Back in March, Ghana’s Parliament passed the Petroleum Revenue Management Act, formally creating two new Ghanaian sovereign funds: the Ghana Heritage Fund and the Ghana Stabilization Fund. I’ve finally had the time to read the Act in its entirety, and I found it rather interesting. Given Ghana’s consistent high scores for good governance, you won’t be surprised to learn that the Act has many of the ‘best principles’ of design and governance. Still, there were a few aspects of the Act that have caused controversy. But before I get into that, let me catch you up.
As their names imply, the Stabilization Fund will help smooth petroleum revenues, while the Heritage Fund will be an inter-generational savings fund. The Minister of Finance will be responsible for overall management of the funds, but the Central Bank will be responsible for the day-to-day operations. If this setup sounds familiar, it’s because this is pretty much a carbon copy of the Norwegian design: the NBIM manages the money (Central Bank) and the GPF-G has oversight for policy (Ministry of Finance).
In Ghana’s case, the Central Bank will be constrained in its investment options. Basically, the new SWFs can only invest the assets in investment grade fixed income securities (although the Act does offer quite a bit more detail as to what that actually means). This reminds me of the approach adopted by Timor-Leste, which decided to start slow (with fixed income) and diversify over time (which it is doing now). It’s a sensible way to go about things, as top notch institutional investors do not emerge overnight.
And yet, while the Act is quite sophisticated and solid, it has not been without controversy. For example, there is a provision that allows the government to borrow against the oil assets in the funds. That’s not something I would have included because it reduces the disciplining effect the funds should have on politicians’ spending habits. In short, while the Act does a good job of defining what the fiscal rules are for fund contributions and withdrawals, the ability to borrow unconstrained money (even if it is backed by a highly constrained, rule-bound SWF) undermines the power of the SWF’s rules and governance practices.
In addition, many were against the Heritage Fund, on the grounds that the country faces serious developmental challenges that require capital investment today. And it’s a fair point. I’ve noted before that (setting aside capacity constraints and Dutch Disease) there is a very good case to spend the money on domestic infrastructure with lasting economic benefits for developing countries.
Whatever the case, all credit to Ghana for taking some initial steps to prevent the resource curse. But there are many more steps to come. Next up on the agenda: implementation and operation.
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