Ghana’s downstream petroleum regulator, the National Petroleum Authority, which is responsible for enforcing fuel quality standards on the market, issued the notice below last week but it is only now getting attention.
It is a curious edict. It says in simple language that fuels refined in Ghana can have as much as 1500 parts per million (1500 PPM or 1500mg/kg) content of sulphur. More than that, such dirty fuel can be mixed up with imported fuel, which, on the other hand, must still adhere to the ECOWAS standard of 50 parts per million (50 PPM or 50mg/kg). Worldwide, countries that take public health seriously are waking up to the frightening effects of air pollution and aggressively pushing for fuel sulphur content to go as low as 10mg/kg.
Here in Ghana, Environmental Protection Agency (EPA) measurements show regularly that in large cities like Accra, the annual concentration of Particulate Matter (think soot, smoke, dust, all that nasty stuff) is often far above the World Health Organisation (WHO) standard of 10 micrograms per cubic meter of air. The Global Burden of Disease Study (GBD), the definitive global guide on epidemiology, advises countries to aim for 7.3 micrograms, plus/minus 1.5ug. The table below shows that concentrations in Ghana are routinely 10x what they should be.
Sulphur dioxide, the main output when sulphur in fuel is burnt in combustion engines, exacerbates particulate matter (PM) effects in very complex and dangerous ways. The correlation between sulphur content in fuel and PM emissions is so strong as to be literally linear (one major route being the formation of sulphate particles in the air).
Sulphur dioxide itself causes serious respiratory and other health issues. From an environmental health perspective, acid rain and acidification of water bodies have all been traced to the noxious gas. Commentators tend to blame mining for Ghana’s increasing acid rain problem, with its catastrophic impacts on agriculture and biodiversity. But emissions from dirty fuel is as much a problem.
Dirty fuel indeed accounts for more than a third of all PM emissions in observations.
Not surprisingly, the number of people who experience strokes, cancers, heart disease, and other harms (including, for the very unlucky, death) as a result of the worsening air pollution in Ghana exceeds 500,000 every year.
This was the context that informed the decision in 2013 to tighten regulations on sulphur content in fuel. At that time, due to concerns about transition issues, the maximum limit was pegged at 3000 PPM. Increasing evidence of the intensifying health damage being caused by air pollution led to an ECOWAS-wide resolution to limit sulphur content to 50 PPM. In November 2016, Ghana set a deadline of July 1st 2017 for all market participants to adhere to the guidelines, except local refineries. When ECOWAS set its timeline to 2020, Ghana reassured the environmental standards community that it intended by that year to be fully compliant, including in its local refineries.
The problem is that Ghana has never really been truly compliant. Importers of refined fuel have flouted the relevant regulatory directives for a long time. And the latest decision to push local refinery compliance to 2023 is merely another gimmick.
In 2020, Broni-Bediako and his research collaborators at the University of Mines & Technology in Tarkwa sampled fuel from several fuel retail outlets in the town. They found concentrations of sulphur as high as 5x the legal limit in some of them. More frighteningly, not a single sample picked up conformed with the regional standard. (Minor distinctions among gasoline, diesel, LPG etc. don’t matter for the ensuing analysis).
Worse, the UMAT researchers found that semi-formal fuel resellers (locally called, “Gao Gao”) actually market product with lower sulphur content on average than the branded Oil Marketing Companies (OMCs).
What is sinister about findings such as the UMAT one is the way they reinforce longstanding concerns about poor and complicit regulation in the downstream petroleum sector. Observers have, for instance, persistently complained about rampant corruption.
In 2013, freelance investigative journalist, Sally Hayden, who has worked with the likes of Reuters and the Financial Times, pierced through the fog to gather clear evidence of serious abuses across the value chain. Inept regulators, rent-seeking politicians, corrupt intermediaries and a largely inert public have formed a combustible mixture literally fouling the air at every turn.
In its review of local capacity, the EPA lists a litany of gaps which raises serious questions about the actual air quality management being done in Ghana today. The claims by the NPA that it will ensure that, at least, imported fuels meet the 50 PPM standard (whilst allowing commingling with non-conforming fuel that will definitely complicate enforcement) are seriously contested by evidence of seriously weak ability to properly enforce the standards.
Nearly 5 years after local refineries, principally the Tema Oil Refinery (TOR), were given special treatment to get their act together and stop supplying dirty fuel to the market, the NPA is back with another lame excuse for continued pollution.
TOR’s reasons for why it cannot meet the higher regional standard (which is still 5x higher than the limit allowed in more health-conscious countries) remains the same: it cannot afford to do so. This is lame for two reasons.
Its former Chief Executive greatly exaggerated the cost of investments needed to acquire equipment to desulphurise the fuel it sells. The $300 million he quoted is nearly eight times what experts in the US typically estimate for refineries significantly bigger than the 45,000-barrel refinery operated by TOR. This is the case even when they opt for the more expensive standard catalytic hydrodesulfurization method.
For example, a benchmark study on hydrotreater installation/conversion to meet the American EPA’s much more stringent (and thus more expensive) sulphur content guidelines show that, adjusting for TOR’s technical and operational parameters, $500 per barrel per day is a viable cost estimate . In TOR’s terms, that is less than a $30 million investment (likely much lower because of the 5x laxness in standards). Another way of looking at it is the cost per gallon approach, where the experience from the US, adjusted to Ghana’s context, suggest about an extra 10 pesewas per gallon of fuel. Meanwhile, new adsorbent based technologies promise to radically lower desulfurization costs multifold.
Equally valuable to know is the fact that TOR can avoid a significant proportion of the cost by simple crude selection. Given prevailing prices in Ghana, no refiner has any business using anything other than light, sweet, grades of crude.
So, for example, using Bonny Light crudes from neighbouring Nigeria (say, under a revamped Government to Government supply deal) immediately reduces the sulphur content to 1300 PPM (considerably lower than the NPA’s 2013 3000 PPM and subsequent 1500 PPM standard) even before advanced techniques are applied to lower the content further.
If next door Ivory Coast can license American technology to meet tougher global (not just regional) sulfur content standards, it gets harder to convince rational people that Ghana cannot meet laxer regional standards. (SIR has in fact been producing gasoline at the 10 PPM global standard for many years now, so this investment was to lower cost and cover other fuel fractions).
Nor is the fact that TOR is an arthritic performer, constantly shutting down production whenever it runs out of funds, a reason to dismiss the dirty fuel matter. The government has no plans to permanently close it down. So long as it remains an epileptic supplier of fuel to the market, and to the extent that it engages in various logistics activities (including medium-term storage), its noncompliance with the standards shall continue to complicate the enforcement picture as a whole, especially because of the commingling loophole.
All the arguments canvassed in this brief essay would have been the same ones that most environmental and Civil Society extractive sector actors and commentators would have made to the NPA if it had consulted properly. But it didn’t. It does not seem to have consulted even the Ghana Standards Authority (the actual domestic custodian of the sulphur standards) and the Environmental Protection Agency for formal, written, opinions before issuing this kneejerk waiver. The EPA and the DVLA, for instance, are required, under current policy, to verify if vehicle filters and other emission controls can handle the tailpipe exhaust requirements in line with air quality standards. Decisions about fuel properties must thus be subjected to a scientific, multistakeholder, engagement test before being made and publicised.
The tendency of those who wield power in Ghanaian and African society to act without regard for public and civic interests will literally suffocate all of us if we don’t keep speaking up. On this issue of sulphur pollution, it clearly starts with calling out the NPA loudly and clearly.
Tomorrow, the 25th of January 2022, the Finance Minister intends to return to Parliament to bulldoze through the controversial e-Levy bill.
Sentiment surveys show overwhelming dislike for e-Levy among Ghanaians. I have no doubt that scientific polling would corroborate the distaste of the general public.
Of the 66 swing constituencies in Ghana, NPP, the ruling party, won 17 in the last (2020) elections. In 2016, it won 49. In effect, the NPP’s popularity in its marginal seats declined by ~60% in just one electoral cycle. Whilst poor infrastructure and jobs tend to dominate voter concerns in Ghanaian elections, swing voters, as a subset, highly prioritize cost of living. Of a representative sample of 50 low and middle income countries, the World Population Review ranks Ghana highest in its Cost of Living Index.
Why then are the ruling party’s Members of Parliament (MPs) so relaxed about the widespread perception among people that e-Levy will worsen the already high cost of living? Is it not evident to them that failure to achieve consensus, even if it means spending more time convincing Opposition MPs and Civil Society activists and making some reasonable concessions, imply putting several marginal seats in urban Ghana at risk? Are there no NPP MPs in marginal/swing seats that worry about the impact of e-Levy on their electoral chances in 2024? Are there no NPP MPs with a difference of opinion about how e-Levy could be designed?
Given the many options available along several key dimensions, can any major political party really manifest the total degree of acquiescence being observed in the NPP right now? No squabbles at all about the rate (should the Finance Ministry stubbornly cling to 1.75%?) About the floor (should it stay at 100 GHS at all cost)? About the range of exemptions (should payments for social services be taxed? Should internet banking be covered?) Etc.? Can it really be the case that not one of the 137 NPP MPs, and the thousands of professional economists, accountants, policy practitioners and the like in the NPP, have any difference in opinion whatsoever about how e-Levy should be designed?
The evidence suggest, incomprehensible as it may seem, that the entire NPP really believe that no changes to the original blueprint suggested by the Finance Ministry is desirable or possible. Or they are much too concerned about being seen as trouble-causers that they are willing to participate in this hasty bulldozing even if it will also damage their relationship with the Minority and make conducting business in the house hell for the NPP parliamentary leadership.
Perhaps, the view in the NPP is that 2024 is far away. Ghanaians would have forgotten by then, especially if e-Levy proves to be a bitter but effective medicine. Furthermore, they probably reckon, that proving to investors and the public that NPP has what it takes to push whatever agenda it wants in Parliament is much too important in reducing the risk perception that has built up around the government’s ability to execute its policy in the face of a hung parliament. A calculated decision may thus have been taken to risk any chance of improving the cordial atmosphere in Parliament in order to assert political supremacy.
Beyond the realpolitik, the Finance Ministry (most definitely with the backing of the President) have also been at work on other tactics since they first broached the e-Levy and got some of us to share our views. They have made it clear that they intend to optimise the administration of the tax until they hit the $1.15 billion some of us felt was unattainable with the original design. By fiercely narrowing the exemptions, capturing internet banking transactions and refusing to shave even a basis point off the rate, they may yet defy initial scepticism and collect their intended booty, but there will be a price.
First, the resistance from the Opposition NDC in parliament shall be staunch, as would that of Civil Society. Neither has been consulted or engaged since the last raft of nasty scenes in parliament. In fact, some have been antagonised. The e-Levy shall become a major symbol of political intransigence in a period of inevitable increases in economic hardship due to the current headwinds. People will add it to petrol pricing and the upcoming increase in fees for public services (15% across the board) as some kind of towering beacon to the idea that the ruling party “doesn’t care if you suffer”. Such sentiments may not blow over as quickly as the government hopes.
Second, the government blew the chance to work in good faith with well-meaning critics who accept the fact that the increasing digitisation of economies around the world does call for updates to tax strategies to tackle potential losses of government revenue. It blew the chance for a robust debate about how to design a more sensitive and strategically sound digital taxation model. It has failed to engage genuinely on the data, the principles, the approach and the pitfalls. Its hardcore approach will make it harder to reverse course on some fronts when the situation demands it. A government should never allow itself to be boxed into losing flexibility.
Third, the government chose to preempt a plan by the Ghana Revenue Authority to sharpen its ability to collect digital taxes, in a broader sense. A plan that has received funding from the British government and support from elsewhere. A political fight is now guaranteed when those plans are finally unveiled.
Yet, the fact that more and more people are choosing to sell everything from waakye to earrings on Instagram rather than on more structured e-commerce sites or physical shops points to more worrying trends than anything e-levy is meant to solve. Because such “informal” operators can continue to accept “cash on delivery” and stay under the radar by avoiding taxable channels whilst still mobilising sales through digital means. By adding e-Levy into the mix, Ghana risks accelerating a trend where digitisation promotes informality rather than help fix it.
The government’s response to that concern is to narrow exemptions in order to prevent gaming of the e-Levy. Whilst acknowledging that this tact may well help it clock the $1.15 billion target it is so adamantly pursuing, we must also hasten to point out the new risks it has created.
Formal credit from banks to the private sector has been plunging for a while.
The hope on the horizon to sustain demand has been the rise of digital lending platforms and a resurgence of the microcredit sector following the devastating events in the financial sector in recent times. E-Levy will constrain that growth by adding an effective tax on repayments. Because of the Finance Ministry’s anti-gaming tactics, and because the new lending models prefer frequent servicing, the cumulative cost of credit will rise considerably. Everytime a borrower services a debt in the emerging fintech or traditional banking sector, the effect of the e-Levy would be to jack up the perceived interest rate. Whilst the microfinance companies will try to accommodate cash payments to lower servicing costs for their customers, the emerging digital players cannot, thereby stunting their growth.
The aggregate impact of similar transactional costs in the economy could be far more distortionary than can be predicted in advance. But their primary effect would be to contribute to already rising inflationary pressures as certain economic actors are forced to simply price in higher transactional costs. When that happens, demand contraction, and with it downward pressures on GDP growth, may result, contributing collectively to a sense of low economic well-being. Demand and growth pressures of this type can fuel their own cycle in a manner that defeats the government’s ability to rein them in ahead of the 2024 elections.
A clue that transactional costs can affect demand (eg. various economic actors lowering spending if they can’t avoid the tax) in the digital sector in just this manner can be found in how Communication Service Tax (CST) has generally performed after rate hikes and drops. An increase in CST rate by a whopping 50% (from 6% to 9%) in 2019 did little to substantially raise revenue. CST outturn actually dropped from about 420 million GHS to 414 million GHS. Despite a reduction in rates from 9% to 5% in 2020, the total take actually went up. The expected total take in 2021 is about 570 million GHS, despite the nearly 45% rate reduction since 2019. In short, the government’s adamant stance on the absolute rate of 1.75%, even at the risk of a damaging confrontation in parliament, is not backed by any serious modelling of digital tax behavior/performance. Sustaining higher demand for goods and services is more critical, and taxes should be designed in order not to suppress economic sentiment.
It is obvious now though that the pliant NPP in parliament and the absence of any spirit of policy debate in the ruling party means that all of the above is academic. We are in the realm of pure power politics now. The government with all its strength and all the resources at its disposal is hellbent on prevailing. Whilst it may yet win the battle for political supremacy, that is no guarantee at all that it will win the war for economic popularity.
Well, “broke” is not a policy word, so it is hard to join the raging debate about the brokeness or otherwise of Ghana if one is more biased towards policy activism.
I will say this though, when Multimedia, a major Ghanaian media outlet, invited me to deliver a ten minute “statement” on an important national issue on the first edition of their primetime show, Newsfile, today, I knew I had to talk about Ghana’s finances.
Whereas “brokeness” is not rigorous enough a term for gauging the finances of a country, “creditworthiness” is. Like most businesses, most countries require debt to function. Globally, we have seen a surge of public debt for this very reason.
Globalisation means that, more and more, governments borrow from investors and savers all over the world, not just in their own countries. 17 African countries (out of 55) are today able to borrow from private investors around the globe (not just from other governments and institutions like the World Bank and IMF). How these investors view the creditworthiness of the borrowing country/government offers one of the most objective metrics in gauging the finances of any country.
Such investor sentiment can be discerned from how much they are willing to charge in interest before they lend to a government. For a while now it has become clear that compared to its African peers, international investors prefer to lend to Ghana at a higher rate, clearly a sign that they are more worried about Ghana’s “credit risk”.
Note that this growing tendency among investors to price in higher risk for Ghanaian debt has been apparent well before COVID-19 struck. But in recent months things have come to a head and Ghana is now grouped globally with countries like Lebanon and war-troubled Ethiopia in terms of debt riskiness.
What accounts for this? Well, since the country became the first on the continent to borrow from the Eurobond market in 2007 (on the back of its first sovereign credit rating in 2003, 3 years after continental pioneer, Senegal), it has been more enthusiastic than most in frequenting the market for more. A combined oil and gold boom from 2010 onwards underwrote this appetite and increased awareness of the Ghana sovereign lending opportunity globally. Before long, all the gains from the HIPC debt relief it secured in the early 2000s had been whittled away. At the end of Ghana’s HIPC program, it owed just 1.18 times more than the revenue the government collects. Today, it owes nearly 5.4 times more.
Towards the completion point of the HIPC program in 2004, the country’s absolute spending on its debt had dropped to barely a little over $100 million. Today, the government requires a whopping $6 billion for the same purpose.
The reason is simple. Take 2021, for instance. The government needed to find $18 billion to make good on all its obligations. It could only raise $12 billion from investment, taxation and operations. An important nuance: these are “net” flows. To fully appreciate the hand-to-mouth nature of the situation, consider that in the same year it actually borrowed $5.2 billion from overseas sources, but promptly used $2.55 billion in paying back some of what it owed from previous rounds of borrowing.
In terms of the burden of debt on national finances, Ghana bears twice that of the average African country.
The announcement yesterday by Fitch, one of three major global companies that assess the creditworthiness of countries, that it will downgrade Ghana’s sovereign credit rating to B-, with a negative outlook (meaning that it is more likely to downgrade further than to upgrade) should therefore not have come as a surprise. But it is very significant for a number of reasons.
First, it can be argued that Fitch has been a bit more lenient with Ghana than some of its peer rating agencies historically. Given investor sentiment on Ghana’s credit risk, its ratings could actually have been worse than it has recently been.
Fitch’s negative outlook is particularly concerning because the B- rating places the country at the border with countries on the verge of defaulting on their debt. Any further downgrade will therefore seriously prolong the country’s shutout from the international private capital markets.
To reinforce the point, this is Fitch’s worst rating since it began covering the Ghanaian economy nearly 20 years ago. The country now has the dubious honour of joining Tunisia and El Salvador as B- peers with a negative outlook.
Ghana has already been in doldrums territory as far as Moody’s and S&P are concerned, so a negative outlook is expected across the board. That seems pretty bad, so how does the government explain things?
The general posture of the country’s economic managers has been to blame COVID for the short-term issues (though, as shown in previous sections, the malaise clearly predates COVID), and low tax compliance by the population for all the other, more chronic, problems.
The chart below summarises the government’s favourite point.
In sum, in the government’s view, Ghanaians pay too little tax compared to their compatriots elsewhere, even in other African countries. True? Maybe. But there are important nuances to note before one starts comparing apples and oranges.
Take a very good look at the countries clustered around Ghana in the chart above, i.e. Ghana’s peer tax laggards. You will notice something curious that is also borne out by the two charts below.
Even a cursory glance will tell you that high natural resource dependency and a strong extractives/commodity sector correlates roughly to lower tax-to-GDP ratios. This is intuitive. Even without the usual rigour of multivariate regression analysis, one can hint at the tendency of extractives to inflate output numbers without necessarily boosting state revenues. That this claim is not some fluke of overzealous correlationism is supported by similar findings beyond Africa.
Commodity supermajor, Australia, has a tax to GDP ratio of about 24% whilst less commodity-dependent France reports a hefty 45%. An even better contrast can be got when one compares two economies similar in many respects except in relation to the scale of their commodity involvement. Norway hovers around 25% for our metric of interest, whilst Denmark has been known to breach the 48% mark.
It is very unlikely that such large differences between Australia and France, Denmark and Norway, or Brazil and Uruguay, can be put down merely to tax collection efficiency or citizen compliance. Nor, clearly, is this strictly a matter of absolute diversification of the economy.
In light of the above, it is reasonable to argue that compared with its true peers on the African continent, Ghana’s tax take (which by the way has now converged with the Sub-Saharan average of about 15%) is pretty unremarkable. Exceptionally low tax revenue for the size of the economy cannot be the reason why the country’s creditworthiness is taking such a hit.
Misdiagnosing the problem however leads to half-baked ideas such as the e-levy, which we have discussed at length here and here. I will sum up our previous conclusions as follows:
The Government’s estimate of making $1.15 billion from the e-levy is overly rosy. Countries like Kenya have been using similar taxes for more than 10 years. Uganda went the same route more than 3 years ago. None of them have been able to rake in fantastical sums. MTN, responsible for 92% thereabouts of transactions in the Ghanaian mobile money space makes about $216 million from unit fees. Adjusting for the facts that Uganda has a fifth of Ghana’s mobile money transactional scale and that it applies less than one-third of Ghana’s proposed rate, Uganda’s $27 million per annum take may translate to about $350 million in Ghana’s case. Far from making a dent in a $6.5 billion fiscal hole. In sum, e-levy is not a major part of the answer.
The current design of the e-levy lacks any backing in serious modelling. Its elements are purely arbitrary. If that remains the case, the tax could seriously distort behaviour and drive the emerging digital economy and its players more into the informal rather than the formal bracket. This will undermine larger digital taxation strategies currently being designed by the Ghana Revenue Authority with the help of the British Government. As more business shifts to currently informal digital channels like Instagram, WhatsApp and TikTok, careful thinking is required to figure out how to craft policies for e-commerce that don’t end up burdening the few formal operators.
Presently, digital money is mostly used to drive off-line transactions. To truly deepen the country’s digitisation drive, smarter strategies are needed to boost in-app purchases and online transactions. A cleverer digital taxation strategy can achieve that. A blunt instrument will only deepen the cash-like use of digital money, thus forgoing the true benefits of digitisation.
Moreover, overconcentrating on tax compliance and collection can distract from other important features, especially when misdiagnosis leads to drawing the wrong lessons from other jurisdictions. For example, one major compositional difference between the rich world and places like Ghana, as far as tax structure goes, is the former’s strong reliance on social security taxes, which reflect demographic and industrial factors that don’t apply in Africa.
Another design blind spot created by excessive focus on collection alone is the tendency not to look at categories of taxation that already constitute major sources of revenue, like VAT. Yet, research shows that Ghana’s VAT structure is rather inefficient.
Add to the above the issue of “exemptions” that has never really benefitted from broader stakeholder consultation and the scale of neglect becomes even clearer.
Indeed, poor stakeholder engagement accounts for the inability of the government to take on public spending, by far the most critical gap to be filled if Ghana is to climb out of its current revenue crisis. Because the government never genuinely invites stakeholders to contribute to policy formulation and merely pretends to listen and then goes ahead to do what it always intended to do anyway, cross-elite buy-in tends to be weak. When painful sacrifices are required, it suddenly becomes obvious to everyone that the government simply does not have the necessary credibility to rally the population.
Furthermore, the government and bureaucratic classes are themselves not genuinely interested in tackling waste in public spending head on. Genuine cooption of independent-minded stakeholders in the academic, civil society and opposition benches in Parliament would lead to hard questions the government has no appetite for.
For example, Civil Society Organisations would insist on truly independent evaluation of a whole raft of government programs that have become mere troughs of patronage for the politically connected. They will ask for a thorough, rigorous, non-partisan review of the more than 40 so-called youth employment programs in Ghana, and demand evidence that they are indeed adding value.
The last time a government slipped and allowed such an independent review, it was discovered that as much as $317 million may have been wasted in one program – GYEEDA – alone.
Whilst the government spends tens of millions of dollars on so called entrepreneurship and employment schemes that it refuses to subject to a truly multistakeholder review, the one area that serious research has established could make a genuine dent in youth unemployment – technical & vocational education (TVET) – continues to suffer neglect.
For decades, TVET has received less than 2% of the total education budget. Whilst the government was busy pouring millions of dollars into evident scams like the so-called “venture capital trust fund” (where officers invented fictitious companies and used them to pocket the cash), purportedly to resource entrepreneurship as a solution to unemployment, it was also sashaying around Accra, cap in hand, begging the likes of DANIDA for $14 million to invest in youth technical skills.
Clearly, the issue is not that Ghana is broke but that it is broken. To mend its broken policymaking and restore the country to creditworthiness, the government and its enabling political class must admit the brokenness of the current public finance model and solicit genuine multistakeholder support to cut another path.
Ghanaian social media activists were relieved after Ghana’s food safety regulator (the FDA) broke months of silence on consumer complaints about curdling canned evaporated milk made by Swiss food giant, Nestle.
As discussed in my previous post, the FDA’s silence despite having been intimately involved in Nestle’s investigation into the milk “coagulation” problem exasperated activists who kept the pressure on until today’s regulatory notice recalling 24 batches of the popular Ideal and Carnation evaporated milk brands.
In my own, quite belated, comment on the subject, I reduced the crux of the issue to whether a biological agent was the cause, in which case a safety issue was highly likely, or if instead a quality deviation that only impacted presentation might be the situation.
The FDA says its investigation has revealed the culprit as a batch or batches of milk powder, the key ingredient in the recalled products, sold to Nestle by a supplier or group of suppliers. Somehow, when “reconstituted” and “recombined” to prepare the evaporated milk product, the end result fails expected heat stability performance. This is a well known hurdle to cross when using milk powder to make evaporated milk.
The inference here is that some supplier vetting and quality assurance processes failed, batch control was faulty, and remediation has struggled to fix this for at least 6 months now judging by the recency of some of the batch dates. Still, no safety issues were found and no contamination has been established in laboratory tests for any microbial candidates.
So, for now, activists can breathe a bit easy. But, for me, the whole episode raises intriguing policy issues that transcend this specific health & safety scare. Why is Nestle using milk powder rather than fresh milk as it does elsewhere? Before we discuss that, bear with me as I meander on a detour of industrial policy with a geopolitical twist.
In the year that Britain broke Asante power in the then Gold Coast (now Ghana), the two halves of what became Nestle had their seminal moments. The British controlled half, Anglo-Swiss company, commenced their UK expansion from Cham by buying the Condensed Milk Company. On the continent, meanwhile, Henri Nestle sold out to more energetic investors in Vevey. Anglo-Swiss and the renamed Farine Lactee Henri Nestle would, after decades of bruising rivalry, merge 31 years later (in 1905, that is) to create what would become the world’s largest and most formidable food giant.
In the same vein of momentous dates, Nestle entered the Ghanaian market in 1957, the year of Ghana’s independence from Britain, to market products made in Europe. It will take 11 years before local manufacturing started, and by 1971 the famous ideal milk was rolling off manufacturing lines in Tema.
For many years, the Government of Ghana owned a quarter of Nestle stock through the state-owned industrialisation-focused bank, the National Investment Bank (NIB). When the joint venture between Nestle and NIB started in 1971, NIB actually owned 49% of the company. Subsequently, the socialist military government of General Acheampong took over and increased state shareholding to 55%.
For nearly 20 years, therefore, the Ghanaian government was the principal shareholder in Nestle. The privatisation wave of the 90s did see the shareholding structure revert to 51% in favour of Nestle in 1993. But Ghana still had plenty of shots to call. Throughout this period also, the Tema plant was Nestle’s only milk processing factory in West Africa (by the way, Nestle’s West & Central African operations have been run from Accra since 2005). Unsurprisingly, production of processed dairy in Ghana increased from about 3 million litres in 1984 to over 30 million liters in the mid-nineties.
It is mind-boggling that despite the influence of the Ghanaian political and policy elite on Nestle’s operations in the region, in the boardroom and elsewhere, the long mulled “integrated dairy value chain” to supply fresh milk has never taken off in Ghana.
In Northern Nigeria, Nestle has invested substantially in developing fresh milk value chains based on Fulani cattle breeds. Nestle’s first zero-emissions dairy farm is in Southern Africa. Nestle Zimbabwe has been investing directly in cows. After concerted business ecosystem efforts, Nestle committed to local dairy value chains in Kenya and Uganda. Some observers have already noted a surge of investor interest in Africa’s dairy prospects because of such growing engagement by the likes of Nestle, Arla and Danone.
Yet, Ghana has mysteriously failed to capitalise on its pioneering dairy industry, exemplified by Nestle’s and Fan Milk’s presence in the country long before regional neighbours got their mojo. Despite Ghana’s head start, countries like Senegal, which is positioning for 70% self-sufficiency in milk, are steadily leaving the country in the dust.
When Erik Emborg introduced the Fan Milk brand in Ghana in 1960, the momentous year of the country’s republican status, the plan, backed by the Government, was very much to embed the operation in the planned integrated dairy complex, complete with local farms. The idea went nowhere and Erik just went on importing milk powder from Scandinavia.
According to dairy researchers, Bonodong Guri, Godwin Ameleke and their collaborators, Ghana’s production of milk, 90%+ of which comes from free ranging cattle, has stayed stagnant at between 36,000 and 43,000 tonnes for over two decades. Compared to 420,000 tonnes of production in next door Burkina Faso (a ten-fold difference). Benin, much smaller and situated in a similar tropical terrain as Ghana, clocks roughly 150,000 tonnes per year. This is no tsetse fly matter.
That there is something spectacularly off about appreciation of the dairy opportunity in official circles is borne out by the failure to capture any significant interventions targeted at boosting fresh milk production in the 5-year initiative known as Rearing for Food & Jobs, the government’s flagship livestock development program, launched in 2019. Indeed, the biggest intervention seen in Ghana’s dairy sector to date may have been the importation of the White Fulani breed of milk cattle from Nigeria by the Colonialists in 1930.
Yet, there is no shortage of critical needs in the beleaguered industry. Water scarcity; a dilapidated veterinary service; lack of genetic breeding technologies; zero cold chain infrastructure across most of the value chain; and a severe absence of commercial scale pasture are a couple of the most prominent.
In 1999, in response to these age old challenges, donor funds made possible a decade-spanning attempt to revive Ghana’s abandoned cattle stations in Nungua, Amrahia and elsewhere. Cross-breeds that can increase milk output per cow by 600% were developed. Supply of tens of thousands of litres of milk to Fan Milk, Ghana’s main ice cream producer, and other processors became possible. Over a ten year period, the performance of the Friesen x Sanga cross-breeds (initially introduced into Ghana in the 1960s from the Netherlands and the UK) were celebrated at various conferences. Then it fizzled out slowly.
These days, the government of Ghana spends about $120,000 a year paying workers at the Amrahia Station. It does not budget for operational or capital expenses. Rather, it expects handouts of less than $20,000 a year from donors for that. The biggest investment into the vaunted national integrated dairy complex vision launched in 1965 in the last three years have been some purchases of artificial insemination kits and bovine semen from the Netherlands capable of adding about 300 calves to Ghana’s herd of about 2 million cattle.
When in 2019, Government took over the 24% stake held in Nestle by NIB as part of a cash swap to save the latter from insolvency and help it meet minimum capital requirements, there was a brief period of hope that something strategic may be done. Instead, the transaction has today become clouded in opacity as stakeholders are kept in the dark about plans to offload the shares to private interests.
Meanwhile, imports of milk powder continue to surge.
Self-sufficiency remains stubbornly stagnant.
And talks with Nestle to procure locally, especially from Amrahia, have still not been backed by any serious policy coordination. But given the multiple ecosystemic issues involved, pure private action, in the face of a highly disabling environment, would falter. Not surprising then that the other 10 major dairy processing companies in the country also resort to imports for virtually all their needs, despite episodic domestic sourcing drives.
Beyond the safety, branding and trust issues that surfaced during this whole Nestle Milk saga, what may endure is the opportunity it has provided for the public to move beyond the political PR flourish of projects like 1D1F and Rearing for Food & Jobs. Because, by so doing, the people of Ghana may then be able to take a hard look at how policy on critical matters like “integrated value chains” is actually executed by the modern State of Ghana.
Yesterday, I saw this intriguing clipping of a press release-like ad by Nestle in Ghana about its mega-brand, Ideal Milk.
The primary message in the ad can be distilled into three lines:
Some liquid Ideal Milk cans on the market have coagulated contents (the fluid has become viscous/thick).
The product will not harm anyone who consumes it.
Customers who are nevertheless worried about the product should reach out to Nestle directly.
I was fascinated by the ad because:
I like Ideal Milk;
I have spent two decades of my life in product safety, consumer protection and supply chain; and
I have recently developed a fascination for the history of food canning;
The value proposition of Ideal Milk, in the wider universe of “evaporated milk”, is “creaminess”. As far back as the 1920s, Nestle was packaging the goodness of ideal milk as being about the cream. Normal cow milk doesn’t always have the frothy cream when you want it and in the amount you need. But Ideal Milk does. It is always creamy. Of course, creaminess must taper off at a point, hence the recent outcry.
Like much of the rest of the food canning industry, it was war that dramatically catapulted canned evaporated milk onto supermarket shelves. The need to send soldiers around the world and keep them for months on the battlefront called for a modern food logistics system that greatly favoured canning. The balance of necessity and accessible luxury has long been a key brand positioning factor for the canned evaporated milk industry even as a host of health concerns, ranging from lactose intolerance to concerns about weight gain and cholesterol, have chipped away at the product’s place in shoppers’ hearts.
How then does one achieve “consistent creaminess” (luxury) and long shelf life (necessity) together? By adding vegetable fat to fresh cow milk and then applying heat treatment and other techniques, such as homogenisation.
The first person to try and commercialise evaporated milk production was Nicholas Appert, in response to a challenge by Napoleon Bonaparte to French chemists to come up with ways for the Emperor to feed his conquering armies in far-flung battlefields. But it would take about a hundred years more for the likes of Borden, Joseph House, and John Meyenberg to perfect and patent the necessary processes. Mass consumer acceptance was not assured until critical steps like homogenisation, sterilisation, and standardisation could be mastered, balancing creaminess, long shelf-life and taste. In 1923, the Evaporated Milk Association emerged to codify what had been learnt on the way to this point.
This “codification” was given the force of law by the United States government in the same year of 1923. The US continued to be a pacesetter in setting standards, with major updates in 1939 and 1940. Today, its Department of Agriculture frames the standard in terms of minimum solid fat content as follows:
Evaporated milk is the liquid food obtained by partial removal of water only from milk. It contains not less than 6.5 percent by weight of milkfat, not less than 16.5 percent by weight of milk solids not fat, and not less than 23 percent by weight of total milk solids (21 CFR §131.130(a)).
In the course of time, however, global standards have emerged. The Food & Agriculture Organisation, a UN agency, now maintains the Codex Alimentarius, the most authoritative handbook of food standards in the world. The specification for evaporated milk in this code is captured by standards, such as: CODEX STAN 281-1971 and CODEX STAN250-2006.
Here is the Codex definition:
A blend of evaporated skimmed milk and vegetable fat is a product prepared by recombining milk constituents and potable water, or by the partial removal of water and the addition of edible vegetable oil, edible vegetable fat or a mixture thereof, to meet the compositional requirements in Section 3 of this Standard.
The minimum solid fats content is specified as:
Minimum total fat: 7.5% m/m
Minimum milk protein in milk solids-not-fat(a): 34%
It is natural when confronted with a situation, as we have it now, where a product meant to be sold in liquid form presents as a thick pasty, semi-solid, sludge, to focus on the part of the standards that seem most applicable to the physical state of the product. But as should be clear from the above, the standards seem silent on the upper bound of solids in evaporated milk. What this clarifies is the fact that, generally, standards are minimalist when it comes to presentation. But not when it comes to safety.
Which brings us to the heart of the matter (sorry for the longwinding detour, I could not resist throwing in some hobbyist tropes). Nestle admits “coagulation” in some packs of ideal milk in response to widespread reports.
They do not specify which batches. On the basis of “collaboration” with the Ghanaian food regulator, the FDA, they are confident that the coagulated milk is safe.
Interestingly enough, there is a very long history of evaporated milk coagulation, dating back to the very early days of the product’s commercialisation. In 1915, a large “outbreak” of incidents involving consumers complaining about coagulated evaporated milk was reported in the US State of Iowa. William Sarles and Bernard Hammer investigated this incident thoroughly and identified a particular bacterium, Bacillus coagulans, as the microorganism responsible.
The primary discovery here was that notwithstanding effective pasteurisation and sterilisation, there exist some bacteria that can evade the controls, infect the can and, during storage, coagulate the liquid milk.
Since these pioneering studies, our understanding of the impact of thermophilic and thermoduric bacteria on evaporated milk has improved greatly. We now know that spores of Bacillus stearothermophilus, for instance, will lie dormant in the can until storage temperature exceeds 40 degrees celsius at which point they will activate and start to attack the milk.
Virtually all the reports of Ideal Milk coagulation I have seen so far do not mention odour, putridity, colour changes or blotches. Curdling and thickening are the only features mentioned. This more or less rules out the worst kinds of fermenting bacteria. But it does not rule out thermophiles like B. coagulans and Bacillus cereus.
Now, for a bit of relief. Bacillus coagulans are today widely believed to act as a probiotic, which means they are generally safe in the human gut.
Same, unfortunately, cannot be said for B. cereus, whose proclivity for contaminating ultra high treated milk is now a growing focus of research.
B. cereus is now routinely implicated in some forms of food poisoning.
In short, so far, no reports have come in to suggest that people are getting sick from consuming Ideal Milk. The most worrying form of coagulation would be that caused by microorganisms. But, as explained above, some microorganisms that cause coagulation are completely harmless. Non-biological causes of coagulation, on the other hand, are mostly related to the persistent challenge of fat separation. Ineffective homogenisation is the most widely cited culprit for this situation. Generally, the process of sterilising milk to increase its shelf-life would itself cause coagulation. To maintain the liquid state of the product, as well as ensure heat stability, delicate calibration of multiple factors is required. Casein content measurement, precise heat regulation, homogenisation, and even salt use must all be carefully modulated.
Thus, the coagulation being witnessed could be the effect of a homogenization failure or related fat regulation issue, such as lecithin use and concentration. Whilst this may raise Good Manufacturing Practice (GMP) questions, not all quality variability issues are automatic GMP breaches, and not all GMP breaches are automatic health and safety issues. There are varied thresholds and caveats, and everything depends on how exactly the variability occurred.
That is why a matter such as this cannot be left to the brand communications strategy of the manufacturing entity involved. The ambiguity and multiplicity of potential causes and effects require that someone other than the manufacturer be involved in communicating with the public. Whilst Nestle has involved the FDA in its investigations, and appropriately so, the press release does not rise to the appropriate level of public assurance. It does not explain why this is not a health and safety issue. There is no independent corroboration that the remedial measures taken to address the root cause are adequate. This is not about protecting the brand of a giant multinational; it is about safeguarding the health of millions, or at least securing their peace of mind.
Talking to people affected by this incident, however, I get the sense that there is a fundamental philosophical conundrum at play here. Some people say that they trust Nestle more than they trust the Ghanaian FDA. It is hard to blame such people. Senior officials of the Ghanaian FDA have in recent times been caught taking bribes in connection with similar GMP, health and safety matters. Some argue that Nestle, despite its occasional run-ins with activists, and not fully atoned for history with baby milk formula, has additional oversight at a global level that may be more stringent than what the local regulator has in place.
So, it is a brand issue after all: it all boils down to the level of trust among the general public. One cannot milk a brand one has not built.
Nonetheless, my personal view is that the regulator has more to do to earn and hold the trust of the general public than Nestle. The latter after all is, first and foremost, in business to make money. If it genuinely believes that its products are not contaminated, it is not difficult to see why it will be reluctant to take steps, like a mass recall, that will not only cost it lots of money but potentially also damage one of its most lucrative brands. A regulator, on the other hand, must balance multiple considerations and strive to be candid and transparent in all its dealings regardless of financial considerations.
The fact that the FDA has so far refused to share its own findings for nearly six months is a serious abdication of its duty to the public. Even if public cynicism and distrust of such vital institutions are sometimes unfair, the FDA has every opportunity to redeem its own brand.
Yesterday, Brookings launched a book, aptly named Breakthrough, coauthored by 15 people active in the worlds of technology, innovation, investment and development.
The book is a truly majestic sweep of what technology innovation can do to get us over the SDGs bar by 2030, or simply put: make this planet a beautiful home for everyone. And, no, I am not being so kind just because I contributed a chapter (here); there are some truly compelling vistas of the near future in the volume.
From creating a multilateral bank dedicated to non-human species to applying synthetic biology to rural agronomic transformation, the authors’ visions are surreally beautiful in their combination of the practical with the truly lofty.
Contributing to Breakthrough was a very nice opportunity to sit back and think about the three passions of my life: technology, activism and social innovation/entrepreneurship. I am at a point where, after nearly two decades in the trenches, I am revising most of what I know. A group of connected agro-tech projects in Malawi, with which I am intimately familiar, thus served as the perfect backdrop for me to use my chapter in the book to tease out my new horizons and perspectives.
The words “transmediary” and “transmediation” are the brushes and ink-pots with which I try to bring out the features in the landscape I am seeing in my world right now, a world in which standalone social enterprises are sadly incapable of making enough of a dent to change the world. A world in which technology is changing much too fast for most people to properly trace its real contours at the intersection of Political Economy and the Knowledge Economy. To get to my point in the chapter, I had to first, in my own head, get to basics.
What is technology?
A technology is a system that produces quick and precise responses to a defined problem.
Therefore, we have to start with “problem”. In the context of the SDGs and changing the world to benefit all its inhabitants, we are clearly talking about social problems.
Given the times, let me give you a familiar example: the last major episode of the bubonic plague in London, in 1665. City planners began to believe that stray animals were involved in spreading the disease. The King therefore ordered the wholesale massacre of dogs and cats. By some estimates some 240,000 of them.
Well, they were right in part. Animal vectors were a major spreader of the disease. But they got the wrong animal.
Turns out rodents were most to blame. So, by killing cats and dogs, the dangerous furry balls now had free rein to run amok, exacerbating the plague.
In our far more complex world, problems are obviously harder to define and diagnose properly compared to Stuart England, so we can expect more unintended consequences when we go chasing silver bullets. But, even worse, problems nowadays also tend to have multitudes of secondary and tertiary effects and adaptive features that confound precise gauges of their causes and impacts.
An easy way to put it is that all problems are connected, and so all solutions must be connected.
Because our fast-changing world, however, also requires very quick and precise solutions, it means that all solutions must be technological at their roots, and all the technologies must be connected.
It is amazing how poorly appreciated this fact is.
Take the automobile for instance. And compare it with the modern notion of a self-driving car.
The classic automobile was described in terms of how many component manufacturers – about 200 in fact – had to collaborate in its making, and how many inputs – about 30,000 – were needed to get it on the road. Many treatises have been written about the interconnectedness of the modern supply chain and how only connected solutions can address concerns like the need to shift to greener inputs and outputs whilst addressing labour rights.
But in the 20th Century world, once the car was made, it was safe to switch our analysis to treating the car as a discrete object with a discrete impact on society. We can look at emissions, vehicular accidents, the blight of traffic on suburbia and many other such technology-society interactions by treating the technology and its producers as discrete elements in a classical mechanical plane.
A self-driving car, on the other hand, is going to be very different. Its ontology is more in the quantum mechanical plane, to use a bad metaphor. To work effectively, it must continuously be wired to other solutions and solution-providers. Municipal risk management systems. Novel satellite complexes. Networked semantic IoT. New safety algorithms developed by collaboratives. Connected car insurance platforms. A whole host of as yet poorly understood meshes of datacenters and super-algorithms developed and managed by a wide range of actors will form the quantum mesh to make the self-driving car a truly viable institution in a world grappling with automation.
What that means is that the actual technology will be EMERGENT through networking across solutions. It is not like Tesla will screen its suppliers, make the car, and release a compact object whose interactions with society can then be mapped in terms of which problems it solves and which new ones it creates. Rather the problems and the solutions will emerge in tandem and evolve alongside the ongoing interventions of a whole host of other actors whose evolving contributions will shape the car’s interaction with society.
Because the problems and solutions will be emergent through continuous relations among actors, which as we all know is a function of power but also of the passion of many who will create these sub-solutions, the worlds of technology, regulation, activism, design and social impact will fuse, and grate far more intensely than we can imagine today.
Consumer safety activists will demand “standardised APIs” between pedestrian safety algorithm stores and municipal road safety engines, and reinsurers will redesign contracts to accommodate on-demand predictive analytics on crashes and the likes. Advocacy won’t be limited to people on the “outside” wanting to check the technology. Activists will be able to “embed” in the technology-complex itself.
Most of the problems that confront us will be solved by technologies that have emerged through continuous interactions of power and passion, of activist technologists suddenly relevant through other instruments besides the market. The dissolving boundaries between government and business domains (consider the number of public cyber-security systems managed by private contractors) will become even more complex as civic actors outside the two spheres also start to assert themselves.
As unintended consequences, feedback loops, and complex causal rings make it clearer to most people that every problem is in fact a problem-solution-problem-solution chain, the infrastructure of our lives will become woven into quantum entanglements connecting everything.
Fintech solutions will not be one thing and government anti-money laundering systems another thing. Crypto will not be one thing, and regulations to deal with its effects another thing. Different actors with different angles to these issues will come at these problem-solution-problem chains with multiple chimeric and intermediate responses, which working together integrate problems and solutions into manageable situations. This is the only way for society to reconcile its need for both speed and precision in addressing rapidly mutating risks.
Those who stand above it all and succeed in creating higher-order systems for integrating the longest problem-solution-problem chains into effective and stable ecosystems where risk is effectively managed, even as social and economic value continues to multiply, are those I have called, “transmediaries”.
They are transmediaries because by taking a systems entrepreneurship view, they can build transmediary platforms that remove inefficient intermediaries. How? Providers of many chimeric and intermediate solutions rely on certain nodes in a network not being able to connect well with other nodes.
Banks are bad at talking to SMEs and millennials, hence the fintech boom. But fintechs are not necessarily any better at delivering financial literacy, suppressing excessive consumer debt, or sieving out triggers of dangerous boom-bust cycles in the macroeconomy. Only system actors working across large networks to build solutions, transmediary platforms, capable of reconfiguring nodes across the financial system can have a real impact on such problems.
So, whether the problem is how to ensure that credentials from MOOCs help address employment – skills mismatches or how to improve prescription surveillance to address antimicrobial resistance, neither social entrepreneurs nor commercial geniuses building discrete business models can fix it. Only transmediation and transmediaries can.
So, what is the call to action here then? I think the starting point is recognition. Narratives can direct energy and resources. The days of the heroic entrepreneur, mega-platform or statesman changing the world have been over for quite a while now. Yet, we refuse to truly embrace the power of networks. My duty is to sound the clarion call yet again.
This is a short postscript to my earlier note on Ghana’s proposed e-Levy.
In view of certain reactions to that piece, I felt that a quick span of the experiences of other countries that have gone this route, which I had suggested offhandedly in my note, would actually illuminate some of the points rather well. So here goes.
There are, near as I can tell, seven countries in Africa that have imposed or set in motion plans to impose mobile money taxes:
Kenya imposes a 12% excise tax on transaction fees a while back. Whilst such excise taxes end up being passed on to consumers, and therefore can be retrogressive, the net absolute effect might still be smaller as when competition succeeds in bringing down fees the tax effects will reduce automatically. Moreover, after all, they apply to income earned and not just movement of funds.
Uganda attempted to impose a 2% fee on transaction value but retreated after a massive public backlash to 0.5%.
Malawi imposed a 1% fee on transaction value and has since retreated.
Tanzania wanted to introduce a graduated levy of between 0.43 cents and 4.35 USD depending on the amount being sent. The President has asked that this be reviewed downwards. Reduction in transaction volumes and value have already greeted the policy announcement.
Zimbabwe has a 2% fee on transaction value.
The remaining countries – Cote D’Ivoire, Congo Brazzaville and DRC – apply the tax on the mobile operator’s turnover.
None of these countries make significant revenue from e-Money related taxes, yet there is considerable evidence of significant distortions of the digital economy since the imposition of these taxes.
Kenya makes less than $100m a year.
Uganda is around $27m a year (total transaction volume has fallen by about 27% in recent times).
In Zimbabwe, the 2% intermediated mobile tax is on course to yield about $50 million by the end of this year.
Ghana’s projected $1.15 billion return is, as should be clear from the foregoing, completely out of line with experiences elsewhere and a sign of weak policy formulation and prior research.
If actual outturn follows the experience of the country’s Communications Service Tax (CST, aka “Talk Tax”), where wildly optimistic expectations failed to pan out, we may end up with something in the region of say, $150m, and yet would be paying $40m to prevent vaguely defined “evasion”. The $40 million set aside for collection of the e-Levy is aggravating general discomfort about the whole enterprise. Given that the budget was expected to pass around next week and implementation of the tax meant to start on 1st January 2022, it is hard to believe the Government when it says that an open, competitive and transparent procurement process had been planned. How long does it take to even write up the Terms of Reference for a serious Expression of Interest (EOI) process?
All this makes one worry that the planned $40 million e-Levy administration service could end up as badly for the country in ratio terms as the CST revenue monitoring situation involving Subah, Kelni GVG and Afriwave. At one point, the country was spending $32 million in various electronic revenue protection measures, none of which made technical sense, yet total CST take was still hovering in the region of $54 million (2017). That is to say, Ghana was spending more than half of the money it was collecting on policing the same money.
Historical experience, like cross-country comparative experience, counsel serious caution and widespread consultation about how the country goes about designing and implementing any digital tax measures.
If these measures are motivated purely by problem-solving, rather than by procurement opportunities, then why is extensive stakeholder consultation always so hard?
The Leader of the Opposition (“Minority Leader”) in Ghana’s “hung” Parliament, who has been a perfect picture of parliamentary due diligence so far in the matter of the stranded 2022 government budget, startled the public by announcing prematurely that he will accept a 1% e-levy rate.
The government has proposed the imposition of the tax on all electronic financial transactions, a mainstay of its plan to increase revenue by 43% in 2022. A 43% revenue increase in one fell swoop would be mindboggling in normal times, but things are far from normal in Ghana’s fiscal circumstances now that servicing public debt is threatening to consume 60% of all government revenues (in the first 9 months of 2021, government revenue was $7.86 billion and it spent $4.23 billion, or 54%, of it servicing loans).
What analysis was the Minority Leader’s capitulation based on? Why 1% and not, say, 1.25% or 0.75%? He doesn’t say.
It is Not just about the 1.75% rate or 100 GHS floor
At any rate, it is not the absolute rate of the e-levy that matters most but rather its entire design as a digital taxation measure that will impact the growth of virtually all digital services well outside the financial sector.
Because of this factor, leaders of policy-oriented Civil Society Organisations (CSOs) are very close to asking the Government to remove the e-levy measure from the budget altogether in order not to derail the entire appropriations process. With e-levy out and a more comprehensive consultation process underway to flesh out a more detailed digital taxation strategy, the less contentious remainder of the budget review by Parliament can continue relatively smoothly at the committee level. Of course, there are equally or even more problematic provisions in the budget, such as a promise, or more appropriately, threat, to return the unconscionable Agyapa policy to Parliament for approval. But that is another matter.
Policy oriented CSOs are yet to come to any broad consensus on the e-Levy, but my survey of the mood of leaders in the community shows growing discomfort about the poor attention paid by the Government to the fact that there are many different design options available in crafting the e-levy, each with different implications.
The absolute rate of 1.75% and the minimum daily cumulative transactional threshold of 100 GHS before the tax kicks in, as indicated in the budget, are by themselves meaningless concepts. The revenue estimate of $1.15 billion is also almost certainly wrong. These three data points are, to repeat, pointless without a ton of caveats about how precisely the e-levy will be designed.
The Budget Process in Ghana is not designed for making fresh & complex policies
Yet, the budget is not the place to roll out complete policy. Policy is first debated by key stakeholders, such as the official opposition and CSOs, finalised, and then the revenue and expenditure implications are captured in the budget. The approach taken by the Government so far puts the cart before the horse.
The minority leader and other important commentators like him who have jumped the gun to reduce this complex debate to a rushed haggling over absolute rates (1.75%) and minimum thresholds of taxable transaction value (100 GHS) are risking a Missouri Compromise which will come back to bite all of us later.
In this brief analysis I hope to show, in broad outline, why the Minority Leader needs to align with the cautious camp and ask for the e-levy to be subject to a wider and deeper policy evaluation process instead of the perfunctory quibbling over narrow figures characteristic of the Ghanaian appropriations process.
Our call is even more poignant now that we know that the Government has set aside a full $40 million (35% more than the total allocation to the National Health Fund) to pay vendors for very suspicious services related to rollout and collections of the e-Levy.
If it turns out, as I will argue shortly, that the $1.15 billion expected to be raised from this tax could turn out to be far less, and yet the effects of the tax may well be what economists call “distortionary”, then its risks would far outweigh its benefits, and it will be sensible to return it to the drawing board.
$1.15 billion revenue estimate in the 2022 budget is naive
Even without a detailed policy document, which the government characteristically refuses to provide, most analysts have pointed out that the $1.15 billion seems to have been derived from a naïve application of the 1.75% tax rate to the portion of the total transactional value of Ghanaian electronic financial services – roughly $130 billion – made up of transactions above $17 in value.
Everyone of course knows that this massive value of total transactions, nearly double Ghana’s GDP, does not represent actual economic value addition or even value generation. It is more akin to how global forex trading has a turnover of more than $200 trillion every month, yet global GDP is only $85 trillion.
To understand the real underlying economic value in electronic financial services, consider that despite the over $100 billion in transactional value, the nominal balance on mobile money float (how much the telecom networks actually retain with the banks to cover the liability claims of e-money) is about $1.3 billion. MTN, the overwhelmingly dominant market leader with over 92% market share, maintains a $1.15 billion float and annually makes about $216 million in profits from the $90 billion or more that circulates across its networks (0.0024% “margin”).
Not all electronic payment channels and e-Money transactions are the same
Interestingly, however, not all electronic financial channels behave similarly, and users of those channels both imprint their behavioural patterns and are in turn imprinted back. That fact is seriously crucial in determining both what the real take from the e-Levy would be as a direct consequence of HOW it is designed and how the tax could impact various parts of the economy.
For example, whilst mobile money transactions now exceed 3 billion per annum in volume, the quantity of debit card transactions totalling $4.3 billion in 2018 was only 61 million, yielding an average transaction volume of $71 per transaction or nearly 400 GHS per purchase, with medians and means well above the proposed transaction threshold of 100 GHS, unlike the situation with mobile money. The overwhelming majority of these card transactions were on international rails like Visa and Mastercard, which have other significant charges, because customers continue to shun the supposedly cheaper Gh-Link product being imposed by GhiPPS (transactions on Gh-Link have dropped to barely $55 million from a high of $140 million in 2017).
As an aside, the trend of failing government-imposed digital financial products reflects in the abysmal float on E-Zwich, which is a measly estimated amount of ~$25 million (described as “value on card”), up marginally from $22 million in 2018 (total value of E-Zwich transactions exceeds a billion dollars per year, by the way). The reason is partly due to high leakage out of E-Zwich, mainly into cash-out, but also the result of government ignoring consumer behavior in its design of policy.
E-Money is overwhelmingly used for offline payments not digital services
Indeed, the vast majority of electronic payments relate to paying offline merchants or peers, or taking cash out. These expenditure patterns have stayed relatively stable. ATM transactional value, a major proxy for cashout preference, for instance, has grown from ~$4 billion in 2017 to ~$5.2 billion today. Whilst POS terminal spending, a good proxy for offline merchant engagement, reached ~$1.6 billion in 2018. Together they account for most card transactions volume, with online merchant spending trailing far behind.
Internet banking transaction value, which better reflects the growth of online digital services, on the other hand, has actually dropped from a high of more than $2.1 billion in 2017 to an estimated $1.5 billion today, and registered users are down by about 5% from highs of nearly one million in 2017.
Meanwhile, the large ticket size (~$260,000) of interbank settlements (RTGS/GIS) also reflects the weak presence of small and medium enterprises and a corresponding absence of boutique banks, particularly after the so-called “clean up” exercises in the banking sector.
All the above goes to show that whilst payment channels that enhance offline cash-substitute behavior are thriving, those that will foster the growth of spending online on actual digital services (such as e-commerce, edtech, e-health, e-insurance, agtech etc) are trailing far behind and in some cases declining. Most Ghanaians still see e-money as purely an offline cash substitute and not as a means to participate more deeply in the digital economy.
E-Money is not stimulating GDP growth and transformation well enough
An intriguing validator of this view is the concept of an “e-money base” as a loose mirror of the more conventional notion of “narrow monetary base”, i.e. liquid cash and on-demand banking. In Ghana, this monetary account line item (sometimes called M0) is about $6 billion. But if one strips the figure of its on-demand banking elements, and focuses purely on physical cash (or currency) in public circulation, one gets about $3.8 billion.
When looking for an electronic parallel to this physical cash amount for analysis, a host of complicated treatments is required, which I won’t go into here. Suffice it to say that the crude figure of $10 billion (aggregate e-money float in the economy stripped of multiplier effects) in the table above should be fine for the simple arguments in this note.
The elementary equation linking GDP and inflation to money supply will yield, in this crude analysis, a physical cash velocity of 19.5 and a e-money velocity of just 7.5. That result is fully consistent with the position canvassed above that, presently, electronic financial services and e-money in Ghana are not sufficiently stimulating the creation of new services. Nor are they proving an effective boost for digital production to stimulate GDP growth. E-money is still fundamentally a cash-substitute for offline transactions. For the size of Ghana’s digital economy to reach the level of, say, Indonesia (at ~2.5% of GDP), it would need to nearly quadruple.
E-Levy will elicit behaviors that can harm digitalisation
If the analysis above holds, then we must consider, as the late Martin Feldstein used to preach, not just the revenue estimate that will result in a steady-state GDP model but also the revenue implications of consumer behavioral responses to the tax and their impact on digital GDP. Here, an elementary economic analysis tool comes to our aid: cross-elasticities.
Given the fact that the most digitized payer in Ghana today is the government, with 85% or more of government payments now digitized in the wake of successive reforms culminating in GIFMIS, compared to less than 40% of private sector payments, the political economy reality is that government will exempt government payments from the tax. It will do this not only to avoid useless double-counting from government taxing its own revenue, but in other interesting ways.
Quasi-government payments such as cocoa cash transfers by licensed buyers, SSNIT related payments and a host of others will over time also qualify for exemption due to lobbying. Because government’s contribution to the e-Money base is significant, this political economy based behavioral response must be compensated for by a shift of the burden to the private sector by government trying to game private sector exemptions.
Meanwhile, the fact that different payment channels, as discussed above, are optimized for different average transaction values, cumulative frequency of payments, and exemption benefits, shall elicit even more complicated gaming responses from private payers.
For example, lobbying is likely to lead to Government setting an upper bound for the e-levy’s application to transactions. It is unthinkable to think that the Government will be able to resist lobbying from investors repatriating their cash abroad for instance to pay the full rate on the full amount. Whatever ceiling the government sets beyond which the total tax payment stays fixed, payers will have an incentive to aggregate and compress their payments across time to benefit from the cap.
Meanwhile, away from the wholesale level and in the more higher-churn retail-point businesses (like table-top hawkers), for which the 100 GHS floor is no comfort, the ability to pool deposits is more constrained, with tragic equity effects. Some smaller payers nonetheless would be able to splice and distribute their payments across time to try and avoid crossing the 100 GHS threshold or whichever floor is set.
Then there is of course the fact that if, as the analysis above suggests, e-money is primarily a cash substitute at offline merchants, then the tendency to carry cash in order to avoid the tax will increase. Cash use in the economy has proven highly resilient. Supply has risen in aggregate terms by about 70% since 2017, and approximately 65% of all transactions still use cash. Compare this to Sweden, for instance, where only about 5% of the population still shop with cash.
The likelihood that a poorly designed e-levy will lead to Ghanaians continuing to stay away from digital services and entrenching in their use of cash, whilst restricting e-Money to cash-substitute at offline merchants only when transactions fall below the threshold or are considerably above the cap will be high. Where a tax induces such complex behavioral responses, it can have wholesale distortionary effects on a major part of the economy, in this case on digital GDP.
In sum, the wide and complex range of exemptions, not least because of government’s strong role as a payer; the interplay between caps and ceilings; and the cross-transaction elasticities (or inducements to switch from payment types) all suggest that different e-levy designs could have dramatically different impacts on the economy. We know for sure that the $1.15 billion revenue estimate in the budget is seriously flawed, as the total eligible value to be taxed is less than the naïve base of total electronic transaction value the government is using. But we can’t be too certain about all the effects until we consider multiple design options. Just knowing the daily cumulative transaction taxability threshold (100 GHS or any other number) and the absolute rate (1.75% or any other number) tells you very little about the likely impact of e-Levy.
E-Levy is NOT just a quick tax measure; it can have lasting impact & need more analysis
In fact, even from a pure monetary policy impact point of view, different e-money transactions behave differently, both in terms of their impact on monetary aggregates and the money multiplier. Empirical evidence from places like Bangladesh show that should the e-Levy encourage cashouts from wallets and discourage B2P, B2C and C2C/P2P transactions, inflationary effects can ensue. Current Bank of Ghana exogenous shock models rely primarily on vector autoregression formulas that are seriously unequipped to deal with the complex behavioral dynamics of gaming by large numbers of agents.
Lastly, before the country rushes into setting absolute rates and floors, as the likes of the Minority Leader would have it, a deeper policy evaluation exercise would also definitely benefit from cross-country comparative analysis. Renowned Kenyan Economist Njuguna Ndung’u has shared empirical evidence from Kenya that shows emphatically that even plain vanilla excise taxes on financial services can dampen growth. What Ghana is proposing to do, depending on exact design, may well be unprecedented worldwide and will therefore require careful modelling by looking at its divergences from global experience.
So, once again, the Minority Leader and all the major commentators pushing for a quick and ready compromise based purely on Parliamentary assent to the absolute rate and floor, but without further legislative guidelines on other features such as caps, exemptions and variations and slopes, are seriously jumping the gun.
This e-Levy thing needs its own separate policy treatment, outside of the tight budget process and timeline. Mr. Government, please take it out, work on it carefully, solicit stakeholder input, and return it to Parliament in the New Year.
Okay, let’s straighten a few records, shall we? It is not that we don’t appreciate the fact of a Vice President of a country like Ghana putting himself forward as a cheerleader of digital innovation. We do.
We live on a continent where politicians are usually caricatured as analog dinosaurs who hear “mouse” and only think “rodent”, see “keyboard” and immediately assume “church organ”.
So, especially for those of us whose professional teeth were cut on digital and technology, it is understandable to expect all of us to be jumping up and down at the sight of a Vice President, no less, who stages major speeches at top universities just to big up “digitisation”. Relax, we get the point.
The only challenge a few of us have with Ghana’s current Digitisation Agenda is the consistent disconnect between the big picture and the path to getting us to it. Most of us can agree on how technology can transform this country, from cutting avoidable deaths due to patchy medical records to fighting corruption caused by manual interference with administrative procedures.
Good ideas abound about the use of technology to improve every aspect of life in Ghana. Even if we are not visionaries ourselves, we can, at least, look at South Korea, Singapore and Estonia for quick and easy inspiration.
Most of us can appreciate how clever electronic solutions can reduce teacher absenteeism, optimise irrigation networks, cut ECG’s distribution losses and turn Accra’s nascent commodity exchange into a force that can actually be felt by Anloga-Woe-Kedzi’s tomato farmers. Those facts have never been in dispute.
The opportunities for social improvement using tech have always been obvious but given the chance leaders bungle things.
Procurement Driven Problem Solving
Most adult Ghanaians remember the famous “court computerisation project” initiated in 1998 to stop the antiquated practice of Judges writing down court proceedings in freehand because the country has not been able to implement a basic, modern, courtroom stenographic system.
It turned out that the Ghanaian computer whiz contracted to design and roll out such a system was not exactly Alan Turing, and the Honourable Minister responsible for overseeing implementation couldn’t distinguish between hardware and software.
In the end, the grand $1.3 million (1998 dollars, mind you) project only resulted in a compact disc loaded with a copy of the Ghanaian constitution and a couple of statutes. Till date, having gone through one “e-Justice” program after another, the country’s lawyers still have to rely on manual filings for many court actions.
In short, Ghana’s problem has always been the “HOW”. Much too often, technology-based social change projects initiated by Government agencies are driven more by procurement factors than a genuine understanding of the problem and the proposed solution.
This means that whilst the social and political benefits of solving a particular problem may be clear and would thus influence the decision-making, too little time is invested in careful analysis of the problem and proposed solution by people showing the right amount of professional scepticism.
Very rarely are such people even in the room when the problem is being analysed and the solution architected. Strategies and models for using technology to address social problems in Ghana therefore often lack the requisite rigour that varied professional opinions and debate would lend. The “HOW” is thus all too often not very well laid out.
Lack of Open Scrutiny & Debate
In virtually every serious country, major public sector ICT projects begin with some kind of Government position paper, a request for professional input from technical bodies, and then a rigorous, open, and transparent debate. Thereafter, some kind of expression of interest process opens up and a consortium is eventually selected to execute. Take the process through which the UK Open Banking initiative, for instance, has travelled to date. Or the ongoing effort to develop “quantum networking” in the United States.
In these parts, on the other hand, almost every public ICT project is shrouded in secrecy. Ghana is the only country, as far as I know, that is currently planning to launch a Central Bank Digital Currency (CBDC) in short order without a single public whitepaper laying out for scrutiny even the most basic elements, such as minting, node operator eligibility and consensus protocol design and membership criteria.
In Germany, where Ghana has been lucky to find a contractor to build its CBDC, the central bank has published copiously on its thoughts about how the design should be approached (such as how blockchain settlement can bridge the Euro and crypto domain) and invited lively debate in its rich technology ecosystem. In Ghana, not only has no attempt been made to engage the country’s policy and ICT communities from the ground up, but even basic information about the project is also not available.
There isn’t a single major ICT project driven by the Government that I am aware of that has been shaped by open debate to improve it. And few people can say that they have spent 15 years like I have tracking Ghanaian Government policymaking.
Not the now famously botched mobile money interoperability scheme featuring the mysterious Sibton; the shameful Kelni GVG call traffic monitoring project, which is basically a scam because telco revenue is a “rating” matter not a packet monitoring matter; and certainly not the scandalous Electoral Commission biometric software procurement from Neurotechnology, which independent analysis shows was cost-inflated by almost ten times.
Most of these projects, very much because of poor technical consultation and open discussion of the merits of competing design approaches, underperform over time and fail to transform the lives of citizens.
The above context frames how an activist such as myself, whose misfortune has been to watch so many poorly designed public sector ICT projects absorb scarce resources and still fail to deliver on their promises, should react to digital salvation schemes touted by politicians.
True, some of the Ghana.gov modules seem to have hit their mark. But such seeming successes (and it is early days yet) are exceptions that prove the rule. Ghana.gov benefitted from a deeper degree of involvement by Ghana’s tech community and was executed using a well-tested consortium model. Still, try to get a detailed document on its architecture online and report your findings.
Vice President Bawumia’s latest speech at the prestigious Ashesi University must be appreciated with all the nuances I have raised above. For the sake of brevity, I will focus on only two big picture “digital heaven” ideas he shared and show how deeper technical consultations and livelier, open, debate would have led to far superior design.
Integrating Ghana’s Proprietary Digital Addressing System into Google Maps
This has been a curious policy stance of the Ghanaian administration. Neither Vokakom nor Ghana Post, the two apparent co-developers of the country’s purportedly proprietary digital addressing system (“GhanaPost GPS”), has its own satellite feeds or sources of geospatial data. Their system is entirely dependent on data and infrastructure accessed through Google’s API.
With this GPS data and critical metadata from the same API, GhanaPost GPS assigns labels to polygonal grids using the old “discrete global grids” system that dates all the way back to the 1940s. In fact, Google has its own unique-code generating system for the grid-cells created using its raw data called “Plus Codes” that it has been offering for free for a while now.
Last year, the Navajo nation adopted this free, open-source, solution to provide a complete street-marking and property identification solution that can aid parcel and mail delivery. This year, Nepal did the same.
In simple terms, Google has an API that will give you data in a somewhat rawer state for use in marking landmarks. Ghana paid some contractors to implement this API and affix some labels on it that it calls an “addressing system”. Google also has another free system that can apply the identical labels for free. Countries like Nepal have gone for that, cutting out the unnecessary detour.
Ghana now says it wants to “integrate” its system into Google’s. Hard as I try, I cannot fathom this. Usually, one integrates separate systems that have separate sources of data and structures of functionality.
Google Street View and other digital landmarking services have already databased street and property names in Ghana by the hundreds of thousands. Google has privileged access to GPS and other geospatial data sets. In fact, that is the data source powering Ghana’s so-called “proprietary” system, so the appropriate term for any further collaboration with Google would be “reversion” to norm, not “integration”.
But beyond this confusion, there is a clear problem of poor problem definition and weak solution matching at play here.
The gridding system at the heart of GhanaPost GPS is fixed within certain preset bounds. The grid geocodes cannot therefore cover a physical street address uniquely because a physical street address has fuzzy edges and has not been pre-designed to fit within any preset rectangular grid. Consequently, one physical address can have multiple “digital addresses”. In fact, a place like Hotel Kempinski in Accra’s Ridge area would have many dozens of such “digital addresses” should they be based on geocoding of rectangular or polygonal grids.
In such a circumstance, replacing the GPS coordinates that many apps can capture and transmit with a supposedly unique “digital address” adds no real value as the so called “digital address” is not a unique one-to-one mapping system for street addresses. It is an arbitrary imposition based on selecting one of several dozen options, printing it out on a plaque, and sticking it on a gate. A user could get by using any other referent, such as a geolocation code generated by WhatsApp, for example. With this referent printed on a package, the courier can navigate to within the same approximate location, provided their internet service is fine.
We have in the past publicly urged the government to focus on how to embed generic GPS-based geolocation capacity within Ghana Post’s digital systems for enhanced mail routing based on efficient distribution algorithms. We have pointed out that the digital addressing system, in its current form, is a diversion of resources from what Vokakom and Ghana Post really ought to have spent the millions of dollars voted for the project on. Which is: digital transformation of Ghana Post to be able to better deliver packages to doorsteps all over Ghana.
These public entreaties have fallen on deaf ears. After all, not once in the history of public ICT deployment in this country has open, robust, healthy debate about the merits of competing approaches of deploying technology ever been given a chance.
Turning Ghana’s Identity SmartCard to a e-Passport
Another interesting problem posed by the Veep is how Ghanaians can use their passports and their national ID cards interchangeably. The solution to this conundrum is apparently to have the national Identity SmartCard (Ghana Card) conform to ICAO global standards for e-Passports.
Once again, both the problem and the solution would have benefitted from a lively debate in Ghana’s tech ecosystem. Because had any technologist, who has no conflicts of the procurement type, been asked, they would have raised many basic questions.
The starting point is: how are most countries deploying e-Passports today? Is it by turning their national ID smartcards into standalone e-Passports? The answer is a resounding “NO”. That is not the best practice currently.
India, to mention just one country, is not turning its Aadhar card into a e-Passport. Instead, it has embedded the ICAO-compliant smart chip (such as a microprocessor or a large-capacity RFID tag) into the cover of the passport itself as the illustration below copied from another author shows. Most countries are using this route.
The reason is simple: a passport is designed to be BOTH machine and human-readable in all its essentials. Furthermore, most e-visas and other electronic travel elements must also have a physical component for a host of reasons including, increasingly, the use of braille for the visually impaired, among others.
To the extent that virtually every country in the world insists on issuing a physical counterpart to its e-visas, a smartcard cannot be a worthy substitute for a physical passport for a long time to come.
The point has been made that a smartcard can be a physical substitute for a passport for travel within an immigration union (such as the Schengen Area) or for citizens returning from overseas. Fine, but such citizens would have used their passports to exit the country and if they are permanent residents or nationals qualifying for the Ghana Card, then they will already have a Ghana Passport or Ghanaian Residence Visa. So, how does adding e-Passport capabilities to the Ghana Card instead of the Ghana Passport become such a priority?
Yes, Half-Baked Solutions Costs Ghana More
A reader may puzzle over the whole importance of this matter. I insist that it is an issue because the weak framing of the problem throws up half-baked solutions and distracts us from asking whether resources being pumped into pursuing e-Passport capabilities for the Ghana Card should instead be spent beefing up the acquisition procedures for both the Ghana Card and the Ghana Passport (which, by the way, is overdue for a security upgrade).
Just as money spent on digital addressing could have been better purposed to address the problem of market distrust due to weak credit referencing, money spent on e-passporting for the Ghana Card could go into tightening the loopholes that are allowing foreigners to grab identity documents meant for citizens left, right and center.
In much the same way that asking someone to stand somewhere and generate a geocode to append to their bank account makes no difference to the bank’s willingness to trust them not to abscond with borrowed funds, so will adding passport biodata to a smartcard so that it can be read by ICAO-compliant terminals do little by itself to improve trust in Ghanaian identity documents at home and abroad.
The solutions looking for problems mindset is becoming pervasive. Not a week goes by without some government agency trying to foist its own definition of an industry problem complete with a procurement-driven packaged solution on some hapless group of citizens or businesses.
Not too long ago, it was the National Identification Authority trying to boost uptake for its expensive “express services” by forcing government workers who have already been enrolled into the Controller General’s biometric database to mandatorily procure a Ghana Card or forfeit their salaries.
The Bank of Ghana too is trying to impose datacenter solutions on banks in the name of cybersecurity. Some of its subsidiaries tried to force eZwich on a reluctant system for years before giving up. There is nothing wrong with state activism in favour of innovation. Where such activism is not subject to rigorous scrutiny and transparency but is largely driven by opaque in-the-shadows interests, as many ICT projects in Ghana often are, then there is cause for alarm.
So, yes, like the next internet addict down the road, I prefer a Vice President going on and on about the power of technology to rescue his nation than one who spends his time amassing rare Lamborghinis. I am only pleading that besides just touting solutions deployed, more time and effort should be expended on opening up the design of these solutions for scrutiny to ensure that they are really up to scratch.
Else, Ghana will merely be celebrating show and pomp, whilst its real problems continue to fester.
Meeting chiefs of the Nzema area this week, Ghanaian President, Akufo-Addo, pledged to amicably resolve the increasingly protracted impasse between one of the country’s local oil companies, Springfield, and a consortium made up of Italian oil major, ENI and its Swiss partner, Vitol.
Attempts by the Government of Ghana to force a “merger” of the separate petroleum discoveries of Springfield, on the one hand, and Eni and Vitol, on the other hand; split the equity of the merged “unit” anew among the companies; and have them jointly produce oil from the combined field is in stark contrast to the voluntary agreement that led to a similar “merger” (or technically, “unitization”) of the country’s most successful oil field to date, Jubilee.
In the case of Jubilee, the oil companies involved (Tullow, Kosmos, Anadarko and others) agreed that the discoveries they had separately made on the concessions separately leased from Ghana were indeed connected in such a manner that it would make sense for the discoveries to be unitized and produced as a single oil field.
In response to the Government’s attempt to impose a formula for a forced unitisation of the fields, Eni-Vitol have decided to trigger the dispute arbitration clause in their lease agreement with the Government. A showdown at the London Court of International Arbitration between Ghana and the Swiss-Italian investors is now imminent.
Usual Justifications for Unitisation
The benefits from unitization are usually spread among the producing oil companies/investors, the Government and the host country.
Because petroleum (oil, gas and other economically valuable derivatives) is often trapped underground or under the seabed (all of Ghana’s commercial discoveries so far are “offshore”, under the seabed) in fluid forms, the “accumulation” can shuffle around the rock formations in which it is trapped.
Concessions are often given out without a full picture of how the petroleum is distributed under the seabed, though with every seismic mapping done by investors the country knows better how to carve out the concession blocks for block lessees to minimize such “straddling” of petroleum reservoirs.
When investors enter into contracts with Ghana to lease a block under the sea (under international law, Ghana controls its coastal seabed, or continental shelf, up to an extent of 200 nautical miles or more into the high seas), they do so in the hope that any “pool” of petroleum they discover in any section of the block that they can drill profitably will be theirs to own and exploit. They will usually also have the right to invite investors to share the costs and profits (i.e. “to participate”) resulting from the eventual harvest of hydrocarbon riches (of course, by law and through negotiation, the Government is entitled to about 10% more or less of any such discovery, usually exercised through the Ghana National Petroleum Corporation – GNPC – or one of its even more commercial subsidiaries, such as Explorco or Gosco).
If it turns out that the pool of oil extends to adjacent blocks, then there is the possibility that the oil in one block can be “suctioned out” by the oil companies who own the adjacent blocks faster or in larger quantities, draining the pool or reservoir to the detriment of the slower or more cautious block owner. To prevent such a fate, each block owner is incentivized to drill as aggressively as they can (so-called “competitive drilling”) leading to suboptimal decisions in many ways.
Because effective drilling requires careful management of the pressure in the reservoir, one has to position production wells carefully in order to apply just the right amount of force on the right points in the overall “geological structure” or “stratigraphic trap” in which the petroleum has accumulated. A common reservoir thus require a central design.
Often, additional measures are needed to engineer the pressure dynamics, such as injection of water and gas at specific points to build up pressure for the petroleum fluids to flow up the production wells through “risers” into production facilities (such as so-called “FPSOs” or “submersible rigs”) on the sea surface. Siting these expensive but non-producing “injector wells” properly often requires that the field engineer takes into account where the production wells are also placed. Without a central field engineer, individual block owners would usually favour more production wells on their side than injector wells that optimizes pressure across the entire reservoir.
All of these suboptimal decisions – competitive drilling, poor siting of wells, underinvesting in secondary recovery infrastructure like injectors, etc – impact the long-term performance of the oil field. Investors, as a collective, may lose out because of duplicative spending on competing wells and injectors. Government loses out on revenue because most capex costs by investors are tax deductible. And the society loses out since in the medium term less oil and less oil revenue are generated for socioeconomic returns (jobs, social spending, contracts for value chain companies etc).
Unitisation is However Not Always the Only Option
It is important to bear in mind however that some of the problems that unitization usually sets out to solve can be addressed through other regulatory means. For example, every well that is sunk in a block usually needs prior regulatory approval. In fact, some operators in Ghanaian waters claim that the total number of approvals needed to get a new oil field going exceed two thousand. The regulator has a say in well spacing decisions through its ability to coordinate the outcomes of multiple “plans of development” for oil fields submitted by different companies in adjacent contract areas.
Companies can also embark on what is known as “pooling” whereby they co-invest in oil wells with regulatory approval in order to minimize the duplicative spending of drilling unnecessary adjacent wells. With horizontal drilling and sidetracking techniques getting more sophisticated by the day, such commercial solutions are even more viable today than they were in the past. The broad term for these other alternatives to unitization is “joint development”.
As a last resort, regulators can even cap production output to prevent excessive drainage of the reservoir. In the present case of Eni, the initial production forecast of 45,000 barrels of oil a day has been significantly exceeded (peak production is now at 57,300 barrels) because this is allowed.
The above caveats notwithstanding, unitization is usually a preferred mode for maximizing recovery when legal and regulatory certainty is required.
Why the Eni – Springfield Impasse then?
Given the potential benefits to investors and block owners/lessees of unitization and the usually voluntary nature of the practice (some jurisdictions like Texas don’t even have a statutory pooling or compulsory unitization regime), why has the Eni-Springfield matter become so acrimonious?
It is clear from the title of this explainer which way my sentiments turn. I think GNPC is the problem. But to make the case properly, it is important to trace the long genesis of the two oil discoveries that the Government of Ghana wants developed as a single unit.
The Eni – Vitol Sankofa Discovery
In March 2006, the Government of Ghana signed an agreement with Heliconia Energy, for the Offshore Cape Three Points block. As is customary in this space, Heliconia flipped the block to Vitol, the parent of its own Bermuda holding company, Atlantic.
In 2009, Vitol struck gas in the area of the block which became the Sankofa oil field. As is customary in this industry, Vitol sold a piece of the block to Eni, in the process sharing the financial risk and enabling an injection of further capital to develop the block towards production. With further exploration, oil was also discovered in the area in 2012.
Three years later, the World Bank provided political risk guarantees totaling $700 million (believed to be the largest ever such commitment by the Bretton Woods institutions to a capital project). Further loans from the IFC and other parties to Vitol and Eni underwrote a program of investment leading to oil production in 2017 and gas production in 2018. The World Bank estimated total project costs at $7.7 billion (of which it was responsible for mobilising about $1.27 billion). Eni, on its part, has reported total expenditure to date of $6 billion, and a revised project life-cycle capital expenditure of $10 billion.
The Eni consortium companies see themselves as deserving credit for having brought the biggest single overseas investment to Ghana to develop a risky and highly complex asset.
The Springfield Afina Discovery
In the same 2015 that the Eni consortium began drilling operations following the earlier approval of the plan of development by the Government in 2014, the Springfield upstream story began in earnest.
Two years earlier, in December 2013, Kosmos Energy had to give up a part of the West Cape Three Points block because under Ghanaian law a company is time-bound to explore for oil and develop any quantity found, or it must relinquish parts of the block on which it has not hit commercially exploitable oil.
The 1.37 square kilometers of seabed given up by Kosmos in this fashion was split into two new blocks and companies invited to bid for both. About 12 companies expressed interest, Springfield being one. In April of 2014, Springfield was thus allowed access to the GNPC data room to evaluate the cumulated data on the two blocks gathered by previous lessees.
Springfield came to GNPC with the Taleveras Group, a company part-owned by Nigerian tycoon, Igho Sanomi. In June 2014, Taleveras was introduced as the technical partner that will operate any blocks awarded the consortium. Unfortunately, soon thereafter, Taleveras began to experience serious financial challenges, culminating in a string of legal actionsaround the world. Not surprisingly, the Evaluation Committee disqualified it as the Technical Operator for lack of relevant experience and financial capacity, and decided to limit Springfield’s bid to block 2 alone.
Hence, in October 2014, Springfield introduced a new Technical Operator, Vaalco Energy, a small, Houston-based, Gabon focused oil junior. Vaalco had some requisite experience (it was Hunt’s partner during a small seismic campaign in Ghana as far back as 1999) and was thus acceptable to the Committee. But just before the Committee could complete its evaluation, Vaalco also decided to pull out as the Technical Operator.
Here is where Springfield’s exceptional tenacity comes into the picture. They convinced the Committee and the Ministry of Energy to award them the block nonetheless pending the onboarding of a Technical Operator. The Committee agreed and in turn convinced Parliament to ratify Springfield’s Petroleum Agreement with the Government, but with a caveat. Springfield was asked to find a Technical Operator within a year. The Ghanaian model contract gives an oil company 7 years to find oil anyway, with room for extension under certain conditions.
Springfield succeeded in convincing the Ministry of Energy and the GNPC to allow it to continue to explore and operate the block without a formal Technical Operator on the basis that oilfield services contractors, like Schlumberger, will more or less play that role despite the lack of official designation. Furthermore, it had set up a technical services company itself called Fairfax and also intended to form a joint venture with Aker Solutions, the Norwegian equipment player, to explore capacity development for exploration and production.
After a 3D seismic mapping exercise involving the giant Ramfom Titan in 2017, it secured the necessary regulatory approvals for drilling. Now primed, Springfield secured a rig to drill two wells in August 2019. The initial plan was to mirror a discovery in the adjacent ENI block (discussed above) called Beech by targeting a well named Oak-1x before targeting the Afina-1x well. Somehow, the campaign was reduced to just one well, Afina, and after 64 days of drilling, the targeted depth was reached in November 2019.
False starts notwithstanding, just before Christmas 2019, Springfield announced with massive fanfare the discovery of 1.5 billion barrels of oil in its budding Afina field.
No doubt that Springfield sees itself as a highly tenacious, groundbreaking, visionary African oil pioneer that will stop at nothing to realise its dream to become the first African operator of a massive ultra deepwater block.
Legal & Engineering Best Practices
After a new oil find, Ghanaian law requires oil companies to “appraise” it. This is such a critical point in this story that it merits quoting the relevant portion of the law. Appraisal is defined as:
“operations or activities carried out …following a Discovery of Petroleum for the purpose of delineating the accumulations of Petroleum to which that Discovery relates in terms of thickness and lateral extent and estimating the quantity of recoverable Petroleum therein, and all operations or activities to resolve uncertainties required for determinationof a Commercial Discovery”.
It is worth noting the boldened portion of the definition above. A major part of the dispute arbitration commenced by Eni-Vitol may well turn on the meaning of this sentence.
More so because the famous Article 8 of the model Petroleum Agreement sets conditions for unitization hinged on this basic prerequisite (various relevant extracts):
“As soon as possible after the analysis of the test results of such Discovery is complete, and in any event not later than one hundred (100) days from the date of such Discovery, Contractor shall by a further notice in writing to the Minister, the Petroleum Commission, and GNPC, indicate whether in the opinion of Contractor the Discovery merits Appraisal.
… Where the Contractor does not make the indication required by Article 8.2 within the period indicated or indicates that the Discovery does not merit Appraisal, Contractor shall, subject to Article 8.19, relinquish the Discovery Area associated with the Discovery.
…In the event a field extends beyond the boundaries of the Contract Area, the Minister may require the Contractor to exploit said field in association with the third party holding the rights and obligations under a petroleum agreement covering the said field (or GNPC as the case may be). The exploitation in association with said third party or GNPC shall be pursuant to good unitization and engineering principles and in accordance with International Best Oil Field Practice.
…Where Contractor indicates that the Discovery merits Appraisal, Contractor shall within one hundred and eighty (180) days from the date of such Discovery (or, in the case of the Existing Discoveries, within nine (9) months from the Effective Date) notify the Minister and submit to the Petroleum Commission for approval and to the Minister for information purposes a Proposed Appraisal Programme to be carried out by Contractor in respect of such Discovery.”
Model clauses from Ghana’s petroleum contracting regime
Here too, the boldened text – “good unitization principles & international Best Oil Field Practice” – is the fulcrum around which the arbitration about to commence in London will turn.
Is Afina a commercial discovery? Are the directives by the Minister for the ENI consortium and Springfield to compulsorily unitise their separate finds on grounds of “straddling” following International Best Oil Field Practice? Can a find that has not yet been established as commercial through appraisal be made part of any other arrangement, including field unitisation, considering the language of the provision?
Obviously, it would be imprudent to make categorical pronouncements now that the matter is in arbitration. But we can explore certain critical aspects to gauge whether things should even have been allowed to go this far.
The Fracas Begins
The complications arose a few months after Springfield’s announcement in December 2019 that it had made a massive find containing 1.5 billion barrels of oil. A field containing that amount of oil is, with virtual certainty, a commercial discovery.
Whilst the determination of whether an oil find is commercial is driven by multiple factors such as the prevailing oil price, the complexity of the reservoir (which will impact costs) and the distance to production facilities or need for totally new infrastructure, volumes and the certainty of recovering those volumes are by far the most commercially sensitive parameter.
Springfield’s initial estimate of 1.5 billion barrels was followed by a claim that the find it had made is in fact connected to the Sankofa East field in the ENI consortium’s block (Springfield would later reveal that it had suspected this from geophysical analysis since 2018).
Following a formal application by Springfield for unitization, the Minister of Energy, on 9th April 2020, issued a directive pursuant to Section 50 of the 2018 petroleum regulations requiring Eni and Springfield to unify their finds.
The interesting thing about Section 50 is that it does not elaborate on the preconditions of commerciality mentioned in the Model Petroleum Agreement nor does it touch on the role of appraisal in establishing the equity split (or “unit interests”). It primarily focuses on the Minister’s powers to issue model contracts specifically for unitisation.
Eni insisted that both appraisal and commerciality were critical factors in any unitization process and refused to budge. So, on 29th July 2020, the Chief Director of the Ministry of Energy wrote a second letter to the two companies lamenting their refusal to share data and the general lack of cooperation. Springfield says that it persistently pursued ENI for a meeting with scant results. Vitol, the other main half of the ENI Consortium, responded to the Ministry that Springfield had already proceeded to the High Court in an attempt to enforce the order to unitise.
On 19th August 2020, the Minister again wrote to the ENI consortium that it is engaging an independent third party to review the claims of the two parties and will impose the findings once they were ready.
Meanwhile, the parties had so far failed to sign a confidentiality agreement for data exchange to commence. Consequently, on 14th October 2020, the Minister imposed conditions for the unitization. Eni and Vitol continued to insist that as far as they were concerned the basis for unitization had not been established by sound engineering principles and data.
It is critical at this juncture to establish that whilst the Minister’s 14th October order imposing terms for the unitization was based on a 6th October technical report by the GNPC, his 9th April order appears to have been triggered primarily by the Springfield application without any comprehensive technical evaluation of the latter’s claims.
Readers would notice that the 14th October order was merely laying out terms, including crucial determinations about unit interest (how much equity two parties – ENI+Vitol and Springfield – stood to gain in the unitized field), for a directive that had already been made.
It will weigh heavily on the minds of the arbitrators that the substantive 9th April directive itself was made before an independent technical evaluation of the claims of Springfield in its application for unitization to the Ministry claiming that its Afina find was connected to ENI’s Sankofa East field. The Arbitrators are also likely to ponder if GNPC, an entity with commercial interest in the fields in contention (and therefore potential bias for one partner over the other) could be considered an “independent third party” to provide a technical assessment that could rewrite the commercial rights and entitlements of its partners.
With those important observations in the background, we can now turn to the 6th October technical report from the GNPC based on which Ghana decided to divvy up a future combined Sankofa-Afina field between Eni-Vitol and Springfield, with Springfield getting a majority stake of 54.5%.
Illustrative Chart of the Equity Split Imposed by Government on the Future Combined Field
OCTP Participation (%)
WCTP-2 (New Discoveries)* Participation (%)
Total Unit Interest (Sankofa-Afina Merged Unit)
*The fiscal regime for this block strangely differs for new and existing discoveries (a couple of undeveloped finds had been made before the latest owner, Springfield, was awarded the block)
The GNPC report asserts in its executive summary that the two finds – Eni-Vitol’s Sankofa East and Springfield’s Afina – are indeed connected (both emanate from a common reservoir straddling their separate blocks). It also states that based on analysis, the P90 case (the lower bound of estimates or the quantity that has at least a 90% probability of being produced or exceeded) for how much oil is in the Springfield side of the common reservoir is 290 million barrels, whilst the mean case puts the oil in place at 642 million barrels (revised upwards from the 506 million barrels estimated from earlier 3D seismic analysis).
Extract from the fateful GNPC 6th October Report
The important matter here is the applicability of the International Good Oilfield Practice (IGOP) requirement in Ghana’s petroleum regime as indicated in earlier sections. The classification of reserves by probabilistic scenarios like P10, P50 and P90 is not an arbitrary process. It follows well laid down IGOP guidelines in the Society of Petroleum Engineers framework for classification. Such guidelines are of course the very types of doctrines and principles constituting the bedrock of Lex Petrolea, or international petroleum law, the domain of norms governing the ongoing Eni-Vitol – Government of Ghana dispute arbitration currently underway in London.
The key issue in reserves classification, as a matter of global practice, is the narrowing of uncertainties and unrisking. In this discussion, we have witnessed a progressive narrowing of Springfield’s initial communication of P50 reserves of 1.5 billion barrels of oil in place to GNPC’s estimate of 642 million barrels in place. Eni’s corresponding P50 number of 535 million barrels in place, on the other hand, has gone up from an earlier estimate of 450 million barrels of oil equivalent (BOE) in 2013 to 535 million BOE after 20 wells drilled and consistent production of more than 3 years.
The question that will weigh on the minds of the arbitrators is whether GNPC’s approach to P90 and P50 classifications is solidly grounded in international standards seeing the wide uncertainty ranges on display.
All this while, due to the disagreements over confidentiality, Eni had not actually received the information based on which these determinations by GNPC and the Ministry were being made. Finally, on 23rd March 2021, the Minister decided to instruct the Petroleum Commission to hand over the data on Springfield’s Afina to Eni under a confidentiality agreement signed with the Commission (as opposed to Springfield).
On 26th April 2021, Eni and Vitol (for simplicity sake, we shall sometimes refer to the Consortium simply as “Eni” going forward) concluded its analysis of the data and submitted a report containing a startling claim to the Ministry: in its view, Springfield’s Afina find is so small it may not even be commercial after all (i.e. it may not be economically profitable to be produced).
Because Ghanaian law does not require finds made in two adjacent blocks to be directly connected before a finding can be made that they are best produced as one field, the technical debate till then had focused on whether there was even any merit in the investigation into whether Afina and Sankofa were really linked geologically. The dimension of non-commerciality now took center-stage and shook up the premises of the debate.
Eni’s analytical posture in the 26th April report starts with a sketch of the geology of the border between the two adjacent blocks. Per this analysis, the closer one moves westward from the Sankofa East area to the Afina find area, the poorer the petrophysical properties become reducing to an extent the likelihood of the presence of a continuous geological structure. Accordingly, Afina, compared to Sankofa East, has much greater mud contamination in its hydrocarbon columns. Thus, whilst the rocks in both fields may be of similar origin and could have matured through time by means of similar geological processes, the evidence, says Eni, does not yet confirm that the two reservoirs are actually connected.
In line with these arguments, Eni then brought up the issue of why the Afina well has so far not been tested. After all, the flow rate would have helped further reduce the uncertainties involved. Bearing in mind that on average 5 wells are drilled to establish commerciality in many similar contexts, to use one untested well as the basis for firm estimates is pushing the envelope.
A more technical argument related to why certain production activities on the Eni side were not impacting on pressure observations on the Afina side. But by far the most aggressive claim in Eni’s 26th April report was the assertion that rather than the GNPC estimate of 642 million barrels of oil in place in the P50 case, a more reliable estimate would be 94 million barrels, which under present conditions may not even be worth developing for production.
If Eni really believes this, it is completely ridiculous for anyone to have assumed on the Government of Ghana side that any amicable solution could be found whilst compulsory unitization was still on the table. Below is a very crude calculation that nevertheless illustrates the commercial impracticality of expecting either Springfield or Eni to play ball along conventional unitization lines. For reasons of simplicity, the calculation looks at the nominal value (without accounting for inflation or the time value of money) of the oil in the two adjacent fields. It also ignores production costs in both the status quo scenario and the scenario in which the unitization proceeds. Whilst it far from an NPV+ calculation, it still serves the purposes of illustration fairly well because it is strictly from Eni’s view, and thus assumes no savings from unitization.
Eni’s Oil-in-Place Nominal Valuation Scenario
Total Unit Interest(Sankofa-Afina Merged Unit)
Nominal Economic Value of Interest Post-Unitisation
Economic Value of Interest Pre-Unitisation
Economic Impact of Unitisation
From Eni’s standpoint the unitization is heavily tilted towards Springfield and offers it nothing besides nearly $6 billion in asset losses. Together with Vitol, it stands to lose more than $10 billion should the unitization proceeds. While Ghana would like to couch the forced unitisation as a technical regulatory matter, the prospect of large financial losses invokes some comparisons with expropriation, a well travelled area in the growing body of Lex Petrolea. In short, in Eni’s eyes, the unitisation is tantamount to Ghana taking half of its find and giving it to another company.
In the same vein, Springfield stands to gain more than $12 billion in this scenario. Since none of the current unitisation models on the table contain a scenario in which Springfield is worse off, it stands to reason that Springfield will stand its ground. Its position is perfectly logical and, in fact, is to be expected.
GNPC, the House of Supreme Incompetence
The conduct of the private companies is completely understandable from a cursory review of the scenarios above.
If GNPC’s view is correct and Springfield’s Afina has 642 million barrels, Springfield gets its just share from the initial tract participation (i.e. the equity split of 54.5% – 44.5% in its favour) but if Eni’s more pessimistic view turns out to be right, Springfield gets a $12 billion windfall.
Whilst the Minister’s terms include the standard “redetermination” provision, whereby these equity splits/unit interests could be revised in light of new data, within an 18-month timeline, the order falls far short of international best practice in how redetermination of international tract participation is to be managed.
First, a Preliminary Unitisation Agreement would normally be constructed very differently from the outright Unit and Unit Operating Agreement the Minister sought to impose through his order. Such an agreement will seek to establish the full extent of the common reservoir in order to determine the Initial Tract Participation (ITP). The ITP would not be imposed as a fait accompli prior to any Preliminary Agreements on the approach to embarking on the road to unitisation.
Second, a cost sharing provision would be necessary at the preliminary level to cover the additional costs of reservoir modeling. Under no circumstances, judging from the picture that emerges from a scan of dozens of relevant case studies in IHS’ commercial PEPS databases, can a pre-unitisation agreement (PUA) even be entered into without preliminary agreements on joint data collection, which in this case would include some appraisal work. It is the PUA that sketches both the “unit interval” and the initial unit interests for subsequent confirmation. Not arbitrary reports by National Oil Companies aiming to short-circuit the path to a Unit & Unit Operating Agreement (UUOA).
It is also the PUA that establishes the working groups within an atmosphere of mutual trust and confidence to enter serious discussions for final unitization. One of the key tasks facing such a working group (for example, a Pre-Unitisation Operating Committee) is the thorny issue of historic capex that would have contributed to the overall commerciality of the combined field. In this case, we have one field that has already incurred costs in excess of $6 billion. The Minister’s directive by focusing purely on historic production numbers without addressing historic capital expenditure showed considerable misunderstanding of the issues at stake.
Another source of confusion is the lack of clarity on the role of truly independent experts in the redetermination process. We can dismiss out of hand the notion of a National Oil Company serving as both participating interest holder and an independent expert offering mediation services in a fraught matter such as this.
In a situation, such as this one, where the Joint Database of production and appraisal data reflects activities to prove reserves by one party and almost none by the other party, one wonders why a uniform redetermination provision makes sense. And what if a redetermination in 18 months results in a drastic reallocation of historic production numbers from the deemed majority holder to the minority holder? Are both parties equally placed to take the financial hits? The degree of complexity introduced by trying to unitise an already producing field with one that has not even been appraised requires a level of sophistication in designing preliminary frameworks that was wholly absent in the Minister’s proposed terms.
Ghana’s refusal to stick to these common global practices, egged on by the GNPC, was bound to lead all parties to the current impasse.
But why heap most of the blame on GNPC?
Much of the justification for blaming GNPC is best illustrated by its 24th May 2021 response to Eni’s assessment of Springfield’s Afina data. The tone of this rather shoddy piece of work was not merely cavalier and perfunctory, but also unanalytical.
Confronting the issue of why a well test has not been conducted at Afina, GNPC airily dismisses the point by citing “value for money”. In what world does testing a well in a field declared as suitable to be combined with another field for joint production not “value for money” when any data so collected would go to improve the eventual common reservoir model?
On the extremely critical issue of how much oil is in the Afina find, GNPC beat about the bush with speculations about possible differences in areas used in computation. No effort is made to actually address any discrepancies that could have resulted from such speculated geometric causes. They then quickly retreat to the ridiculous mantra that producing best estimates of oil in place is a “post-unitisation” matter. That is to say, the parties should just give up their rights on the say-so of the GNPC and the Minister and the calculations can come later.
Having been blatantly caught out for discrepancies in their use of inferences about the oil and water contact dynamics and compositions in the hydrocarbon column, GNPC barefacedly mumbles something about using data from other nearby structures to approximate the drivers of the volumetric figures. It is absolutely elementary in reservoir estimation to be confident about “fluid contacts” data. The dismissive approach GNPC took to this issue alone would absolutely have strongly reinforced perceptions of unprofessionalism and bias.
As a further sign of incompetence, GNPC does not include in any of its technical evaluations to the Minister the actual implication of unitization for Ghana’s own fiscal situation. As the crude nominal valuation analysis above shows, it is entirely possible for Ghana to lose money (due to the relative differences in participating interest in the pre-unitisation tracts) – maybe up to 25% – if Eni’s numbers turn out to be correct. In these circumstances, why would a National Oil Company breezily argue that sound estimation of commerciality is irrelevant in an assessment of unitization?
The only sound and professional thing for GNPC to have done when the Minister referred the matter for advice was to lay out the requisite preparatory work needed ahead of a pre-unitisation agreement. As the organization relied upon by the government for technical insight into the petroleum business, it was GNPC’s duty to know and to advise that a rush towards a Unit and Unit Operating Agreement was completely immature when the global best practice is to establish a preliminary framework within which issues of commerciality and optimal recovery can be thrashed out in an atmosphere of mutual trust and confidence.
By persistently pushing the thesis that all commercial determinations must happen “post-unitisation”, GNPC proves itself to be a wholly provincial, unsophisticated, and even oafish National Oil Company that cannot be relied upon to guide our political leaders to make the right decisions for harnessing our national energy resource endowment.
The conduct of GNPC invokes comparison with that of Pemex, Mexico’s National Oil Company, which has led to a similar international dispute about the operatorship of the Zama field. A general approach of disregarding international best practices has led to a Pemex that has been ranked as the world’s most indebted oil company, perpetually struggling to fund its capital expenditures.
It is clear that Ghana must follow the footsteps of Brazil and India and establish a technical agency for hydrocarbons (like Brazil’s ANP) that is focused on providing technicalpolicy leadership in the petroleum sector (not merely exercising regulatory oversight like the Petroleum Commission) instead of one suffering from the schizophrenia of combining commercial hubris with technical policy savvy.
Of course, the culture and mandate of the Petroleum Commission can also be transformed for it to take over from the GNPC the role of providing technically sound, professional unbiased, purely national interest driven, policy advice to the Government.
If this does not happen soon, GNPC’s reckless conduct will not only end up embarrassing the country, it will one day cost all of us billions of dollars we can ill afford.