Jacob Hobenu, Financial Analyst
Edited transcript
David’s Introduction: My guest today has written an interesting piece on the need for Ghana to have a sovereign wealth fund. He’s concerned that revenue from the oil will just go into the consolidated fund and be spent in a manner that will not make an impact on this country. I’ll be asking him what he thinks we can do with the revenue, how the sovereign wealth fund can be created and where he sees the future of Ghana with regard to oil and gas.
David: I saw a piece that you wrote about a year ago on the subject of oil and gas revenues. Oil and gas is not your area of expertise, you are currently working as a banker so what are you doing writing papers on this subject?
Jacob Hobenu: Managing revenue is all about finance and that is what I do on a daily basis. When news of the discovery of oil and gas in Ghana came up there was this sudden interest for advice from the Norwegians and other countries in the sub-region. All the seminars I saw on TV had people from Norway and Nigeria all offering advice on what to do with our money. I started digging way back to about three centuries, looking at the history of the extractive industry and wondering to myself if we had to take all that advice others were telling us rather than develop our own strategy.
David: So you wrote a paper on the need for a Sovereign Wealth Fund? I noticed that there was quite a bit of research there but the thrust of what you were saying is that the Dutch disease is very easy to contract, am I right?
Jacob Hobenu: Yes, the issue is that countries with some form of natural resource are usually excited and optimistic when these resources are discovered. For decades governments have thought of just absorbing this new stream of cash flows into the consolidated funds and use it for whatever fiscal expenditure. The difficulty with this approach is that the currency becomes overvalued, inflation sky-rockets, exports become expensive, and the currency becomes a hard currency. As a result of that the local industry will collapse because exports become too expensive for others to afford, and inflation sets in. We just can’t tame inflation; the oil revenue has not even started trickling in but we have difficulty managing inflation as it is now.
David: Large inflow of oil revenue has to be a good thing?
Jacob Hobenu: It is. However there is a way to manage the oil revenue. During the 17th century, Netherlands, which had virtually no natural resources, performed better than Spain which had an abundance of gold and silver coming from their colonies. The reason behind this was that they spent those revenues and it resulted in high inflation and an overvalued currency. Then local companies collapsed; then came unemployment and consequently increased poverty; although they had so much money. It is therefore a paradox. In recent decades some tiny middle income countries like Qatar, Bahrain, Oman and the United Arab Emirates have done extremely well. They have moved from third world status to middle income status and some even to first world status because they managed the oil revenue well by not just absorbing it and spending it but by putting it into a fund targeted at certain strategic industries and out of these industries other ancillary industries sprung up.
David: It’s estimated Ghana may receive up to $20 billion over the next two decades or so. Are you asking that we save it or invest it?
Jacob Hobenu: The issue here is that that $20bn over 18 years is equivalent to $1.1billion annually. In 2008 total government expenditure was around GHC 8billion and in 2007 government expenditure was around GHC 5.6billion.
David: You are saying it’s not that much money after all?
Jacob Hobenu: There was growth in one year of expenditure over GHC 2billion and that is more than the $1.1billion we will be receiving and so if we just want to spend it we’ll not actually see it because it will go into government’s normal expenditure. Unfortunately, we are so optimistic about the revenue potential of the oil industry and seem to believe it will transform Ghana and all that. Is that really going to happen? Of course we are all hoping that new discoveries will be made but based on how much we have now it’s really not that much. So we have to create a sovereign wealth fund, put all the revenues into that fund and then target certain industries for investments which is different from the fiscal regime i.e., spending it. So we target sectors like infrastructure, housing etc.
David: But that’s spending it?
Jacob Hobenu: It is spending it but it is not without receiving returns. Let me give you a typical example. It is estimated that Ghana has a housing deficit of about 400,000. Assuming government decide to clear this deficit over a 10 year period by building affordable housing for GHC 25,000, the banking system will need GHC10bn to be able to finance mortgages for those 400,000 units. Our banking system is just so small and cannot support it; at the end of 2008 total banking system assets was just about 11bn and out of that about 7bn was from customer deposits and that’s short-term. You cannot use short term resources to finance 20 year mortgages, which means we’ll need long-term funds. And for this housing deficit to be sorted out it will mean that there should be a platform where long term bonds will be issued for banks and that is one way we can use the proceeds from the oil revenue. Even in the USA they have government sponsored agencies that provide mortgages. So that if the banking systems cannot support housing, then government will intervene. Developments such as first class toll roads, inter-city and inter-regional toll roads could take place.
David: But you can put the money in the consolidated fund and still do that?
Jacob Hobenu: Yes, that is what we have been doing over the years but the issue is that government used those same funds to build houses and toll roads but then they were unable to recoup the revenue. But if you put the revenue into an entity that is a private sector arm of government investing in different areas, you are sure to reap huge benefits because the objective of many private sector arms of government are profit oriented unlike government which has social issues to worry about. All we need to do is take out the infrastructural burden from our budget and add it to the sovereign wealth fund to be run on a profit objective basis. The percentage of government’s budget that goes into infrastructural development is huge and that is a very big drain on government expenditure. We should Isolate the infrastructural task from government, free it of that burden and allow it to focus solely on social services such as health and education. Let the infrastructural task go into a government private development arm so as to take away interference from politicians. When I was studying for my masters in London, I realized that most private sector arms of middle eastern countries such as the Qatar Investment Authority , Delta Two, Government of Singapore Investment Corporation, Abu Dhabi Investment Authority were all in Western Europe and America acquiring stakes in strategic companies.
David: You would prefer government to buy stakes in major telecom firms such as MTN and Vodafone for example, right?
Jacob Hobenu: That is right. Many of these oil countries have the cash flows and they tried spending it through the fiscal regime but realized that they couldn’t manage the Dutch Disease and so they had to find a way to invest. In Dubai , infrastructure is a big thing and this is because their sovereign wealth funds were invested in infrastructure and so they have some of the best infrastructure in the world and the economy has boomed significantly over a short period.
David: What about using the resources to diversify the economy. For example, if we are of the view that tourism is worth developing, that might be an avenue for use of the resources. That is a more sustainable area of economic activity.
Jacob Hobenu: That is the idea behind the sovereign wealth fund because when it is invested it is not absorbed and dissipated.
David: But can you imagine politicians in a poor African country like Ghana with money suddenly flowing in putting that money aside?
Jacob Hobenu: There are few of such institutions that enjoy some independence and some level of autonomy although they are quasi government institutions such as the Bank of Ghana and the Social Security and National Investment Trust. Give the sovereign wealth funds such status such that they are independent and insulated from government interference. In Nigeria for instance, they established the Petroleum special trust funds but it actually collapsed because it was not given that much insulation and the politicians spent it.
David: I would imagine that transparency would be essential in ensuring that such good intensions are achieved.
Jacob Hobenu: The Sovereign Wealth Fund Institute is an organization of largely oil rich nations. It has a transparency index with basic requirements that include oil producing countries meeting to disclose financial statements, investment portfolios etc. This is to guarantee that people know how much money came in, where the money is and what they are doing with it on a regular basis. For instance in our case instead of allowing one auditing firm to audit such an institution on a yearly basis, what we can do is to rotate the auditing firms. For instance, this year we have PriceWaterHouseCoopers , next year we have KPMG so that the auditors themselves will act as checks on one another because auditors themselves can become corrupt. Creating a system that has checks and balances would minimize abuse.
David: In the President’s inaugural speech, I recall him speaking about Ghana’s plan to create a General fund for oil revenues. Is that the right way to go?
Jacob Hobenu: It is in the right direction. He talked about a general fund for future generations. I have not yet seen anything regarding implementation and yet we have barely a year to receive first oil revenue.
David: What would you have liked to see at this stage?
Jacob Hobenu: The creation of a legal framework determining the percentage of revenue that will go into the fund, what the fund will be used for and all that. I have not seen anything like that yet. The sad issue is that when first revenue trickles in and the system is not in place we may end up paying it into the consolidated fund with the intention of putting the sovereign wealth funds structures in place; trust me that will delay the process.
David: Over the years, a substantial amount of revenue was generated for this country from gold mining. So what did government do with that money?
Jacob Hobenu: In Botswana, at the time of independence they were very poor. What happened was that they established a fund and made the government enter a 50-50 joint venture with DeBeers of South Africa. Botswana is the world’s largest producer of diamond by value. Botswana over that period (from 1966) to date moved from a poor country to middle income status with a per capita GDP of $9000 and they’ve grown consistently over the years at about 9%. This is attributed to the systems they put in place. Currently Ghana has less than 20% stake in all the mining firms and there are even some firms in which we do not have any stake at all; and all that we get is 3% royalty. The money we receive is not that huge and the other issue is that those revenues are put into the consolidated fund. We have a huge population of 22 million, distributing that tiny revenue to everybody will not make us feel the impact of the resource. If we created a target fund with the revenue and targeted just one sector like housing, we would not be faced with slums around the cities. We would have had a well planned economy and out of that we would be able to do business more easily and freely.
David: So most of the revenue that came from gold you are saying went into the consolidated fund and was spent.
Jacob Hobenu: That’s right. And so we have nothing to show for all that gold that’s been dug out unlike in Botswana with the entire infrastructure. They have created a middle income economy to show for all the diamond mining. On the contrary we have environmental degradation and nothing really to show. Again, in Botswana, the industry has been expanded with auxiliary industries feeding into the diamond industry with a major revenue drive. We started it and I would very much have liked to know what Ellis, Biney and Brown, the Fanti merchants who started the Ashanti mine in the 1890’s think today looking back at what they started. Now it has been taken over by multinationals. It is our resource. What we need to do is put structures in place to benefit from it. I am very much in favor of GNPC taking up more stake than the usual 10% because that is what will really make Ghana benefit.
David: Must one always own to receive benefit?
Jacob Hobenu: For gold, because we own so little, the chunk of the revenue is from tax. The problem with our tax collection is that there are too many loop holes in the system. One other important issue is that the oil revenue will flow in freely based on whatever entitlements we have. The tax components are so easy to collect; what will happen is that we may end up focusing on the revenues from the oil industry and not focus on fixing the loop holes in the tax regime for the other industries. We need to put the structures in place and let government expenditure continuously be financed by tax revenue; let us plug the loop holes in the tax collection system and introduce more efficient taxes on real estate. Let’s also ensure that we collect it in order to finance the social services and let the oil revenue go solely into infrastructure development and clear the housing deficit. With regards to the Western Region, what is needed is a whole new economic city for a minimum of 2 million residents that is well planned. Accra and Kumasi are chocked and if we should have a third major economic city, the western region is the obvious choice. A vibrant petrol chemical industry and oil industry need to be developed in the Western Region. It will demand billions to put these structures in place. The oil revenues can be targeted at addressing some of these infrastructural needs and requirements. When this is achieved, auxiliary oil firms in the upstream, downstream and middle-stream will all feel comfortable to establish operation centers there; if there is no infrastructure, we will be limiting and restricting ourselves to just the upstream sector.
David: Sounds like we need government to have a clear idea of what it wants to do.
Jacob Hobenu: Yes, a government with a vision. We heard what His Excellency the President has said regarding a general fund to diversify the economy for future generations but putting in place the structures and the legal framework is the problem. If these basic structures are in place, implementation will ensure that his vision becomes a reality.
David: Actual implementation has been one of Ghana’s greatest weaknesses.
Jacob Hobenu: Politicians do not have what it takes to implement ideas in our part of the world because they are not backed by think-tanks. Unfortunately in our part of Africa politicians surround themselves with other politicians.
David: So we don’t always have competent people in charge, do we?
Jacob Hobenu: No we don’t. That is one difficulty we must overcome at some point in our development.
David: Thank you very much for coming
First Broadcast 19th September 2009, TV3 Ghana
