Reflecting on Ghana's new Sovereign Funds

By Ashby Monk, from Oxford SWF Project

Back in March, Ghana’s Parliament passed the Petroleum Revenue Management Act, formally creating two new Ghanaian sovereign funds: the Ghana Heritage Fund and the Ghana Stabilization Fund. I’ve finally had the time to read the Act in its entirety, and I found it rather interesting. Given Ghana’s consistent high scores for good governance, you won’t be surprised to learn that the Act has many of the ‘best principles’ of design and governance. Still, there were a few aspects of the Act that have caused controversy. But before I get into that, let me catch you up.

As their names imply, the Stabilization Fund will help smooth petroleum revenues, while the Heritage Fund will be an inter-generational savings fund. The Minister of Finance will be responsible for overall management of the funds, but the Central Bank will be responsible for the day-to-day operations. If this setup sounds familiar, it’s because this is pretty much a carbon copy of the Norwegian design: the NBIM manages the money (Central Bank) and the GPF-G has oversight for policy (Ministry of Finance).

In Ghana’s case, the Central Bank will be constrained in its investment options. Basically, the new SWFs can only invest the assets in investment grade fixed income securities (although the Act does offer quite a bit more detail as to what that actually means). This reminds me of the approach adopted by Timor-Leste, which decided to start slow (with fixed income) and diversify over time (which it is doing now). It’s a sensible way to go about things, as top notch institutional investors do not emerge overnight.

And yet, while the Act is quite sophisticated and solid, it has not been without controversy. For example, there is a provision that allows the government to borrow against the oil assets in the funds. That’s not something I would have included because it reduces the disciplining effect the funds should have on politicians’ spending habits. In short, while the Act does a good job of defining what the fiscal rules are for fund contributions and withdrawals, the ability to borrow unconstrained money (even if it is backed by a highly constrained, rule-bound SWF) undermines the power of the SWF’s rules and governance practices.

In addition, many were against the Heritage Fund, on the grounds that the country faces serious developmental challenges that require capital investment today. And it’s a fair point. I’ve noted before that (setting aside capacity constraints and Dutch Disease) there is a very good case to spend the money on domestic infrastructure with lasting economic benefits for developing countries.

Whatever the case, all credit to Ghana for taking some initial steps to prevent the resource curse. But there are many more steps to come. Next up on the agenda: implementation and operation.

Sovereign Investor:  It is interesting to compare the new Ghana Act with the equivalent law in Timor-Leste, on which the Ghana Act appears to have drawn heavily.  Both provide strong division of duties between the investment policy role (Ghana's Advisory Committee and Timor-Leste's Investment Advisory Board), the overall management (Ministry of Finance), and the operational management (central bank).  This structure has the effect of removing (as far as possible) political influence in both the setting of the investment policy (by the Advisory Board) and the implementation of the investment objectives (by the central bank).  Both laws have transparency as a fundamental principle.  Both countries have a committee (Ghana - Accountability Committee; Timor-Leste - Consultative Council) that assists parliament and the population monitor compliance with the relevant laws.  Both countries require the detailed publication of who has paid into the fund - Ghana requires quarterly publication, Timor-Leste requires the information to be published annually.  There are a number of other parallels too. 

By adopting robust governance structures and transparency, both countries appear committed to avoiding the inevitable risks associated with a large fund being solely and opaquely under the influence of a single person or ministry, and have instead adopted a system of institutional checks and balances at the highest level as an effective means of overall governance.