What Can Previous Booms Tell Us About the New Oil Boom?

*IMANI: What Can Previous Booms Tell Us About the New Oil Boom?*

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Ghana’s turnaround after nearly two decades of military misrule began with the reforms of the late 80s.

Though, today, many consider these reforms – driven mainly by the so-called Bretton Woods institutions – to have achieved next to nothing in terms of socio-economic transformation, even their worst critics agree that at the time they were an essential element in the process of arresting Ghana’s terminal decline.

The decades since then have had their own defining attributes in the context of Ghana’s self-extraction from the abyss of complete economic collapse, perhaps best exemplified by the famines and mass expulsions of Ghanaians from neighbouring countries that marked the early 1980s.

The 90s saw the magnificent rise of a modern telecommunications industry in this West African country of 24 million. The government implemented bold and far-seeing reforms, turning around the wholly degenerate state of affairs that Professors Kofi Allotey and Akorli, charitably, prefer to describe as: “significant service quality problems”.

The liberalisation of the telecom industry in this era was guided by a wise marriage between national interest and private incentive, and was largely responsible for reversing the disintegration of the telecom system whereby rotten cables competed with widespread theft for pride of place in the gallery of confusion.

The reforms that accompanied the liberalisation included the establishment of an independent, autonomous, regulator, and the breaking of the monopoly of the state-owned service provider, which had become by this time a byword for corruption and inefficiency.

The stage was thus set for an expansion of telephony access from 1 in every 300 in 1994 to 1 in every 2 persons in 2010. This boom in the first decade of the new millennium was clearly predicated on the wise conduct of the authorities in the preceding decade.

So if telecoms had been the turnaround story of the 90s, what took the 2000s by storm?

The financial industry.

While it is true that financial industry reforms were included in the package that Structural Adjustment brought to Ghana in the late 80s, and also that liberalisation was consistent throughout the 90s, it is in the 2000s that the reforms truly gelled.

A stabilisation in the so-called “macroeconomic environment” evidenced by steadying inflation, some reduction in interest rates and a reduced tendency on the part of the central bank to print cash for the government to splash around in wanton fashion, led to a remarkable flourishing of the banking sector.

The Ghana Stock Exchange over a significant period was touted as one of the best performing exchanges in Africa.

A flexible, light-touch, regime was put in place for the so-called “non-banking financial industry”, thus allowing non-deposit taking credit institutions (such as the now vaunted UT) to thrive. Private investment surged into insurance and pension funds. Private equity became almost mundane, as the likes of Ghana’s DataBank led the drive to buy into the moribund erstwhile state-owned manufacturing sector, albeit with mixed results. And by the end of the decade, the number of banks operating in the country had grown in number from just about a dozen to more than 27.

These fresh attitudes on the part of the authorities and the key industry players owed significantly and directly to the strengthening of independent, autonomous, regulatory bodies, such as the Securities & Exchanges Commission and the Inspectorate divisions at the Bank of Ghana. Freed of the short-term imperatives of politicians, the tendency grew for these actors to refrain from arbitrary interference and to allow for the professionalization of the sector.

And yet, there is now unanimous agreement amongst the chattering classes that the gains from these two sectors are faltering. Failure to persistently stay the course of innovative policymaking has led to diminishing returns, as quality credit remain out of reach for small and medium enterprises, while hopes for a massive outsourcing industry built on top of the telecom base gradually dim. Increasingly, government sees the two industries as cash cows, to be quickly milked for more politically convenient priorities, and the notion that their real role lies in innervating other parts of the economy towards greater productivity seems to be losing weight in the corridors of power.

As we turn over to a new decade, a new story beckons – that of oil.

The insights that the telecom transformation of the 90s and the financial sector transformation of the 2000s bring to bear on the new oil era should be obvious by now.

In the morning of December 15 2010, the Ghanaian President symbolically turned on the taps for oil to begin flowing from Ghana’s first significant commercial oil find – the Jubilee field.

The “program of field development” leading towards this day has been available to the government in various formats for more than two years now. Yet, the updated laws and regulations to govern the nascent production stage of the program are still being fiercely contested in Parliament. More critically, the Ministry of Energy is still in charge of the sector as the de facto regulator.

There is anything but clarity about several key aspects of the industry. The policy process is happening in the context of a transparency vacuum that frightens social activists and public interest analysts. Revenue analysis for policy planning purposes remain superficial because there is still no official view on how much it would cost to produce a barrel of oil from the field.

Of the other two key parameters that would determine the likely revenue inflows, only the estimated average price of a barrel of oil in the coming fiscal year (presumably discounted to North Sea Brent since the new oil is “light sweet” crude) has received official treatment. Anticipated average volume of production is only murkily appreciated. The reason being that in the name of “fast-tracking”, the original plan that called for the development of more than two dozen production wells was pared down to one in which less than half of this expected number was drilled. Pipelines to cart away gas associated with the oil to power onshore power-plants and feed fertiliser factories, amongst other hopes, won’t be on stream for at least 18 months.

In the specific case of the gas infrastructure, even though the political elite would be hard put upon to concede, the truth is that the financing was mired in confusion, with rival companies laying claim to the technical contract, principally because government argued that all the gas ought to be provided to the state for free. They should have, as in the case of the telecom liberalisation of yesteryear, married national interest to private incentive. Today it is still not clear whether the associated gas shall be flared, used in place of crude to power the converted vessel that is serving as the production platform, or injected into the field. While the oil companies have at several points indicated that injection was the most viable compromise (and had even drilled wells for this purpose), it now appears that this approach could endanger the integrity of the field, and that one of the gas-injection wells has actually not been completed.

The companies say there shall be “operational flaring” of the gas (a practice abhorred by environmentalists), and that this is permitted by incoming regulations. The government says there shall be no flaring. As usual, you can’t make head or tail of it.

The point is hardly whether oil shall prove to be a “curse” or a “blessing” for Ghana. That artificial dichotomy is simplistic to the point of uselessness. The oil find, impressive though it is, does not change the fact that Ghana’s proven reserves and production volumes are puny compared to what pertains in places like Angola and Nigeria, where the force of oil has been substantial enough to knock out of place several important systems (or, on a per capita basis, places like Gabon and Equatorial Guinea). The features of Ghana's nascent industry places the country more fittingly in a category that includes such countries as Cameroon, DRC, Cote D'Ivoire and Chad. The real choice is actually one of oil becoming either a drop of “catalyst” or a bag of “stuffing”. A catalyst would generate multiplier effects across the economy. Stuffing, on the other hand, will create the bloated impression of plenty, leading to reckless spending decisions and creeping fiscal irresponsibility.

Wisely, however, the government has begun to dampen some of the excesses of enthusiasm that had started building up around the oil. It has revised anticipated oil revenues for 2011 from $1 billion to a conservative $400 million. This is very prudent since revenue forecasting for policy planning purposes, in direct contrast to revenue forecasting for commercial public relations purposes, should be conservative.

As you watched Ghana’s political elite, decked in blue jumpsuits branded by one of the 5 private companies in the consortium that developed the Jubilee field, sauntering through the steel maze of the production vessel’s deck on national TV, the image must have seemed very apt. You must have thought: "they are still finding their way through the labyrinth."

For all our sakes, we hope they make it.

*Courtesy of IMANI-Ghana (www.imanighana.org) & www.AfricanLiberty.org *