governor of the Bank of Ghana has an obligation to report to the Minister and the Investment Advisory Committee on a quarterly basis regarding the performanceoftheGhanaPetroleumFunds(section30).Reportsandauditsconcerningthe performance of the Ghana Petroleum Funds are also to be reviewed by the Investment Advisory Committee against set benchmarks (section 32). There are requirements for internalandexternalauditsofthepetroleumfunds(sections46and47)aswellasannual reportstoParliamentsontheperformanceoftheGhanaPetroleumFunds(section50). In order to ensure transparency in the operations and management of the funds, the Bill guaranteestransparencyasacardinalprincipleinthemanagementofpetroleumfundsand makesprovisionforthepublicationofallpayments,receipts,recordsandreportsandaudits of the funds. In general, section 60 imposes an omnibus obligation on the Minister of Finance and Economic Planning to publish all records on payments and receipts in the Gazette and in two national dailies within 30 working days of the end of the applicable quarter.TheserecordsarealsorequiredtobepublishedonthewebsitesoftheMinisterof FinanceandEconomicPlanningandofParliament. The Bill thus establishes two levels of transparency. On one level is the requirement to publish all payments by oil and gas companies and others engaged in the oil and gas business. On another level is the provision of information about the management and utilizationoffundsbythestate.Overall,theobjectiveisthattheremustbepublicaccessto information about the decisions and transactions involving oil revenue. Section 49 reinforces this view by providing that in their operations, the government and other institutionalactorsmustadheretotheprinciplesoftransparencyandgoodgovernanceand in this regard, they are required to take steps to entrench transparency mechanisms and ensurefreeaccesstononclassifiedinformationbythepublic. However, the Bill contains hedges around the principle of transparency and these could hinder public access to information. Principally, it permits information to be declared as confidential. According to section 64 of the Bill, confidential information means informationthatisdesignatedormarkedasconfidential.Thismeansthattherewould belimitedaccesstosuchinformation.ForexampleParliamentandthePublicInterestand
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Accountability Committee can still have access to information that has been declared confidential. Furthermore, while it is an criminal offence to hinder public access to nonclassified information(section52),thedisclosureofinformationpertainingtotheoperationsofthe GhanaPetroleumFundsortheuseofsuchinformationforpersonalbenefitattractsahefty fineoffivehundredthousandUSDollarsoratwoyeartermofimprisonment.Thisissureto serveasadisincentivetoinformationdisclosureandcaneasilyfrustratetheattainmentof theobjectiveoftransparencyinthemanagementofoilrevenue. Itisclearlyimportantinthecontextofoilrevenuemanagementtostrikeabalancebetween theneedtoassurebusinessfirmsthattheinformationthattheyprovidetothegovernment orthemanagersoftheoilfundswouldremainconfidentialandtheneedforpublicaccessto information, it is clear that drafters of the Bill are erring on the side of business confidentiality. To achieve this balance would first require a much clearer definition of confidentialinformationthanthatprovidedundersection64oftheBill.Inthisregard,itis proposedthatthedefinitionusedbytheAlaskaPermanentFundCorporationstatuteshould beadopted.Itdefinesconfidentialinformationasinformationthatdisclosestheparticulars ofthebusinessoraffairsofaprivateenterpriseorinvestor.37Allotherinformationwould thusqualifyasnonconfidential.Also,thepenaltyfordisclosureshouldbereducedandthe words intentionally or deliberately be inserted in the penalty provisions to ensure that accidental disclosure isnot penalized. In light of Ghanas commitment to the principles of the Extractive Industries Transparency Initiative (EITI), rules that favour nondisclosure of information relating, in this case, to payments made to government in connection with petroleumexploitationwouldbeoutofcontext. With respect to the issue of conflict of interest, the provisions of the Bill are far from adequate.Theonlyprovisiononconflictofinterestisinsection36oftheBill.Eventhough thisisastandardprovisioninstatutesdealingwithconflictofinterest,inthecontextofthe Bill,itisrestrictedonlytothemembersoftheInvestmentAdvisoryCommittee.Thismeans that other persons, for instance the Minister of Finance and Economic Planning, the Governor of the Bank of Ghana and members of the Public Interest and Accountability Committee as well as staff working within public agencies directly involved in the management of oil revenues are not covered by the rules on disclosure of interest. To ensure that these other functionaries do not compromise the integrity of the system of investment management put in place by engaging in selfserving decisionmaking, the provision on conflict of interest should be made generally applicable. Again, in Alaska the PermanentFunctionCorporationstatutehasaconflictofinterestprovisionthatappliesto membersoftheboardoftrustees,theexecutivedirectorandthestaffofthecorporation. ThebylawsoftheCorporationalsoempowertheBoardofTrusteestoimposestandardsof conductanddisclosurethatarestricterthanthoseimposedunderthelawsoftheStateof Alaska. In terms of the roles and competences of the institutions and agencies to be directly involved in the management of oil revenue, the Bill achieves what may be termed as an optimal mix by assigning roles to the public institutions that have the power under the
37
Section 37.13.200 of Alaska Permanent Fund law.
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Constitutionandtheexistinglawtodealwithmattersofpublicfinancemanagement.The Minister of Finance and Economic Planning has the primary responsibility for the managementofthefundsandthisaccordswithhisroleasthekeypoliticalofficeholderthat superintends public finances in the country. The roles assigned to the Bank of Ghana, the AuditorGeneralandParliamentarealsoinlinewiththeirrespectiveconstitutionalrolesin relationtopublicfinancemanagement. TheonlynewgovernanceinstitutionstobecreatedwhentheBillisenactedintolawarethe InvestmentAdvisoryCommitteeandthePublicInterestandAccountabilityCommittee.The Investment Advisory Committee is a technical entity to be charged with advising the MinisterofFinanceonthetechnicalaspectsofinvestmentofoilfunds.Itsmembersareto be appointed by the President on the basis of their professional competence and their expertise in matters of finance, investment, business management and law. In order to ensure that the President does not appoint only persons who share his political views or belongtohisparty,itmaybeusefultoaddaprovisiontotheeffectthatthePresidentshall nominate them subject to the approval of Parliament. Further, section 34(7) should be reviewedtodisenablethePresidentfromremovingamemberoftheInvestmentAdvisory Committeeatwill.Inotherwords,thetenureofofficeofitsmembersshouldbeguarantee in order to ensure that they have the necessary independence of mind to advise the Minister and engage the other stakeholders without fear of being removed by the President. ThePublicInterestandAccountabilityCommitteeontheotherhandismeanttoallowfor publicparticipationinthegovernanceofoilrevenue.Inthatsense,itisnotatechnicalbut politicalentity.Thatbeingthecase,theproposalthatitsmembershipbedrawnfromamong the various stakeholders listed under section 56 of the Bill ensures that a broad range of interests are represented on the Committee in order to ensure that public nonpartisan inputisguaranteedthroughtheworkoftheCommittee. However, the decision to leave the appointment to the President may pose problems in terms of what criteria he takes into account in appointing such persons. In other jurisdictions, such as Sao Tome and Principe, there are prescribed procedures of appointment of members of their equivalent of the proposed Public Interest and Accountability Committee. In the case of civil society representation, for example, the representativesarenominatedbythecivilsocietyorganizationsthemselvesduringthefirst termoftheirPetroleumOversightCommitteeandtheNationalAssemblythenselectsthe representatives from the nominated persons. Thereafter, the civil society representatives are selected directly by the civil society organizations in accordance with the prescribed procedures.TheeligibilitycriteriastatedintheBillshouldalsobebroadenedtoexcludeall personsholdingpublicofficeatthediscretionofthePresident.InAlaskaanypersonholding public office is disqualified from being a member of the Board of Trustees of the Alaska PermanentFundCorporation. Itwouldalsobeusefultotightenthecriteriaforappointmentbytyingthemtocompetence. The fact that these stakeholders can be represented on the Public Interest and AccountabilityCommitteeisnoguaranteethattheywoulddoacompetentjoboffulfilling their mandate. The knowledge and skill to perform the functions assigned under the law wouldberequiredattheendoftheday.
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With regards to the execution of its mandate, it would seem that the Public Interest and AccountabilityCommitteecouldendupbeingatoothlessbulldogbecauseitdoesnothave any powers under the Bill to implement its findings either on its own or through the assistanceofotherstateagencies. TheSaoTomeandPrincipestatute,whichappearstohaveinfluencedthedraftersoftheBill on this and other issues, goes much further in respect of the powers of the Petroleum Oversight Committee. In summary, the Petroleum Oversight Committee under Sao Tome andPrincipelawhasthepowerto conductpublicandprivateinterviews; compel testimony, documents and other evidence having a bearing on its investigation; reviewpetroleumagreementsenteredintobytheState; institute legal proceedings in court to compel compliance with its orders or the fulfilment of any obligation under the law including enjoining actions by public officials and the disgorgement of any benefit obtained by action or inaction in violationofthelaw.38
Inaddition,theSaoTomeanPetroleumOversightCommitteehasthepowertosuspendthe transfer of the Annual Funding Amount or any other funds from the National Oil Account where a violation of the law has not been remedied. The powers of the Committee are therefore quite extensive and permit the exercise of control by nonpoliticians over the process of managing the utilizing oil revenue. This makes public oversight effective and genuineasopposedtothesituationproposedundertheBill.IntheGhanaiancontext,the PublicInterestandAccountabilityCommitteemayendupnotbeingineffectiveifallitdoes is consult widely on matters pertaining to the management of oil revenue and submit annual reports to Parliament without an effective mechanism for redressing mismanagement. g. RelationshipoftheBilltotheExistingLaw Inlargemeasure,theproposedregimegoverningthereceiptintoandwithdrawaloffunds fromtheGhanaPetroleumAccountconformtotheexistingrulesandregulationsgoverning thereceiptandhandlingofpaymentsduetothestateaswellthewithdrawaloffundsfrom publicaccounts.Intermsofarticle176oftheConstitution,allrevenuesraisedorreceived forpublicpurposesarerequiredtobepaidintotheConsolidatedFundexceptrevenuesor moneys that are payable by or under an Act of Parliament into some other fund establishedforspecificpurposes.Inpursuanceofarticle176,theFinancialAdministration Act, 2003 (Act 654) provides that revenue or other moneys raised or received for governmentbusinessoronbehalfoftheGovernmentbepaidintotheConsolidatedFund, except payments required to be made into some other special fund set up by an Act of Parliamentorportionsofrevenuepermittedtoberetainedbythecollectingagency. Consequently,underthecurrentlegalregime,revenuereceivedfromtheoperationsofoil companiesarepaidintotheConsolidatedFundincompliancewitharticle176andsection6
38
Sections 3 and 4 of Sao Tome and Principe Oil Revenue Management Law
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of the Financial Administration Act. Withdrawals of such revenue are governed by the provisions of articles 178 and 179 of the Constitution. Article 178 prohibits withdrawals from public funds except where such withdrawal has been authorized by or under the authority of an Act of Parliament while article 179 provides the framework for the authorizationofexpenditurefrommoniessowithdrawn.Inthatsense,itmustbepointed outthattheprovisionsseektointegratethepetroleumtransfersfromthePetroleumFunds into the normal budgetary process, thus ensuring that there is adequate legislative oversight.Indeedthetransferanddisbursementrulesaredraftedwithcaretoensurethat Parliaments constitutional role in financial and fiscal matters is not sidestepped. Indeed, section22(1)providesexplicitlythatpetroleumrevenues,theirusesandexpenditureitems shallbepartofthenationalbudgetandshallbesubjecttothesamebudgetaryprocesses thatarenecessarytoensureefficientmonitoringofsuchuses. There are however a number of deficiencies in the Bill as far as concerns its relationship with the existing law. First of all, section 1(2) of the Bill purports to make the Bill, when enacted into law, a superstatute in that its provisions will trump any law which is inconsistentwithit.Thisincludessubsequentlegislationandthisisproblematicbecauseif ParliamentenactsanotherlawinthefutureanditconflictswiththePRMlaw,theprinciple ofinterpretationisthatthatsubsequentlegislationshouldprevailbecauseitisconsidered tohaverepealedtheexistinglaw. Second,theBilldoesnotmakereferencetotheexistinglawsandregulationsthatdealwith theissuesofpublicfinancialmanagement,suchastheFinancialAdministrationActandthe InternalAuditAct.SincetheBilldoesnotcoveralltheissuesofpublicfinancialmanagement except those that pertain to petroleum revenue, it is essential that the Bill should cross referencethesestatutes.TheAlbertaHeritageSavingsFundActcontainsexamplesofsuch crossreferencingandtheideaistoensurethatthereislegislativecoherenceacrossboard. h. InternationalBestPracticeReview Thedesignofinstitutionalarrangementsspecificallymeanttogovernnaturalresourcefunds orrevenuesasaseparateanddistinctincomestreamhasbecomesomewhatwidespread. For obvious reasons, including in particular differences in levels of political and economic development,theseinstitutionalarrangementsdifferintheirnatureandpurpose.Butitis clearthatanoverallobjectivethatiscrosscuttingisthatthechoiceofinstitutionaldesignis dictatedbytheobjectivetoprudentlymanageoilrevenuesoastoavoidtheresourcecurse. In other words, these institutional arrangements all serve to provide the solution to the perverseincentiveproblemthatistheincentiveonthepartofpoliticianstooverspendoil revenueforpoliticalreasonsthatmaynotnecessarilybearanyeconomicordevelopmental logic. This crosscutting objective is evident from a review of legislation governing oil revenuemanagementinNorway,Alaska,EastTimorandSaoTomeandPrincipe. ThePRMBilldrawssignificantlyfromthelawsoftheseothercountries.Indeed,intermsof internationalbestpracticetheBillcannotbefaultedfornotmimickingwhatexistsinother jurisdictionsbutratherforlackingoriginalityinmanyrespectsthroughoverrelianceonthe laws of other countries. For instance, the decision to vest ultimate management responsibility in the Minister of Finance and Economic Planning with the Bank of Ghana having responsibility for the operational management of the fund is based on the
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Norwegianmodel.InNorwaythepetroleumfundismanagedonadaytodaybasisbythe BankofNorwaybuttheMinistryofFinancehasultimateresponsibilityforthemanagement ofthefund. ThetransferanddisbursementrulesproposedunderthePRMBilldrawsubstantiallyfrom theprevailingregimeinsomeofthecountriesstudied,asshowninTable1below.Inmost oftheseoilproducingcountries,allrevenuesfrompetroleummustfirstbedepositedinto thenationaloilaccountpriortodisbursementinaccordancewithastatedformulaandwith theapprovalofthenationallegislature.

Table1:RulesGoverningInflowsandOutflowsfromNRFsinSelectedCountries Country Inflow QuantitativeConstraints Qualitative Constraints
Norway All oil revenues enterthefund Parliament is unconstrained but politicians have committed to an informalhandlingrulenottospend more than 4% of the balance on thefundperannum Parliament is unconstrained but is supposedtostaywithinthehighest amount that can be sustained in perpetuity (the permanent income fromtheoilwealth).Theformulais givenbylaw.Specialreportingand justification procedures must be followed if amount exceeds the guideline Outflowscannotlegallyexceedthe highest amount that can be sustained in perpetuity (except in the transitional period before regular oil production starts). The formula is specified in the law on oilrevenuemanagement Aformulagovernstheamountthat canbepaidoutfromthefund.The rulesareenshrinedinstatelawand thestateconstitution. Outflows cover balance of government budget decidedbyParliament Outflows cover balance of government budget decidedbyParliament
EastTimor
All oil revenue enterthefund
SaoTomeandPrincipe
All oil revenue enterthefund
Outflows enter the government budget directly, but must be usedfordevelopment purposes.
Alaska
A fixed proportion of oil revenues entersthefund
Outflows can only go tocitizensintheform of permanent fund dividends. The rules areenshrinedinstate law and the state constitution.
Source:MacartanandSandbu(2007)
ThepublicoversightregimeproposedbytheBillalsodrawssignificantlyfromtheregimesof otherdevelopingcountries,especiallySaoTomeandPrincipe,ChadandTimorLeste.Table 2providesasummaryofthepublicoversightregimesinselectedcountries.

Country
Azerbaijan
Table2:OilrevenueManagementOversightSelectedExamples OversightBody Membership Mandate

SupervisoryBoard 9 members, all appointed by the Review and comment President, but should represent on draft annual bothgovernmentandcivilsociety budget, annual report andfinancials,audits
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Chad Committee for the Control and Supervision of the Oil Resources (CCSPR) of College deControle Board of Directors of Kuwait Investment Authority Petroleum Oversight Committee
Sept.2010
Kuwait
9 members, multiple Ensure funds constituencies. Includes 4 compliance with membersfromcivilsociety. financelaw;authorize and control withdrawals, and overseeuseoffunds. 8 members. Includes 5 members Oversee and direct fromprivatesector. the activities of state oilcompany
SaoTomeandPrincipe
TimorLeste
11 members, multiple Permanent oversight constituencies.Includes3fromcivil of all payment, society. management,anduse of oil revenue and oil resources. Petroleum Fund Multiple members; exact number Advise on matters Consultative may vary in time. Includes former relating to the Council government officials, government performance and appointees,andcivilsociety. operation of the PetroleumFund.
Source:BellandFaria(2007)
WhiletheinvestmentstrategyofthePRMBillalsoaccordswiththestrategiesencapsulated inthelawsofotherpetroleumproducingcountries,itdoesnotgofarenoughintermsof the extent of regulating investment decisionmaking by the Minister of Finance and EconomicPlanning,theGovernoroftheBankofGhana,theInvestmentAdvisoryCommittee and investment managers appointed by the Bank of Ghana pursuant to the Operations Management Agreement. In taking such decisions, the managers of the Ghana Petroleum Fundsmustbestrictlyregulatedsothattheydonotengageinrecklessinvestmentactivities thatwouldunderminetheobjectiveofoptimizingtheuseofoilrevenues.Inthisregard,a provisionsimilartosection37.13.120oftheAlaskaPermanentFundCorporationLawwould beapposite.ThesaidprovisionisreproducedbelowinBox2:
Box2:AlaskaLawArticle01:AlaskaPermanentFund Sec.37.13.120.Investmentresponsibilities (a)Theboardshalladoptregulationsspecificallydesignatingthetypesofincomeproducing investmentseligibleforinvestmentoffundassets.Whenadoptingregulationsauthorizedbythis sectionormanagingandinvestingfundassets,theprudentinvestorruleshallbeappliedbythe corporation.Theprudentinvestorruleasappliedtoinvestmentactivityofthefundmeansthat thecorporationshallexercisethejudgmentandcareunderthecircumstancesthenprevailing thataninstitutionalinvestorofordinaryprudence,discretion,andintelligenceexercisesinthe designationandmanagementoflargeinvestmentsentrustedtoit,notinregardtospeculation, butinregardtothepermanentdispositionoffunds,consideringpreservationofthepurchasing powerofthefundovertimewhilemaximizingtheexpectedtotalreturnfrombothincomeand theappreciationofcapital. (b)Thecorporationmaynotborrowmoneyorguaranteefromprincipalofthefundthe obligationsofothers,exceptasprovidedinthissubsection.Withrespecttoinvestmentsofthe 26|P a g e
ReviewofPetroleumBillsandLocalContentPolicy fund,thecorporationmay,eitherdirectlyorthroughanentityinwhichtheinvestmentismade, borrowmoneyiftheborrowingisnonrecoursetothecorporationandthefund. (c)Theboardshallmaintainareasonablediversificationamonginvestmentsunless,underthe circumstances,itisclearlyprudentnottodoso.Theboardshallinvesttheassetsofthefundinin stateinvestmentstotheextentthatinstateinvestmentsareavailableandiftheinstate investments (1)havearisklevelandexpectedreturncomparabletoalternateinvestment opportunities;and (2)areeligibleforinvestmentoffundassetsunder(a)ofthissection. (d)Thecorporationmayenterintoandenforceallcontractsnecessary,convenient,ordesirable formanagingthefund'sassetsandcorporateoperations,includingcontractsforfuturedelivery toimplementassetallocationstrategiesortohedgeanexistingequivalentownershippositionin aninvestment. (e)Beforeadoptionofaregulationunder(a)ofthissection,theregulation,inelectronicformat, shallbeprovidedtotheLegislativeBudgetandAuditCommitteeforreviewandcomment.The boardshallsubmitinvestmentreportstothecommitteeatleastquarterly.
Sept.2010
TheprudentinvestorrulehasalongpedigreeinUnitedStateslawandhasservedwellto protectinvestorsfromrecklessandnegligentdecisionsbyinvestmentmanagers.ThePRM Billshouldatleastincludeaversionofthisruleinthesectionsdealingwiththeinvestment offundsfromboththeGhanaHeritageFundandtheStabilizationFund. i. Recommendations Based upon the analysis of the Bill and the review of the laws of other countries, it is recommendedthattheBillberedraftedtoincludeprovisionsonthefollowingissues: 1. Any transfer of funds from the Petroleum Funds should require the signature or authorizationoftheMinisterofFinance,theGovernoroftheBankofGhanaandthe Chairman of either the Finance Committee or the Public Accounts Committee of Parliament; 2. ThereistheneedtoinjectgreaterspecificityandclarityintotheprovisionsoftheBill relating to the use to which the ABFA may be put and to take account of the constitutional obligations of the government under the economic objectives of the DirectivePrinciplesofStatePolicy; 3. CompliancebythePresidentwithhisconstitutionalobligationtopresentaprogram of economic development to Parliament should be written into the Bill as a preconditionfortheuseofoilfunds; 4. Thereistheneedtoclarifysomeofthepriorityareasofexpenditureinsection22to ensuregreaterclarityandtoavoidpoliticalabuseoffunds; 5. A Community Development and Environmental Compensation Fund should be established to take care of communities impacted directly by the operations of oil companies;
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6. The investment approach proposed under the Bill should be reexamined and its scopewidenedtodiversifytheinvestmentoffunds; 7. Thetypesofdomesticinvestmentsaswellastheareasofinvestmentmustalsobe clarified; 8. TheprovisionsoftheBillontransparencyandconflictofinterestshouldberevisited and expanded in scope to permit easy access to information by the public and ensure that those who serve on or with agencies directly concerned with the managementofoilfundscannotbenefitfromtheirpositionontheseagencies; 9. The relationship of the Bill to the existing law should be strengthened through explicit crossreferencing in order to ensure greater coherence; and interagency coordination; 10. There should be a provision requiring a supermajority of the Members of ParliamenttoeffectanamendmentorrepealofkeyprovisionsoftheBillwhenithas beenenactedintolaw.Thiswouldpartiallyguaranteeagainstpoliticalinterference by future governments that may feel restricted by its proposed legislative arrangements; 11. ItwouldbeusefultoaddaprovisiongivingtheMinisterofFinanceatimelinewithin which to make the regulations by legislative instrument on the matters specified under section 63 of the Bill and that where he fails to do so, then the Attorney General must formulate and pass such regulations. The reason is that there is a tendency in this country of ministers failing to formulate regulations even though requiredbylawtodoso.Asthemattersspecifiedundersection64arecriticaltothe properandefficientmanagementofoilrevenue,wecannotaffordnottohavethese regulationsinforce;and 12. TheBillshouldincludeexplicitprovisionsonprudentinvestorobligationssimilarto thatcontainedintheAlaskaPermanentFundCorporationLaw.
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IV.
TheGhanaPetroleumRegulatoryAuthorityBillandthe Petroleum(ExplorationandProduction)Bill
a. Introduction A major challenge to developing countries in the governance of their natural resource sectorsrelatestotheregulationoftheactivitiesandoperationsofenterprisesandinvestors withinthesesectors.Effectivepolicingoftheactivitiesandoperationsinnaturalresource exploitation as significant implications for social and economic development, including deriving optimal fiscal or financial benefits from such exploitation, the environmental sustainability and the social welfare of local communities. Though an effective regulatory regime is certainly not sufficient to produce such optimal outcomes or to minimize the deleteriouseffectsofnaturalresourceexploitation,itcertainlyisanecessarycondition. Itispossiblyinresponsetothischallengethatthegovernmenthasproposedtheenactment ofthePetroleumRegulatoryBillasanoverarchingregulatoryframeworkforthepetroleum sector. In its current form, the Bill proposes a substantially integrated approach to regulation that covers the upstream, midstream and downstream aspects of petroleum operations. In contrast to the current approach that compartmentalizes these subsectors, the Bill seeks to bring them under the auspices of one regulator the Ghana Petroleum RegulatoryAuthority(GPRA). Another Bill that has been proposed to regulate the upstream sector is the Petroleum (ExplorationandProduction)Bill.EventhoughthereisnomemorandumtotheBill,itisclear fromareadingofitslongtitleandsomeofthekeyprovisionsthatitseekstocomplement the GPRA Bill in relation to upstream regulation. However, as shall be pointed out below, therearesignificantoverlapsbetweenthetwobillsanditisnotimmediatelyclearfroma studyofbothbillswhytheycannotbeconsolidatedintoasinglepieceoflegislation.Thisis particularlythecaseinviewofthefactthattheGPRAwouldbesolelyresponsibleforthe regulationofallupstreampetroleumoperations. b. OverviewoftheBills i. TheGhanaPetroleumRegulatoryAuthorityBill TheprimaryobjectandpurposeofthisBillistheestablishmentofthePetroleumRegulatory Authority to regulate, overseeandmonitor operations within the petroleum industry as a whole.ThejurisdictionofthePRAcoversupstream,midstreamanddownstreampetroleum operations. The Bill proposes that the GPRA be vested with the power to regulate operations within the upstream petroleum industry with a view to making the industry moreefficient.Toattainthisobjective,theGPRAistoprovidetheenablingenvironmentfor increased private sector participation and investment, promote a vendor development programme to enhance national participation in the supply chain process and strengthen the regulatory framework for healthy competition and quality assurance within the
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upstream sector of the industry. In addition, the GPRA is to initiate, negotiate and administer petroleum agreements as well as assess appraisal programmes, field development plans, tailend production and the decommissioning of petroleum fields and facilitiesforapproval. As part of its oversight of the upstream sector of the industry, the GPRA can acquire or assist in acquisition of petroleum data, promote and administer the management of the data(bothforlicensedandunlicensedareas)andassistinthemeasurement,estimationand assessmentofroyaltyandprofitduetotheGovernmentandcostduetooilcontractors.Itis also to ensure that contractors and licensees uphold the laws, regulations, rules and contracttermsrelatingtotheirupstreampetroleumoperations. The Bill also seeks to provide a broad framework for interagency cooperation within the upstream industry by providing that the GPRA should collaborate with the Environmental Protection Agency, the Ghana Maritime Authority and relevant agencies to ensure that contractorsobligationsrelatingtohealth,safetyandenvironmentalstandardsinoilandgas operations are met. The GPRA is mandated under the Bill to collaborate with the Ghana Maritime Authority in the approval of plans for the construction of submarine petroleum pipelinesandtheallocationofsafetyzones. Themidstreamregulatoryschemeseekstogovernlicensingtoinstallandoperatefacilities forthetransportationandstorageofpetroleum.ItgivespowertotheGPRAtograntlicense onspecifiedconditions.TheGPRAhaspowertodeterminethemannerandplaceinwhicha contractor is to deliver petroleum. The Bill further regulates the grant of permit for the transportation of petroleum by pipeline and the survey of pipeline routes. The right to construct, finance, operate and maintain an export pipeline and pumping station is to be carried on through the GNPC. However, the GNPCs operations in this regard will not constitute petroleum operations under the Bill. Transportation arrangements viapipelines are to attract a tariff that is consistent with the respective shares of the petroleum transported.Tariffsaretobesetatlevelsatwhichthepipelinecompanywillcoverthecosts of constructing, financing, operating and maintaining the export pipeline and related facilitiestogetherwithareasonablereturn.TheBillseekstoimposearequirementthatthe Government be fully involved in the determination of the tariff charges for the pipeline. However,transportationofpetroleumotherthanbypipelinemustbedonewiththelicense oftheGPRA.UnderSection48theBillstipulatestherequirementtouseapprovedmethods and practices for confining petroleum obtained. In Section 49 a licensees documentation forimplementationofworkistobesubmittedtotheGPRAaspartoftheregulatorysafety supervision. Withregardtodownstreamoperations,thereisarequirementtoobtainalicensebeforea person can engage in downstream activity. Downstream activity in respect of crude oil, gasoline, diesel, liquefied petroleum gas, kerosene and other designated petroleum products covers importation, exportation, reexportation, shipment, transportation, processing,refining,storage,distribution,marketingandsale.Qualificationforalicenseto engageinupstreamactivitymayonlybegrantedtoacitizen,abodyincorporatedunderthe Companies Act 1963 (Act 179) or a partnership registered under the Incorporated Private
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Partnership Act, 1962 (Act 152) or a foreign individual or company in a registered joint venturerelationshipwithacitizenoraGhanaiancompany. Undersection52apersonmayapplytotheBoardforalicenseandtheBoardshallapprove the application for a license if the applicant meets all the conditions prescribed. A license issuedmayberenewedbytheBoardbutcannotbetransferredwithoutthepriorapproval oftheBoard.AlicenseissuedbytheBoardistobeconspicuouslyexhibitedbythelicensee in his business premises. Section 63 makes provision for a refinery license to be granted beforeapersoncanconvertcrudeoilintopetroleumproductsforsale.Undersection64the MinisteristodesignateanetworkofStrategicStoragedepotsforpetroleumproductstobe managedbytheBulkOilStorageandTransportationCompany.Apersongrantedalicense toengageinrefineryprocessandforstorageistodosowithoutdiscrimination.Bysection 69 is not to operate a downstream industry such as petroleum products retail station, petroleum products storage depot and pipeline, liquefied petroleum gas depot or oil refinerywithoutthepriorwrittenconsentoftheBoard. Under section 70 petroleum products for sale are to be displayed on a dispensing unit or flow meter unless the price of the petroleum product is indicated in Ghana Cedis or Pesewas.TheMinistryistomonitorthereleaseandstorageofstockofpetroleumproducts stored at strategic storage depots. By section 76 petroleum service providers in the downstream industry must submit a monthly report that indicate imports, production, domesticsaleandconsumption,inventoryofcrudeoilandproductsandexports.TheBoard istoconsiderthesereportsandtakethenecessaryaction.TheBillmakesprovisionforthe Boardtopromoteoffairtradepracticesinthedownstreamindustrywhichservethepublic interest, achieve efficiency and cost reduction, ensure continuous supply of petroleum productsandenhanceenvironmentalprotection. AnInspectoratedivisionistobeestablishedbytheAuthorityforthepurposeofgivingeffect to the Bill. The Inspector appointed may at reasonable times enter any premises used or suspected to be used by a petroleum service provider to investigate activities carried out there.TheGPRAmust,havingregardtotheneedforcommercialconfidentiality,releaseto thepublicanyinformationconcerningalicencetoanypersononpaymentofafee.Section 91requirestheGPRAtokeepdatasubmittedbyalicenseeconfidential. ii. ThePetroleum(ExplorationandProduction)Bill The Petroleum (Exploration and Production) Bill provides for the regulation of upstream petroleumoperationsandthusseekstorepealthePetroleum(ExplorationandProduction) Law,1984(PNDCLaw84).Ownershipofpetroleumexistinginitsnaturalstateisvestedin the state. The exploration, development and production of petroleum can be undertaken subjecttotheconclusionofapetroleumagreementamongtheinvestor,theRepublicand the Ghana National Petroleum Corporation (GNPC). Data and information generated as a resultoftheconductofpetroleumoperationsarethepropertyofthestate. While the Bill vests ultimate regulatory power in the Minister for Energy, it provides in certain instances for the power to regulate to be exercised either by the Minister or the GPRAorbyMinisterandtheGPRAorexclusivelybytheMinister.Forexamplethepowerto authorize inspections of petroleum operations (section 5), to request the provision of
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information relating to petroleum operations (section 7), to take measures necessary to ensuresafetyinpetroleumoperations(section38(2))andtoappointanauditortoauditthe operationsofacontractormaybeexercisedbyeithertheMinisterortheGPRA.Theonly instancewherepowermaybeexercisedjointlybytheMinisterandtheGPRAisinrelation totheapprovalofthelongtermexplorationandproductionprogramoftheGNPC(section 18(3)).Inmostcases,however,regulatorydecisionsaretobetakensolelybytheMinister. These include decisions relating to the management of petroleum blocks (section 9), unitisation (section 10), the approval of development and decommissioning plans (section 14),theapprovalofannualandlongtermproductionprograms(section15),theapprovalof the right of the GNPC to conduct petroleum operations in open blocks (section 18), the grant of consent for the assignment of petroleum agreements and the approval of the changeofownershipofacompanythatispartytoapetroleumagreement. In large part, the Bill is a modified version of the Petroleum (Exploration and Production) Law but has introduced a number of innovative and useful provisions which may have a positiveimpactonpetroleumoperations.Theseincludethesubmissionofdecommissioning plans (section 16), the establishment of the Decommissioning Fund (section 17), the domesticsupplyrequirement(section39)andthetaxationofinterestpaymentsonloansby thirdparties(section42). c. RelationshipwithExistingLaw BoththeGPRABillandthePetroleum(ExplorationandProduction)Billhavebeendrafted takingintoaccounttheexistinglawontheareastheyseektoregulate.Theyareclearlyin consonance with the Constitution and both make reference to existing legislation dealing withaspectsofpetroleumoperationsthatfallwithinthescopeoftheirprovisions.However, while the Petroleum (Exploration and Production) Bill merely seeks to repeal and replace PNDC Law 84, the GPRA Bill provides that when enacted, its provisions shall take precedence over any existing law that relates to upstream and midstream petroleum activities. These include the Environmental Protection Agency Act, 1994 (Act, 490), the EnvironmentalAssessmentRegulations1999(L.I.1652),theGhanaMaritimeAuthorityAct, 2002(Act,630)andthePetroleum(ExplorationandProduction)Act,19,PNDCL84.Ineffect, anysuchlawwillbedeemedmodifiedtotheextentthatitsprovisionsareinconsistentwith theprovisionsoftheGPRAActwhenithasbeenenacted.ThisattemptatmakingtheGPRA Act a superstatute may not work effectively and efficiently where there is minimal inter agencycoordinationofregulatoryactions.AsthishasalwaysbeentheprobleminGhana,it isbettertoexplicitlyrepealsectionsofexistingstatutesthataredeemed,intheopinionof Parliament,tocontradicttheprovisionsoftheGPRAActthantoleavetheminplaceinthe expectationthattheywouldbeinapplicableinpractice. d. BestPracticeReview In terms of conformity to international best practice concerning petroleum regulatory regimes, the two Bills were reviewed in light of similar regimes in the United States of America, Canada, the United Kingdom and Australia, all of which have long traditions of regulating oil and gas operations. The review was conducted in terms of the comprehensiveness and depth of the proposed legislative measures, their clarity and
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internalcoherenceorconsistencyaswellastheextentto whichtheytakeaccountofthe needsofthepoorintheregulationofoilandgasoperations. In general, the two Bills are extremely comprehensive in their coverage of areas of regulation,particularlyinthecontextofupstreampetroleumoperations.Theareascovered are in the main comparable to the best practice legislation the countries named above. However, it was noticed that the two Bills seem to adopt an approach that is based on providingaminimumsetofrulesoneachaspectofoilandgasoperationsandreservingthe powertomakemoredetailedregulationsgoverningthoseaspectstotheMinisterofEnergy. The legislative proposals on issues such as health, safety and environment are thus minimalistinapproachrelativetowhatisprovidedintheenablingstatutesofthecountries studied.AnexcellentexamplemaybedrawnfromtheprovisionoftheCanadaOilandGas OperationsActdealingwiththeescapeorspillageofoilorgasinthecourseofpetroleum operations.ThetwoBillsdealwiththequestionofenvironmentalprotectioninaverybroad way by imposing an obligation on a petroleum contractor to ensure protection of the environmentbyhavinginplacesystemstodealwithspillage,fireandsoon.Incontrast,the CanadianActspellsoutclearlyandindetailthebasisofliabilityforsuchactionsandrights ofpersonswhohavesufferedactuallossordamageaswellasthebasisfortherecoveryof costsincurredforactionstakenbythegovernment.39Inmostrespects,thetwoBillslackthe necessary depth as they tend to leave room for detailed regulations to be made by the Minister. Incontrast tothePetroleum(ExplorationandProduction)Law,theGPRABillsuffersfrom very poor drafting both in terms of structure and content. Most of its provisions are not clearandthereissomuchinternalincoherenceinit.Forexamplesection45oftheGPRA whichseekstostatetheprinciplesgoverningthepaymentofpipelinetariffsisprobablythe best candidate for legislative incoherence. The provision is unclear and introduces new concepts(suchasnominee)thatarenotdefined.Alsowords,phrasesandtermsareused interchangeablyintheBillwithoutanystatementoftheirrelationships.Sothetermspermit andlicenseareusedasiftheymeantthesamethingasapetroleumagreement.40 ThestructureoftheBillisalsoabitconfusing.Forinstancekeyprovisionsonissuessuchas the surrender, revocation or expiration of a petroleum agreement, which would normally flowdirectlyfromthemainprovisionrequiringthatanagreementbeconcludedpriortothe exerciseofrightsofexploration,developmentandproduction,areplacedinthesectionof theBilldealingwithmiscellaneousmatters.41Therearealsotoomanysectionsdealingwith offencesandsomeoftheactionsthataresoughttobepenalizedareclearlyoddcandidates forpenalsanctions.Forinstance,theprovisiononconflictofinterestinsection95oftheBill oughtnottobeinthepartoftheBillcreatingoffences.Ratherthanmakeitanoffencetobe involved in a situation of conflict of interest (e.g. holding shares in a petroleum company/firmwhilebeingamemberoftheboardoftheGPRAorothergovernmentalbody in charge of the petroleum sector), it is better to make it mandatory that such persons disclosetheirinterestandletajudgmentbemadeastowhethertheyshouldstillbetaking
39 40
See Section 26 of Canada Oil and Gas Operations Act. See for instance section 28(4) of GPRA Bill 41 Sections 120-122 of GPRA Bill
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part in decisionmaking relating to transactions in which they have an unmistakeable interest. TheTablebelowoutlinessomeofthekeyprovisionsandcommentsontheirdeficiencies. Section/Provision ofGPRABill Section23(b)
Commentary The power of the Authority to appoint and thus change or substitute an operator for an oil and gas field is too broad and should be expressly limited. There is need for flexibility here because private sector firms are usually better placed to determine who among them has the requisite competence, skill and financial capacity to be an operator than the government. WhyistheapprovaloftheNationalSecurityCouncilrequiredtooperatea drilling rig? If at all required, the Councils power of approval should be qualified(e.g.theapprovalshallnotbeunreasonablywithheldandwhereit iswithheld,theCouncilshallprovidereasonsforsodoingtotheextentthat itshallcompromisenationalsecurity) It may be necessary to specify some of the resource management and social considerations that may inform the decision of the Authority regardingthegrantofaproductionpermit The reference to a petroleum exploration and production permit seems odd; the use of the term petroleum agreement would make it internally consistentwiththerestoftheBill.Itmayalsobeusefultoaddaprovision to the effect that the contractor has a right to appeal the decision of the AuthoritynottograntaproductionpermitwithertotheMinisterortothe HighCourt SincetheBilldoesnotprovidefortheextensionofpetroleumagreements and the time limits for the implementation of work programs or the payment of area fees, it may be necessary to either provide for them or refer to the sections of the Petroleum (Exploration and Production) Bill dealingwithsuchmatters. Thereferencetoapetroleum explorationand productionlicenseisalso odd here. Is that the same as a petroleum agreement? The issue of co existence of petroleum contractors and persons interested in exploiting naturalresourcesotherthanpetroleumneedstobeadequatelyaddressed toavoidconfusionandalsoasituationwheretheassertionofthepowerof theGPRAcouldbeinterpretedbythepetroleuminvestorasamountingto regulatoryexploration.Inotherwords,thereisneedforacarefulbalancing oftherightsoftherespectiveholdersofnaturalresourcerights. The offence creating section should prescribe a sanction for its contravention The provision should specify the market (e.g. the New York Mercantile Exchange)soastominimizeconfusioninthedeterminationofthemarket referencepriceforcrude The entire provision requires redrafting to make it clearer. The various parties to a pipeline tariff contract and their rights and liabilities must be clearlyspeltout. The license conditions here should be made mandatory rather than discretionary
Section26
Section27(2) Section28
Section29
Section30
Section33(4) Section39 Section45 Section53(3)

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Section54(3) Section72 Section79 Section80
Section81
Section82 Section83(2)(d) Section84
Section85 Section91
Itwouldbeusefultospecifytheperiodofalicenseandprovideforrenewal uponexpiryofthatperiod Why should the minister be responsible for monitoring performance as opposedtotheAuthority What is meant by support in subsection (1) and why is environmental protection one of the objective under a section dealing with fair trade practices Is the state intending to expend resources to promote the entry of new players into an economic activity? Why not maintain a regulatory stance thatprovidesequalityofcompetitionandallowprivateeconomicactorsto decide whether there are sufficient market incentives to engage in the activity? IsitthecasethatinvestorstakingadvantageoftheprovisionsoftheFree ZonesActwouldbeexpected toexport75%oftheirproductsasrequired bythatAct?Howdoesthattallywithourcurrentstatusasanetimporterof petroleumproducts?Isthatstatusgoingtochangeintheshorttomedium termasaresultofthecommercialproductionofoilandgas? The reference to the Protection Against Unfair Competition Act in this section is misplaced. That Act deals only with the intellectual property aspectsofcompetitionandnotmonopolizationorcartelization. Whyisgovernmentalpricefixing(i.e.prescribedpetroleumpriceformula) better than pricefixing by market actors? The current tenor of this sub sectionisbadandcontradictory Theintentandpurportofthissectionseemstobethesameassection80. Is the Authority going to focus on regulation or market promotion activities?IstillthinkthattheproperroleoftheAuthorityistoregulateto eliminate or minimize anticompetitive activities and allow private economicsactorstomakechoicesaboutentry. It would be useful to first set up the Complaints Settlement Committee beforeprovidingforitsfunctions The provision of the GPRA Bill on confidential information (section 91) is not clear as to its scope of application, that is, whether it applies to upstream,midstreamordownstreamoperations.Ideally,itshouldapplyto all three streams but that needs to be made clear. Further, it is highly restrictive and not likely to promote transparency and accountability in relationtotheoperationsofboththeAuthorityandpetroleumcompanies. TheprovisionsofthePRMBilldealingwithconfidentialinformationcanbe used, with due modification, to regulate access to information under the GPRABill.
Ascanbeseenfromtheabove,theGPRABillrequiresalotofredraftinginordertoclarify itssubstantivescopeandcontentandtomakeitsstructuremorelogicalandlessconfusing. That should be done with an effort to consolidate the two Bills into one for purposes of enactment.Thereasonissimple:iftheagencythathastoacttoimplementbothlawsisthe same,itmakessensetohaveallitspowers,duties,rightsandliabilitiesunderoneroof.Itis alsonecessarytoreconciletheoverlappingprovisionsofthetwoBillsandtofillinthegaps in both. For instance, neither of the two Bills contains provisions regarding protection againstexpropriation.EventhoughthisisarightguaranteedundertheConstitution,itisnot uncommontostillprovideforitintheenablinglegislation.
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Also,intermsofregulatoryauthority,itmaybeusefultolimittheGPRAtotheregulationof upstream and midstream petroleum operations and then create a new agency called the National Petroleum and Energy Agency (NPEA) to take over the downstream sector by fusing the current functions of the NPA and the Energy Commission. In this way, specialization can be attained because of the difference in the nature and character of petroleum operation between the upstream/midstream subsectors and the downstream subsector. Where the former focuses on issue of rents for granting exclusive access to a publicresource,thelatterisconcernednotwiththerentsbutwithenergyavailabilityand consumer protection issues. Granted that these can be addressed under the same regulatoryregimeoverseenbythesameregulator,itisproposedthatregulatoryefficiency andefficacycanbeattainedbetterwhenthereisspecialization. e. ConclusionandRecommendations Inconclusion,itmustbesaidthatthecurrentlegalregulatoryregimeonpetroleumrequires some rationalization and the two Bills are intended to achieve that objective. However, substantialworkisrequiredtobedoneespeciallyinrelationtotheGPRABillwhichisata veryrudimentarystage. In view of this, it is recommended that the two Bills be consolidated for purposes of enactment. Alternatively, the overlapping provisions of the Bills should be removed and streamlined as to avoid legislative surplusage. In order to fill in gaps, there is theneed to introduce polluterpays principle in a more explicit and comprehensive manner and also provide expressly against gas flaring in the industry. A comprehensive provision on protectionagainstexpropriationofpetroleuminvestmentshouldbeintroducedineitherof the two Bills. Finally, the GPRA should be limited to upstream and midstream petroleum operations leaving either the NPA or the Energy Commission to deal with downstream issues. In the alternative, the NPA and the Energy Commission may be combined into a single downstream regulatory entity called the National Petroleum and Energy Agency (NPEA).
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V.
LocalContentPolicyProposal
a. Introduction
Alocalcontentpolicyisonethatrequiresfirmsoperatingwithinaneconomytoensurethat theirbusinesstransactionsincorporateasetamountorvalueoflocalmaterialsorservices. Local or domestic content requirements are widely used to ensure local value addition, especiallybyforeigninvestors,andthuslinkspecifiedinvestmentactivitiestoothersectors of the local economy. Governments use local content requirements to attain diverse economic or developmental objectives. These generally include the creation of a strong base for industrialization through increased domestic value addition, expansion of employment opportunities, enhanced export performance, trade balancing, transfer of technology, the curtailment of restrictive trade practices and the promotion of linkages between upstream and downstream industries. From an economic perspective, local content requirements can increase local production in intermediate goods, induce (or compel) technology transfer and learningbydoing in local industries and surmount coordinationproblemsrelatingtothesupplyanddemandofintermediateproductsinlocal markets. However, the welfare impact of local content requirements is not certain. As the United NationsConferenceonTradeandDevelopment(UNCTAD)notedinits2003publicationon foreigndirectinvestmentandperformancerequirements,theoreticalandempiricalstudies ofthewelfareimpactofsuchrequirementsoftenvarydependingonhowwelfareisdefined. Where for instance local content requirements are used to reduce the power of multinationalmonopoliesandincreaselocalsourcing,thewelfareofthehostcountrycould improveasaresultbutglobalwelfaremayreduce.42Empirically,thereportnotesthatthe welfare impact of local content requirements has also been varied. While some empirical studies have shown that they have been effective tools in overcoming information asymmetries and other market failures to prompt TNCs to source locally, other studies haveconcludedthatlocalcontentrequirementscanbeacostlyandinefficientpolicytool in terms of resources allocation and growth.43 However, depending on the political and economic contexts in which they are deployed, these requirements can enhance efficient capabilitiesoflocalsupplierswhooperatewithinacompetitiveenvironmentwithaccessto the technology and skills needed to sharpen their capabilities. The reverse may be true when they are employed behind a wall of protection: they tend to contribute to the development of inefficient suppliers that saddle the economy with outdated technologies andredundantskills.44 For Ghanas emerging petroleum industry, the Government has designed a policy framework for local content and local participation in petroleum activities with a view to increasingdomesticvalueadditioninthesector.Thepolicyframeworkcontainsanumberof proposals that aim to maximize the benefits of the petroleum industry both for the state
42
See UNCTAD, Foreign Direct Investment and Performance Requirements: New Evidence from Selected Countries (2003), at 7-8 43 See id., at 8. 44 Id., at 9
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andforlocalbusinesses.Thekeyproposalsofthepolicyframeworkarefirstanalyzed.Thisis followedbyadiscussionofbestpracticesbydevelopingandindustrializedcountriesinthe implementation of domestic content programs as part of industrial policy. In spite of potential challenges by their trading partners, most countries still continue to use local contentrequirementsasdriverstodomesticcompetitivenessandinordertosustainlocal nonefficiency policy objectives. Canadian and Chinese approaches to the use of local content requirements are reviewed and presented as exemplars of local content policies that have yielded concrete economic gains for their societies. Even though local bureaucratic,politicalandeconomicvariablesdifferbetweenGhanaandthesecountries,it issuggestedthatGhanacandrawupontheseapproachesincraftingandimplementingthe localcontentpolicies. The compatibility of the local content policy proposals with Ghanas obligations and commitments to the World Trade Organization (WTO) is also analyzed. In particular, the WTOcompatibility of the measures contemplated is examined in the context of the multilateral agreement on TradeRelated Investment Measures (hereafter TRIMS Agreement)whichspecificallydisciplinesdomesticcontentmeasuresbyWTOMembers.A numberofcasesdecidedbydisputesettlementpanelsoftheGeneralAgreementonTariffs andTrade(GATT),thepredecessoroftheWTO,andbytheDisputeSettlementBody(DSB) oftheWTOarereviewedinthissection.Theconclusiondrawnhereisthat,byallexisting standards, the local content proposals may be TRIMSinconsistent in their current form. Furthermore,theyarelikelytoviolatetheGeneralAgreementonTradeinServices(GATS) totheextentthattheyaccordpreferencestotheprocurementoflocalservicesoverforeign like services or service providers. The proposals can however be justified by a limited numberofexceptionstothesemultilateraltradeagreements. b. OverviewoftheLocalContentPolicyFramework According to the Policy Framework Proposal a number of policy objectives are to be achievedthoughtheimplementationofthelocalcontentrequirements.Thefirstobjective isthemaximizationofthebenefitsofoilandgasweathergenerationthroughmaximumuse of local expertise, goods as services, and the creation of employment for individuals as businessatalllevelsoftheoilandgasvaluechainaswellastheretentionofthebenefitsso denied in the country. The second stated objective is the development of Local capability though education, skill as expertise development, transfer of technologic and active researchanddevelopment.Thethirdobjectiveistheachievementofadegreeofinfluence and control our development initiatives for local stakeholders. The fourth objective is the attainment of at least 90% of local content and participation throughout the oil and gas value chain within a decade. The fifth objective is to increase the capabilities and international competitiveness of domestic business and the final objective is to create supportiveindustriesthatwillsustaineconomicdevelopment. AmajorcomponentoftheLocalContentPolicyFrameworkisthemandatoryrequirement thateveryprofit,operation,activityortransactionmusthaveaLocalcontentPlacewhich includesallaggressoftheLocalcontentFrameworkdocumenti.e.ownershipofoilandgas businesses, procurement of local goods and services, training and technology transfer, employmentandtrainingofGhanaians,andlocalcapabilitydevelopment.Thisobligationis composednotonlyonoilandgasfirmsbutalsoonregulatoryagencies.Theimplementation
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of the Local content Plan must ensure measurable and continuous growth of Ghanaian participationinallaspectsoftheoperations. In order to ensure local participation in the ownership of businesses in the oil and gas industry, the local content policy provide, that preference be accorded to Ghanaian independentfirmsintheawardofoilblocks,oilfieldlicenses,oilliftinglicensesandinall projects involving the award of contracts. This is however subject to the fulfilment of conditionstobespecifiedbytheminister.Foreignfirmsandoroperatorsmustcedeatleast fivepercentoftheirinterestinexplorationasproductionactivitiestoGhanaiancitizen.The interestsotransferredcannotbetransferredbytheGhanaiancitizentoaforeigner. Alloperatorsintheoilandgasindustryaretoberequiredtoprocure,asfaraspracticable, goods as services produced by or provided in Ghana in preference to foreign goods as services. Operators shall engage in local procurement of goods and services which are competitive in terms of price quality and timely availability. The policy also mandates preferenceforGhanaianentitiesintheprocurementprocessuptoamarginof10%above the fair market price of the goods or services. Thus in the evaluation of bids for (public) procurementpurposes,bidsthatcontainthehighestGhanaiancontentmustbeselected.A foreignoperatorcannotprovidegoodsandorservicestoanotheroperatorintheoilandgas industry unless that foreign operator operates from Ghana and partners with a locally ownedandregisteredcompany.Localcontentintheprovisionofgoodsandservicesstarts withaminimumof10%byvalueinthefirstyearofoperationstoaminimumof20%inthe secondyearandmustincreasebyaminimumof10%eachsubsequentyearorasmaybe specifiedinregulations. Thereisalsoamandatoryrequirementplacedonalloperatorstoprepareandimplement plansandprogramsforthetrainingofGhanaianinalljobclassificationandinallaspectsof the petroleum value chain so as to transfer technology and knowhow in petroleum operations. To this end, operators are obligated to provide the facilities, including scholarships,financialsupportandtechnicaltrainingplatforms Besides the training designed specifically to transfer technology and knowhow to Ghanaians, there is a general requirement to employ and train Ghanaian who already possess the necessary expertise and qualification at various levels of the operations of foreignfirms,includingmanagement.Thisrequirementsetsourspecifictargetsthatforeign firmsmustachievetobecomplaint.Usesare: To guarantee compliance, the employment and training must be approved by the Ghana Petroleum Regulatory Authority and once approved it cannot be varied by the foreign operatorexceptwiththepermissionoftheGPRA.Furthermore,theforeignoperatormust submit quarterly reports to the GPRA on its execution of the training and employment program. Thefinalaspectofthelocalcontentpolicyrelatestolocalcapabilitydevelopmentthrough theprovisionofsupporttolocaltrainingandtechnicalinstitutions.Thecoreobjectivehere istoensurethatGhanaianenterprisesandindividualsdeveloptherequisitecapabilitiesso astobecompetitiveinternationallywithrespecttotheprovisionofthefullrangeofsupport services required by the oil and gas industry. Seeks to partner with foreign operators in
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providing skills trainings at alllevels including artisanal training, training of technicians to provide maintenance services and high level training such as general management, engineeringdesign,procurementandbusinessstrategydevelopment. Intermsofitsimplementationstrategy,theLocalContentPolicyFrameworkprovidesthat effectwillbegiventothepolicyproposalsthroughtheenactmentofregulationsandother legal instruments. The GPRA will be assisted by an independent National Local Content Committee to oversee and ensure the full implementation of the Local content and participation policies. In addition, there will be established an Oil and Gas Business DevelopmentandLocalContentFundtosupportlocalcapabilitydevelopment.Thefundwill supporteducation,trainingandresearchanddevelopmentintheoilandgassector.Sources offundingwillincludecontributionsfromoperators,oilandgasrevenue,levies,grantsand supportfromdevelopmentpartners.Thedisbursementoffundswillbetheresponsibilityof theEnergyMinistryortheMinistryresponsibleforthepetroleumsector. c. EvaluationoftheLocalContentPolicyFramework The Local Content Policy proposals appear to have been thought though verycarefully. In certainrespects,theyareanelaborationoflocalcontentrequirementsthatalreadyexistin current legislation, especially the Petroleum (Exploration and Production) Law (PNDC Law 84). Section 23 of PNDC Law 84 imposes a number of local content obligations on contractorsthataresimilartoandinsomecases,thesameas,thosecontainedintheLocal ContentPolicy.Theseobligationsareasfollows: Ensurethatasfaraspossible,employmentopportunitiesaregrantedtoGhanaians havingtherequisiteexpertiseandqualificationsinthevariouslevelsofoperations; As far as practicable use goods and services produced or provided in Ghana in preferencetoforeigngoodsandservices; Prepare and implement plans and programs for training Ghanaians in all job classificationsandallaspectsofpetroleumoperations; Prepare and implement plans and programs for transfer to GNPC of advanced technologicalknowhowandskillsrelatingtopetroleumoperationswhileprotecting thecontractorscompetitiveposition.
Admittedly the Local Content Policy Framework has introduced more specificity into the existing provisions. However, it is not sufficient to require that investors provide a Local ContentPlanthatbroadlycoversallaspectsoftheLocalContentPolicy.Thedetailsofthe planareasimportantas,ifnotmoreimportantthan,theplanitself. While some of these policy objectives are clear, specific and in some cases, measurable, others are broad, vague and incapable of measurement. For example it is difficult to comprehendandmeasurewhatismeantbytheachievementofadegreeofinfluenceover developmentinitiativesforlocalstakeholders.Whatdegreeisenvisaged?Whatismeantby influence and control? What is meant by development initiatives? Is development a reference to oil and gas development or to macroeconomic development? Who are the targeted stakeholders? Do they include shareholders, employees, subcontractors, local communities or governmental agencies? Also what is meant by capabilities? Is it a
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reference to technical or productive capabilities? And finally, what are supportive industries? These questions underscore the fact that the Local Content Policy certainly requires more elaboration especially when it is being translated into legislation for implementation. The institutional apparatus for ensuring implementation may need to be reexamined. Currently,theLocalContentPolicyprovidesthattheMinistryofEnergyshouldhaveoverall oversightresponsibilityforitsimplementationinconsultationwithanindependentNational LocalContentCommittee.However,thespecificdutiesoftheMinistryandtheCommittee havenotbeensetoutinthePolicy.Giventhecomplexcharacteroflocalcontentmeasures, they have in practice often required multiple institutional involvement for efficient and efficacious implementation. For example, there is certainly a trade dimension to their implementation because of the fact that preference is being accorded to local goods and servicesoverforeignlikegoodsandservices.Thismaymeanthatcertainborderandnon border measures, including import restrictions and tariff adjustment measures to be successful.Thereasonissimplythatifthesegoodsandservicesareimportedatcompetitive worldprices,andareofgoodquality,operatorsmaynothaveanincentivetoprocurelocal goods in preference to them. This scenario already implicates the Ministry of Trade and Industry, the Ministry of Finance and Economic Planning and the Customs, Excise and PreventiveServices(CEPS)intheimplementationofthelocalcontentmeasures. Iffiscalincentivesaretobegrantedtofirmsthatcomplywiththelocalcontentmeasures, then it means also that the Ministry of Finance and Economic Planning, the Internal RevenueService(IRS)andCEPSwouldbeinvolvedintheprocessofimplementation.Both the IRS and CEPS will be tasked with auditing the returns of such firms and issuing a certificateofcompliance.CEPSwillalsomonitorandreporttheinputimportsoffirmsunder theschemesincethisisnecessarytodeterminewhethertheyaremeetingthelocalcontent requirements. The Ghana Investment Promotion Center may also be involved since the measuresinquestionareinvestmentmeasures.Also,apexindustryassociationssuchasthe AGIandtheChamberofCommercecouldbegiventhelegalmandatetomonitorandreport compliancetotheappropriatepoliticalandbureaucraticinstitutions.Thisisfeasibleonlyifit isassumedthattheapexindustryassociationissufficientlyautonomousofitsmembership andthatitwouldnotcolludewithitsmembershiptomisreportlevelsofcompliance. Asnotedearlier,thereisageneralstatementintheLocalContentPolicytotheeffect that fiscal incentives will be granted to firms that comply with the local content requirements.Itwouldbeusefultoclearlydefinethenatureofthefiscalincentivesand to make them attractive enough to elicit compliance. Tax incentives such as duty drawbacks,dutyfreeimportationofcapitalgoods,taxholidaysandsoonalreadyexist for some types of investments in the country. Also, notwithstanding that the Local Content Policy is neutral as to the ownership of the business enterprise subject to compliance,itwouldbeusefultodistinguishitstaxincentiveschemefromthosealready inexistenceforforeigninvestorsortieitintotheseexistingonesasadditionalincentives for meeting the domestic content requirements. Moreover, for a mandatory domestic content scheme to work effectively, the benefits of compliance must significantly outweigh the costs. For instance, if the benefits deriving from the proposed fiscal incentives under the scheme can be offset by savings arising from cheaper imported inputs,firmsmaynotseetheneedtocomeundertheschemeunlessthesanctionsfor
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noncompliancearehighenoughtodeterthemfromimportingtheirinputs.Therefore positive incentives (tax benefits) must be counterbalanced by negative incentives (e.g. financial penalties for noncompliance)45 if an adequate rate of compliance is to be expectedfromthescheme. Many developing countries that have imposed local content and other performance requirementshaveoftenresortedtomultiplefiscalinstrumentstoinducecomplianceas opposed to a single instrument that applies to several industries. In some cases, a number of fiscal incentive instruments are applied to a single industry. For example, under its Motor Industry Development Program, South Africa adopted three fiscal instrumentstoattainthetwinobjectivesofencouragingexportsofautomotiveproducts andenhancingdomesticvalueaddition.Thesefiscalinstrumentswere: An importexport complementation scheme that allowed equipment and componentmanufacturerstoearndutycreditsfromexportingandusethese credits to offset their import duties on cars, components or materials. The dutycreditscouldbetradedinthemarketforcash; Adutyfreeallowancefordomesticequipmentmanufacturersequivalentto 27percentofthewholesalevalueofthevehiclestheyproduce; A duty drawback scheme for small vehicle manufacturers with the value of thedrawbackdependentontheexfactorypriceofthevehicleproduced.46 Besides using multiple fiscal instruments to provide incentives to domestic industries, the practicebybothdevelopingandindustrializedcountrieshasbeentoenactspecificpolicies andprogramsforselectedstrategicindustriesandtodesigntheincentivestofittheneeds ofsuchindustriesratherthantoprovideablanketincentiveforall(covered)industries.For instance, an export credit scheme similar to the South African one mentioned above may notbeattractivetotheconstructionindustryinGhanabutwouldcertainlybeattractiveto foodandbeverageproducersintendingtoexporttheirproductstoothermarkets. d. InternationalBestPracticeReview i. CanadasBenefitsPlanModelinOilandGas CanadasBenefitsPlanApproach47 Within Canada, the trend in the use of DCRs has been in the direction of what may appropriately be described as the benefits plan approach. Basically, the investor is requiredtoshoworagreeonabenefitsplanwhichwouldbeimplementedinthecourseof production of energy. The trend towards increasing use of DCRs is exemplified in the approachesoftheCanadianprovincesofNewfoundlandandNovaScotiaundertheAtlantic AccordImplementationActsdealingwithoffshorepetroleumexplorationandproduction.
Exceptforthosefirmsthatopttotakeadvantageofthetaxincentivesunderthedomesticcontentscheme, thismaynotnecessarilyentailaprovisioninthelawthatstatesthepenaltiespayablefornoncompliancebut ratherataxincentivestructurethatisstrongenoughtoserveasapunishmentforthosefirmsoptingoutof thescheme. 46 SeeUNCTAD,note1above,atp.190. 47 ThissectiondrawssignificantlyfromacasestudybytheCenterforEnergyEconomics,BureauofEconomic Geology,UniversityofTexasatAustintitledNorthAtlanticCanada:LocalContentRequirements,and availableatwww.beg.utexas.edu

45
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IntheProvinceofNewfoundland,theAtlanticAccordlegislationrequiresthatpriortothe commencement of investment activities in offshore energy production, a Canada Newfoundland or a CanadaNova Scotia benefits plan be approved by the Offshore PetroleumBoardofeitherprovince.Thebenefitsplanmustcontainthefollowing: A plan indicating levels of employment for Canadians, especially the local laborforceoftheprovince; Aplantoprovidemanufacturers,consultants,contractors,andcompaniesin theprovinceandotherpartsofCanadawithafairopportunitytoparticipate onacompetitivebasistosupplygoodsandservicestotheinvestor; Anundertakingtoestablishanofficeintheprovincewhereappropriatelevels ofdecisionmakingaretotakeplace; An undertaking to give first consideration to individuals resident in the provincefortrainingandemployment; An undertaking to give first consideration to domestic goods and services wherethosegoodsandservicesarecompetitiveintermsoftheirfairmarket price, quality and delivery. The Board is however barred from compelling prospective investors to enter into uncompetitive contracts for goods and services; AplanindicatingexpendituresforR&Dtobecarriedoutintheprovince. Box 1: Sample Statutory Provisions from Atlantic Accord Implementation Acts of Canada 1. Opportunity
To provide manufacturers, consultants, contractors and service companies in the ProvinceandotherpartsofCanadawithafullandfairopportunitytoparticipateona competitive basis in the supply of goods and services used in any proposed work or activity{ 2. Employment
ToprovidefortheemploymentofCanadians,and,inparticularmembersofthelabor force of the Province More specifically consistent with the Canadian Charter of RightsandFreedoms,individualsresidentintheProvincebegivenfirstconsiderationfor trainingandemployment Inaddition,providefordisadvantagedindividualsorgroupstohaveaccesstotraining and employment opportunities and to participate in the supply of goods and servicesusedinanyproposedworkoractivity 3. Procurement
firstconsiderationis(tobe)giventoserviceprovidedfromwithintheProvinceandto goodsmanufacturedintheProvincewherethoseservicesandgoodsarecompetitivein termsoffairmarketprice,qualityanddelivery

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4.
EducationandTraining;Research&Development
aprogrambecarriedoutandexpendituresbemadeforthepromotionofeducation andtrainingandofresearchanddevelopmentintheProvinceinrelationtopetroleum resourceactivitiesintheoffshorearea 5. EstablishmentofOffice
the corporation or other body submitting the plan shall establish in the Province whereappropriatelevelsofdecisionmakingaretotakeplace;
ii. LocalContentRequirementsinChinasWindPowerSector Box2:LocalContentRequirementsinChinasWindPowerIndustry LocalcontentrequirementshavebeeninplaceinChinaswindpowerindustryformanyyears. Wind farm projects approved by the National Development and Reform Commission (NDRC) duringtheNinthFiveYearPlan(19962000)requiredthatwindturbineequipmentpurchased for these projects contain in least 40 percent locally made components. Beginning in 2003, NDRClaunchedaprogramtoauctionofftherightstodevelopmentforlargewindfarms(Wind Concession) that includes local content requirements that have been growing more stringent overtime.Requirementsbeganwithmandating50percentlocalcontentin2003,andincreased to 70% in 2004, where it remains today. In selecting the winning projects under these concessions,localcontentpercentages(abovetheminimumstandardsof5070percent)area keydeterminantoftheevaluationresponsiblefor35percentofthescoreusedinevaluating bids in 2006, up from 20 percent in 2005. In additions, the 70 percent local content requirementnowappliesnotonlytothegovernmentrunwindconcession,buttoallwindfarms beingdevelopedinChina. Theselocalcontentrequirementsarecausingforeignfirmsinterestedinsellingwindturbinesin China to develop a manufacturing strategy that will allow them to meet these requirements. Consequently, many leading international wind turbine manufacturers are either establishing localmanufacturingfacilitiesorassemblyfacilitiesforChinesemadecomponents.Localcontent requirementscurrentlymandateacertainfractionofdomesticmanufacturing,buttheydonot promoteacomprehensiveformoftechnologytransferthatincludesthetransferforknowhow orofintellectualpropertyrights.Consequently,foreignwindturbinemanufacturerscanmeet currentrequirementsbydevelopingaChinesemanufacturingbasewithoutnecessarilyinvolving Chinese owned firms in wind turbine design and assembly activities, and consequently can maintaincontroloverkeyintellectualpropertyandtechnicalknowhow. Obtaining the intellectual property associated with advanced wind turbine designs is a key priority for the Chinese government as it develops new policies to promote wind power developmentthatexplicitlysupportChinesewindturbinemanufacturers.Somehaveproposed, forexample,thatnewwindprojectsmayneedtomeetnotjustalocalcontentrequirement,but alsoalocalintellectualpropertyrequirement.Althoughtheexactdeterminationofthismetric 44|P a g e
ReviewofPetroleumBillsandLocalContentPolicy maybedifficult,theideawouldbetorequirethatthemajorityoftheintellectualpropertyrights (IPR) associated with the wind turbine would have to be in the hands of a Chineseowned (or perhapsmajorityChineseowned)company.ThiscouldbeachievedthroughlocalChinesefirms taking leadership role in selfdeveloping wind turbine IPR, or by those firms purchasing wind turbineIPRthroughlicensingarrangementswithforeignfirms(orthroughtheoutrightpurchase ofthosefirms). Source: Joanna I. Lewis, A Review of the Potential International Trade Implications of Key Wind Power Industry Policies in China, Paper prepared for the Energy Foundation, China SustainableEnergyProgram(2007)
Sept.2010
iii. WTOCompatibilityAnalysis Upon the coming into force of the MarrakechFinal Act establishing the WTO, all member states had to notify their existing traderelated investment measures to the WTO TRIMS Council.Fordevelopingcountries,afiveyeartransitionperiodwasgrantedafterwhichall TRIMS were supposed to be phased out. The period for industrialized member states was evenshorter[.].Memberstateswerehoweverpermittedtorequestforextensionofthe transition period if domestic economic circumstances did not allow for a smooth phasing outofexistingTRIMS.Formostdevelopingcountries,thetransitionperiodexpiredin2000 andsomerequestedforextensions.ThismeantthatanyTRIMSexistingafterthetransition periodwouldhavetobesubjectedtothedisciplinesoftheTRIMSAgreement. In this regard, the WTOcompatibility of the Domestic Content Bill can only be judged in termsofitscompliancewiththeTRIMSAgreement.Thebasiccriterionwouldbetheextent towhichtheBillpotentiallyaltersthebalanceofcompetitionbetweenforeignanddomestic productsthroughitsprovisions.Inotherwords,theBillsproposedmeasuresmustfitinto thefreetraderegimeoftheWTO. Three key questions are germane to WTOcompatibility analysis. The first is whether the Local Content Policy Framework, read as a whole, violates any WTO multilateral trade agreement?Secondly,iftheanswerisintheaffirmative,arethereanyexceptionsthatmay be made for the measure(s) proposed to be implemented? That is, is there any wriggle room available for Ghana to escape from its multilateral trade commitment regarding domestic content requirement? The third question is: What are the consequences of noncompliance?Thatis,supposingGhanagoesaheadtoenactandimplementtheproposed measures, what remedial options are available to other WTO members affected by the measures (e.g. governments of foreign intermediate input producers or service providers whomaylosetheirmarketshareduetothelocalcontentrequirements)? DotheLocalContentProposalsviolateanyWTOMultilateralTradeAgreement? It has already been noted that the WTO Agreement that has a direct bearing on local content requirements is the TRIMS Agreement. The TRIMS Agreement however makes explicit reference to the GATT, specifically to Articles III (National Treatment) and XI (QuantitativeRestrictions).Adomesticcontentlawmayalsopotentiallybeinconsistentwith
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the Subsidies and Countervailing Measures(SCM) Agreement ifitconfersanadvantagein theformofafinancialbenefit(e.g.ataxorinterestratecredit)thatisconsideredtoamount toasubsidytodomesticproduction.Thisopinionwouldthusanalyzetheprovisionsofthe TRIMSAgreementreadinconjunctionwiththoseoftheGATTaswellastheprovisionsof theSCMAgreementthatcouldbeinvokedtodisciplinedomesticcontentmeasureswithin theworldtradesystem.Inthecontextofservicesprocurement,alocalcontentrequirement mayviolatetheGeneralAgreementonTradeinServicesifitaccordspreferentialtreatment to domestic services or service providers to the disadvantage of like foreign services or serviceproviders. TheTRIMSAgreementprovidesinrelevantpartthatWTOmembercountriesareprohibited fromtheapplicationoftraderelatedinvestmentmeasuresthatunderminetheirobligation relating to national treatment and to the general elimination of quantitative restrictions. The TRIMS Agreement was adopted as part of Uruguay Round set of multilateral trade agreements in recognition of the fact that certain investment measures can cause trade restrictive and distorting effects.48 An illustrative list of investment measures that are primafacieinconsistentwiththeTRIMSwasthusannexedtotheAgreement.Accordingto the Annex, TRIMSinconsistent measures include measures which are mandatory or enforceableunderdomesticlaworunderadministrativerulings,orcompliancewithwhich isnecessarytoobtainanadvantage.Specifically,measureswhichrequirefirmstopurchase goods of domestic origin or from domestic sources whether expressed in terms of the volume or value of production and those that mandate that firms purchases or use of imported goods be limited to the volume or value of their exports are considered prima facie inconsistent with the TRIMS Agreement. The first disciplines measures designed to enforce domestic sourcing generally whilst the second disciplines measures which tie exportstothequantityorvalueofdomesticallysourcedinputs. In order to appreciate the legal implications of these provisions for the domestic content legislation of WTO member states it would be useful to review what GATT/WTO dispute settlement panels have said regarding the extent to which such measures conform to memberstatesfreetradeobligationsrelatingtonationaltreatmentandtheeliminationof quantitativerestrictionsandtheuseofsubsidiesassidepaymentstofirmsthatcomplywith DCRs. The first GATT Panel decision on local content legislation was rendered in February 1983 when the United States challenged Canadas implementation of its Foreign Investment ReviewAct,(hereafterFIRA).InCanadaAdministrationoftheForeignInvestmentReview Act, Canada had through the implementation of the FIRA obtained undertakings from foreigninvestorswhichobligatedtheseinvestorsto(i)purchasegoodsofCanadianoriginin preferencetoimportedgoodsorinspecifiedquantitiesortopurchasegoodsfromCanadian sources;and(ii)manufactureinCanadagoodswhichwouldotherwisehavebeenimported. The United States contended that these undertakings were inconsistent with Canadas national treatment obligation under GATT Article III especially Article III:4 and III:5. In generalterms,thenationaltreatmentprinciplebindsGATT/WTOmemberstoprovideequal treatment to imports and domestic products through their laws, regulations and
48
See Preamble to TRIMS Agreement
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requirements. In the view of the United States, these undertakings amounted to requirementsthatgavelessfavorabletreatmenttoimportedproductsthantolikeproducts of national origin. Notwithstanding the fact that the FIRA did not directly provide for domestic sourcing and manufacturing undertakings, foreign investors routinely negotiated purchaseandmanufacturingundertakingswiththeCanadiangovernmenttoeithersource fromormanufactureproductsinCanada. The GATT Panel first of all agreed with the United States that the purchase undertakings were requirements within the meaning of Article III:4 because these undertakings were enforceable by the Canadian government against defaulting investors in Canadian courts. The Panel rejected Canadas argument that the purchase undertakings were private contractual obligations imposed on foreign investors visvis the Canadian government. Second the Panel found that the purchase undertakings excluded the possibility of purchasingavailableimportedproductsthustreatingthelatterlessfavorablethandomestic products. The Panel did not find sufficient evidence to determine whether the purchase undertakings violated Article III:5 of GATT which covers domestic quantitative regulations dealing with the mixture, processing or use of products. Having found the purchase undertakingsinconsistentwiththenationaltreatmentobligationofCanada,thePanelruled thatCanadashouldtakestepstobringtheFIRAintoconformitywithGATTArticleIII:4. As noted above the Panel in the Canada FIRA case did not have sufficient evidence to determinetheissuewhetherthepurchaseundertakingsbyforeigninvestorsviolatedGATT ArticleIII:5asclaimedbytheUnitedStates.Ironically,itwouldbeinacasebroughtagainst the United States by a number of countries including Canada that this issue would be settled. Just before the conclusion of the Uruguay Round, in United StatesMeasures AffectingtheImportation,InternalSaleandUseofTobacco,anumberoftobaccoproducing countries, i.e. Argentina, Brazil, Canada, Chile, Columbia, El Salvador, Guatemala, Thailand and Zimbabwe, requested the constitution of a GATT Panel to determine whether the United States domestic tobacco content requirement under section 1106 (a) of the 1993 BudgetActofCongresswasincontraventionofArticleIII:5oftheGATT. Section1106(a)oftheBudgetActestablishedaschemeknownasthedomesticmarketing assessment (DMA). The DMA contained a quantitative regulation requiring that United States manufactures of cigarettes certify that they used at least 75 percent domestic tobaccointheirmanufacturingofsuchcigarettesannually.Noncompliancesubjectedthe defaultingmanufacturertomonetarypenaltiesandtherequirementtopurchaseadditional tobacco from domestic sources. The complaining countries thus argued that by imposing strictfinancialpenaltiesondefaultingmanufacturingfirms,theDMAeffectivelyprohibited suchfirmsfromusingmorethan25percentimportedtobaccoannually.Also,byimposing the75/25rationsonfirms,theDMAviolatedArticleIII:5totheextentitpredetermined the proportion of foreign and domestic tobacco that could be used in domestic manufacturing of cigarettes. Further, the DMAs minimum domestic contentrequirement violatedArticleIII:1whichrequiredthatdomesticmixinganduseprovisionsshouldnotbe applied to imported or domestic products so as to afford protection to domestic production. This was because, in the view of the complainants, the minimum domestic tobacco use requirements permitted unlimited use of domestic tobacco without penalty, while providing substantial penalties for the use of imported tobacco in excess of 25 per cent.
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The Panel ruled that the DMA was enacted by Congress by and implemented through regulations made by the United States Department of Agriculture. It thus constituted a regulation within the meaning of Article III:5. The DMA was an internal quantitative regulationinthatitestablishedaminimumspecifiedproportionof75percentfortheuseof UnitedStatesdomesticallygrowntobacco.IntheopinionofhePanel,theDMAcontravened ArticleIII:5totheextentthatitrequiredthataspecificproportionoftobaccousedinthe manufacture of cigarettes be supplied from domestic sources. The Panel thus recommendedtheUnitedStatesshouldbringitsDMAmeasuresintoconformitywithGATT. ItisinstructivetonotethatinthiscasethemajorityGATTcontractingpartiesthatcontested the Unites States domestic content legislation were developing countries with export interestintobacco.IndeedCanadawastheonlyindustrializedcountrypartlytothedispute. Consequently,oppositiontofuturemeasuresunderGhanaDCAshouldbeexpectedfromall countrieswithsignificantexportinterestsintheaffectedproducts. The Canada FIRA and United States Tobacco cases foreshadowed the legislative framework of the TRIMS Agreement. A WTO Panel decision involving Indonesias use of domestic content requirements has defined the parameters of the TRIMS Agreement in relation to such requirements. In Indonesia Certain Measures Affecting the Automotive Industry,aPanelwasconstitutedattherequestoftheEuropeanCommunities,Japanand the United States to determine whether Indonesias 1993 and 1996 car programs which provided for local content requirements linked to tax benefits for National Cars (i.e. cars whichincorporatedaspecifiedpercentagevalueofdomesticproducts)andtocustomsduty benefits for imported parts and components used in such cars, violated Article 2 of the TRIMSAgreementandArticleIII:4oftheGATT. The Panel first considered the issue whether the Indonesian measures at issue were investmentmeasureswithinthemeaningoftheTRIMSAgreement.ThePanelexamined thewordingofvariouslaws,regulationsandadministrativedirectivesrelatingtothe1993 and1996carprogramsandconcludedthatthemeasures[were]aimedatencouragingthe developmentofalocalmanufacturingcapabilityforfinishedmotorvehiclesandpartsand componentsinIndonesia.Aclearintentionofthesemeasures,thePanelreasoned,wasto significantly impact investment in car manufacturing. Consequently, the Panel rejected Indonesiascontentionthatthemeasuresdidnotqualifyasinvestmentmeasuresbecause they were not adopted by the governmental agency in charge of investment policy. The PanelfoundthatIndonesiahadactedinconsistentlywithArticle2oftheTRIMSAgreement. Animportantaspectofthepanelsrulinginthiscaseisthatasimpleadvantageconditional ontheuseofdomesticgoodsisconsideredtobeaviolationofArticle2oftheTRIMSevenif the local content requirement is not binding as such. Thus the choice between making DCRsaremandatoryorvoluntaryisnotnecessarilydeterminativeoftheissuewhetheror notaviolationhasoccurred. Finally, in India Measures Affecting the Automotive Sector, the Indian Ministry of CommercehadissuedaPublicNoticetotheeffectthatacarmanufacturerthatwishedto import automotive kitsmust enterinto a Memorandum of Understanding with the Indian Director General of Foreign Trade. The MOU imposed on the manufacturer an indigenizationconditionwhichrequiredthelattertouseaminimumamountoflocalparts
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and components and a tradebalancing condition requiring the manufacturer to ensure that its exports be equal to its imports over a stated period of time. The European Communities and the United States requested the DSB to determine the conformity of IndiasindigenizationconditionwiththenationaltreatmentobligationofGATT1994.While thedisputewaspendingIndiamodifieditsmeasures,butthePanelstillfoundaviolationof GATTArticleIII:4IndiaappealedthePaneldecisionbutsubsequentlydecidedtowithdraw itsappeal. FromtheaboveanalysisofGATT/WTOPanelandAppellateBodydecisions,itisclearthat certain components of the local content policy proposals may be inconsistent with the TRIMS Agreement. Of particular interest to the WTOcompatibility analysis is the requirement that all operators in the oil and gas industry should procure, as far as practicable, goods produced by or provided in Ghana in preference to foreign goods and shouldengageinlocalprocurementofgoodswhicharecompetitiveintermsofpricequality and timely availability. The policy also mandates preference for Ghanaian entities in the procurementprocessuptoamarginof10%abovethefairmarketpriceoflocallyproduced goods.Thesemeasuresaresimilartothosethatwerethesubjectoflitigationinthecases reviewed above. To be TRIMSinconsistent, however, we need to prove that these proposedmeasuresare(a)investmentmeasures;(b)thattheyaretraderelated;(c)that they require the use of domestic over imported products; (d) that they are mandatory or enforceableand(e)thattheyarenecessaryinordertoobtainagovernmentaladvantage. The Local Content Policy Framework document nowhere mentions the word investment. ButthePanelinIndonesiaAutosreasonedthatthefactthatameasureisnotexplicitly adopted as an investment regulation is no ground for deciding its character as such but rather the manner in which such measure relates to investment. Thus if the measure is designed to encourage investment, whether foreign or local, in the covered sector, it qualifiesasaninvestmentmeasurewithinthemeaningoftheTRIMSAgreement.TheLocal Content Policy cannot escape scrutiny as an investment measure based on this test. The Panel also held that the test of whether a measure is traderelated is a simple one of proving that the measure favors the use of local products over imported products and therefore impacts trade. The Local Content Policy obviously favors the use of local over foreign products and so meets this test. It is very clear that the requirements are mandatory and or enforceable and that foreign companies operating in the oil and gas sector cannot opt out of its scheme. From a reading of the Policy document, the words shallandmusttendtobeusedinreferencetotherequirements,leavingnodoubtthat thepolicymakersintenditsrequirementstobebindingandenforceable.Itisalsoclearthat thealternativecriterion,i.e.thatconformitywiththerequirementsisnecessarytoobtainan advantage, is satisfied to the extent that only firms that meet the requirements can take advantage of the promised fiscal incentives. The Local Content Policy is therefore potentiallyTRIMSinconsistent. Furthermore the Local Content Policy may be contested as inconsistent with the GATS where it can be established that its provisions discriminate against foreign services or serviceprovidersinfavouroflocallikeserviceorserviceproviders.IntermsofArticleXVII ofGATS,eachMemberoftheWTOistoaccordservicesandservicesuppliersofanyother Member, in respect of all measures affecting the supply of services, treatment no less favourablethanthatitaccordstoitsownlikeservicesandservicesuppliers.Thisisknown
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as the National Treatment obligation and it applies only to service sectors listed in a MembersScheduleofConcessions.Consequently,ifanyoftheserviceslistedinGhanas Schedule (e.g. insurance) is the subject matter of a discriminatory treatment in favour of local insurance suppliers in the oil and gas sector, the measure would be GATS incompatible. IftheLocalContentPolicyMeasurespotentiallyviolatetheTRIMSAgreementandthe GATS,arethereanyexceptionsthatmaybeinvokedinitsfavor? ThereareanumberofexceptionstotheTRIMSAgreementthatmaybeinvokedtodeviate fromitscoreobligations,includingtheobligationofmemberstatestodesistfromtheuseof localcontentrequirements.Article3oftheAgreementpermitsmemberstatestoinvokeall the exceptions to free trade permitted under GATT 1994. These include the exception relating to the use of safeguard measures to protect seriously injured domestic industries (ArticleXIX);thegeneralexceptionsrelatingtotheprotectionofpublicmorals,protectionof plant and animal life, the conservation of exhaustible natural resources, protection of intellectual property and restrictions relating to the exports of domestic raw materials necessary for the domestic processing industry during periods of price stabilization. The exceptions of the GATT relating to national security (Article XXI) and those relating to balanceofpaymentsmayalsobeinvokedsoastodeviatefromtheobligationsimposedby theTRIMSAgreement. Furthermore, Article 4 of the TRIMS Agreement specifically provides that developing countriesmayinvokethebalanceofpaymentsexceptionsofGATTArticleXVIIIinorderto temporarily deviate from their national treatment obligation as well as their obligation to eliminatequantitativerestrictions. In IndonesiaAutos (reviewed above), the Panel noted that as a developing country, Indonesia was entitled to invoke these exceptions in justification of its domestic content measurescontainedinthe1993and1996NationalCarProgramsbutfailedtodoso.49The question whether or not Indonesias domestic content requirements could have been justifiedintermsofanyoftheforegoingexceptionswasthereforenotdeterminedbythe Panel. In consequence, the Local Content Policy can be justified in terms of any of the above exceptions depending on the evidence that governmental agencies responsible for tradepossess.ForinstancepersistentbalanceofpaymentdeficitseitheronGhanastrading (current) or capital account or both may be invoked as the basis for using the measures proposedunderthePolicy,if,andonlyif,theCentralBankcanmarshalsufficientevidence to link these deficits to increasing imports and to demonstrate how local content requirements can surmount the balanceofpayments problem.50 In short, any exception invokedmustbeexplicitlyprovidedforinthePolicywhenitispassedintolawandsecondly governmental agencies must be ready with the evidence to support the exception.
49 50
See Indonesia- Autos, paragraph 14.92 The BOP exception is particularly dangerous for Ghana because in terms of Article XV of GATT 1994, the statistical opinion of the IMF on BOP matters is determinative as to whether a country can invoke the BOP exception in order to restrict international trade. See Report of the WTO Appellate Body in IndiaQuantitative Restrictions on Imports of Agricultural, Textile and Industrial Products (DS90) (1999). Thus given the current free trade position of the IMF (and the World Bank) in respect of Ghana, it would not helpful to invoke the BOP as the basis for DCRs imposed under the Bill.
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Depending on the exception invoked, some of that evidence may have to come from the private sector. For instance an exception to the effect that local content measures are required to safeguard domestic industries from serious injury posed by imports of like intermediate products can only be supported by industry or even firmlevel evidence relating to injury. Therefore, beneficiaries of the Local Content Policy and local firms in generalmustbepreparedtoprovidesuchevidencetogovernmenttomakeacaseforthe useoflocalcontentrequirementsassafeguardmeasures. WhatOptionsareOpentoWTOMemberslikelytobeAffectedbytheProposedMeasures? WTOmemberstatesareentitledtochallengeothermemberspoliciesandlawsthatnullify or impair free trade benefits that should ordinarily accrue to them under the various multilateraltradeagreementsbutfortheviolationoccasionedbythesepolicesandlaws.In certain cases, member states are even entitled to bring what is known as nonviolation complaints where measures that are otherwise consistent with the multilateral trade agreement nevertheless upset the competitive relationship in the marketplace between importsanddomesticproducts. The question whether or not the measures contemplated under the Local Content Policy would,ifimplemented,nullifyorimpairthefreetradebenefitsofGhanastradingpartners withintheWTOisanempiricalquestionthatcannotbeadequatelyansweredatthisstage. Suffice it to say that WTO member states likely to be affected by the measures would bothertocontestthemonlyifthestakesarehighfortheircompaniesdoingorwishingtodo business in Ghanas oil and gas sector. If the measures significantly impede foreign firms fromdoingbusinessinthesectorbyraisingtheirinputcostsoriftheyalterthebalanceof competitionbetweendomesticandforeignfirmsinfavoroftheformer,foreignfirmsmay complain to their home governments who will in turn explore all the options available to redress the complaint, including the option of contesting the measures through the WTO dispute settlement system. If the stakes are not high for foreign businesses, then Ghana maynothavetoworryaboutbeingdraggedbeforetheWorldTradeCourt. Finally, as can be seen from the cases reviewed so far, the trend seems to be that the industrializedcountriesmountchallengestolocalcontentrequirementsinareaswherethey possessacomparativeadvantagesuchasinthemanufactureofautopartsandcomponents and where that advantage is the risk of being undermined by lateindustrializers such as India,China,BrazilandIndonesia.Thereforeitmaybethecasethatwheredomesticcontent measuresareimposedonsectorsoronintermediateproductsinwhichtheydonotpossess sufficientcomparativeadvantagetheymaylesslikelycontestsuchmeasures. c. Recommendations Inviewoftheforegoinganalysis,itisrecommendedthat: 1. The Local Content Policy should be translated into legislation in orderto provide a basisforenforcementandcompliance; 2. The incentives to be granted to petroleum operators that meet the requirements shouldbeasdiverseaspossibleandnotbelimitedtofiscalincentives;
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3. There is the need for multistakeholder involvement in the design and implementation of the local content policy and program in order to ensure stakeholderbuyinandultimatelyprocuremaximumcompliance; 4. Interagencycollaborationisneededasmanygovernmentagenciesmustbeinvolved intheoperationalizationofthelocalcontentprogram;and 5. TheWTOcompatibilityofthelocalcontentpolicyandtheensuinglegislationmust be kept constantly in view to avoid challenges to its legality before WTO Dispute SettlementPanels.
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Legislative Review 2010-09

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CONSOLIDATEDREPORTONPROPOSEDPETROLEUMBILLSAND LOCALCONTENTPOLICYFORTHEPETROLEUMSECTOR

By: Dr.DominicAyine FacultyofLaw UniversityofGhana Submittedto: TheGhanaResearchandAdvocacyProgramme(GRAP) Accra Email:dominic.ayine@ayineandfelli.com;akuritinga@gmail.com

Seeforinstancesection39oftheEnergyCommissionAct(Act541)andsection.oftheNPAAct. Section1ofAct235 6 Section2ofAct235 7 Section3ofAct235 8 Section4ofAct235 9 Section12ofAct235

SeeforinstancethecaseofFWOilInterests,Inc.v.TheRepublicofTrinidadandTobago,ICSIDCaseNo. ARB/01/14,inwhichallegationsofcorruptionwerelevelledagainstofficialsofTrinidadandTobagoconcerning abotchedoilexplorationdeal.Thecaseisdiscussedinfraatp..... 13 SeeCoulombeetal,1995

Section6(1)ofBill(onwhatconstitutespetroleumreceipts)andsection64(onwhatispetroleumrevenue) Section 3 of PRM Bill 16 Section 10 of PRM Bill 17 Section11ofPRMBill 18 InKuwaitthistypeoffundgoesbythenameofReserveFundforFutureGenerations.

(a) (b) (c) (d) (e) (f) (g)

Section 29 of PRM Bill

SeeOliver,Dawn,Law,PoliticsandPublicAccountability:TheSearchforaNewEquilibrium,PublicLaw,1994, p.238at246. 36 SeeJusticeJ.N.KTaylor,TheConceptandProblemsofPublicAccountabilityUnderGhanaLaw,17Reviewof GhanaLaw,pp.7094at70.

Section 37.13.200 of Alaska Permanent Fund law.

All oil revenue enterthefund

All oil revenue enterthefund

A fixed proportion of oil revenues entersthefund

ThepublicoversightregimeproposedbytheBillalsodrawssignificantlyfromtheregimesof otherdevelopingcountries,especiallySaoTomeandPrincipe,ChadandTimorLeste.Table 2providesasummaryofthepublicoversightregimesinselectedcountries.

Table2:OilrevenueManagementOversightSelectedExamples OversightBody Membership Mandate

Section33(4) Section39 Section45 Section53(3)

Section54(3) Section72 Section79 Section80

Section82 Section83(2)(d) Section84

firstconsiderationis(tobe)giventoserviceprovidedfromwithintheProvinceandto goodsmanufacturedintheProvincewherethoseservicesandgoodsarecompetitivein termsoffairmarketprice,qualityanddelivery

aprogrambecarriedoutandexpendituresbemadeforthepromotionofeducation andtrainingandofresearchanddevelopmentintheProvinceinrelationtopetroleum resourceactivitiesintheoffshorearea 5. EstablishmentofOffice

See Preamble to TRIMS Agreement

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