The Government’s agenda of revamping the railways to facilitate vibrant economic activities is on course and is still high on its priority projects, Mr Ken Ofori-Atta, Finance Minister stated in Accra on Monday.
In that regard, he said government had initiated several projects in the railway sector, stressing that, the Ghana Railway Company Limited had completed the rehabilitation of the 30-kilometre narrow gauge railway line from Accra to Tema, which had enabled the restoration of passenger rail services on the corridor.
Mr Ofori-Atta stated in the presentation of the Mid-Year Fiscal Policy Review of the 2019 Budget Statement and Economic Policy & Supplementary Estimates in Parliament in Accra.
He said the 40-kilometre Achimota to Nsawam line, had been rehabilitated and test runs had commenced in anticipation for the re-launch of the sub-urban commuter rail services from Accra to Nsawam to ease traffic congestion on the corridor.
Mr Ofori-Atta said preparatory activities had commenced for the extension of the narrow-gauge rehabilitation works to Koforidua.
He noted that the engagement of a strategic investor for the development of the 303-kilometre Eastern Railway Line on standard gauge, from Accra to Kumasi with a branch line from Busoso to Atiwa through Kyebi on a Build, Operate and Transfer (BOT) basis with Ghanaian participation was at the final stages of procurement.
The Finance Minister said the rehabilitation of the Kojokrom-Tarkwa section of the Western railway line was progressing steadily and currently the project was 60 per cent complete and employs over 300 people.
Mr Ofori-Atta stated that work on the construction of the 22 kilometres standard gauge Kojokrom-Manso section of the Western railway was being undertaken in two phases.
“Phase I (Kojokrom- Eshiem) is 45 per cent complete and a major railway bridge is under construction at Eshiem,” he added.
On the Tema-Mpakadan (Akosombo) rail line, Mr Ofori-Atta said significant progress had been made and the status of the project currently stood at about 45 per cent and was expected to be 58 per cent complete by the end of 2019.
He said feasibility studies had also been undertaken on the proposed 670 km Greenfield railway corridor from Kumasi to Paga, popularly known as the Central Spine.
Already, he recalled that a contract was signed for the development of the first phase from Kumasi to Bechem, a distance of about 103 km early this year.
He said the old Railway Training School and two workshops located at Essikadu, had received major refurbishments and facelifts.
“The training school is to be upgraded and equipped with modern teaching and learning facilities to enhance capacity building and skills development for the Railway Sector,” he said
Africa Center for Energy Policy (ACEP) has advised the government to focus on addressing excess power generated by the Independent Power Producers and not renegotiating the take or pay agreements with the producers.
The Executive Director of ACEP, Ben Boakye, said to Citi News that the sector’s real challenge is the reckless signing of power agreements which must be addressed.
“The problem the energy sector has is not because we have take-or-pays. It is because we have excess [capacity]. The problem is the reckless signing of more than we need.”
During the mid-year budget review, the Finance Minister said the country was in a “state of emergency” as far as the energy sector was concerned.
The “obnoxious” take-or-pay contracts were cited as a critical risk to the economy by the Minister.
Ghana’s installed capacity of 5,083 MW is almost double the peak demand of around 2,700 MW.
Of the installed capacity, 2,300 MW has been contracted on a take-or-pay basis meaning Ghana is contractually obliged to pay for the excess capacity though it does not consume it.
“This has resulted in us paying over half a billion U.S. dollars or over GHS 2.5 billion annually for power generation capacity that we do not need,” the Finance Minister said during the budget review.
He noted that the government intended to renegotiate and convert all take-or-pay contracts to take-and-pay contracts.
But Mr. Boakye said the country could also explore other alternatives beyond converting all contracts.
As another option, he suggested that the country could opt out of some contracts “and pay the damages.”
“If you recognise that damages for cancelling the contract is better to wait for five years to pay $1 billion, then you take the option and pay the $200 million to save the difference.”
The Finance Minister, Ken Ofori-Atta, will seek Parliament’s approval to spend more the approved GH¢78 billion during the presentation of the 2019 Midyear Budget Review on Monday.
A statement from the Finance Ministry reveals that this year’s presentation “will see an upward revision of the 2019 appropriation ceiling and its underlying measures, in order to achieve the objectives of the 2019 budget theme of expanding the economy and increasing jobs.”
Legislators passed last year passed the Appropriation Bill, giving the government the green light to spend some GH¢78, 771, 833,602 billion for the 2019 financial year.
It is this amount that the statement from the Finance Ministry says it will seek to review upwardly.
The government over the 2019 financial year was expected to spend GH¢95.6 million to subsidise electricity bills for customers.
Out of the GH¢ 78.7 billion, GH¢ 19.4 billion was also permitted to be used to pay compensation of employees (wages and salaries, pensions, gratuity and social security).
A further GH¢ 18.6 billion was earmarked to service domestic and external interests on existing debts, while GH¢ 13.7 billion will go to grants to other government units such as the National Health Insurance Fund, the Ghana Education Trust Fund, Road fund, Petroleum Related Fund, District Assembly Common Fund, Retention of Internally-Generated Funds, Transfer to GNPC and other earmarked Funds.
Also, capital expenditure took some GH¢ 8.5 billion, while GH¢6.3 billion went into the use of goods and services.
Some GH? 730 million was allocated to arrears and GH¢ 5.3 billion will go to amortisation.
What to expect in today’s Midyear Budget review
In accordance with Section 28 of the Public Financial Management Act, 2016 (Act 921) the Minister for Finance, Ken Ofori-Atta, will Monday present the Mid-Year Review and Supplementary Estimates to Parliament.
This year’s presentation will have a particular focus on issues affecting the energy sector and planned reforms for the sector.
Another major area expected to be addressed is the financial sector’s performance.
Ghana’s debt situation, domestic revenue mobilisation, and the review of the Luxury Vehicle Tax will also be highlighted. The Luxury Vehicle Tax has been criticised by economists and the public alike.
Government will, therefore, seek the approval of Parliament for supplementary estimates.
Aside from highlighting Ghana’s fiscal performance between January and June 2019, as well as a fiscal strategy going forward, this year’s Mid-Year Budget Review will touch on policies leading to increases in industrial output, such as the agro-food sector.
Roads Rehabilitation and Construction, the strengthening of Security, and Government Priority Programmes, among others, will also be addressed.
According to the statement from the Finance Ministry, against the backdrop of the Ghana Beyond Aid vision, this Mid-year presentation to Parliament is expected to explain how Ghana will take advantage of the opportunities that come with the hosting of the Secretariat of the Africa Continental Free Trade Area (AfCTA).
In a nutshell, Monday’s review covers:
- A brief overview of the macroeconomic developments (2018 and 2019);
- An analysis of revenue, expenditure, and financing performance for 2019;
- A revised fiscal outlook for the unexpired term of the financial year; and
- An overview of the implementation of the annual budget.
Part 1 examined nine VAT measures that are extolled as fiscal success and concluded by noting several flaws that negate their effectiveness: distortion of the tax structure, increase in tax burden, and not non-achievement of ambitious revenue targets for almost three (3) years. Part II discusses the Energy Sector Levies Act (ESLA), 2015 (Act 899)— the preeminent “nuisance” tax; the temporary levies, and the Special Petroleum excise measures.
Energy Sector Levy Act (ESLA)
Parliament enacted ESLA to address fiscal problems relating to (a) precipitous fall in crude oil and other commodity prices from late-2014 to 2016; (b) impact on global demand and recession in many SSA states—which Ghana escaped; but (c) stalled its recovery from disruption in gas supply from Nigeria for over two (2) years; (d) arrears of subsidy from delays in adjusting prices for petroleum and power supply—due to escalating crude prices for fuel and thermal plants; (e) consequent power crisis (called “dumsor”); and (f) unpaid road arrears that almost crippled the economy. Table 1 shows the ESLA levies on various products at its passage.
Table 1: Energy Sector Levies and Pricing Formula
A weak link existed between the unpaid and the non-performing loans (NPLs) that the State-owned Enterprises (SOEs) owed to, and weighed heavily on, banks and suppliers. Given the popularity of its “nuisance” tax stance in an election year, the government, in Opposition at the time, even put pressure on its MPs to boycott the vote on ESLA.
Measure 10: ESLA—retention of the levies
First, the continuous existence of ESLA epitomizes a major reversal in policy stance for the government. Second, given the shortfall in meeting revenue targets since 2017, Table 2 shows that, apart from meeting its original goals, the ESLA flows are now a major source of fiscal stability and even meeting electoral promises through the “capping” policy.
Table 2: Projections of ESLA revenue flows (2016 to 2022)
Table 3 shows the projections, actual and lodgments into the various ESLA funds, for the years that ESLA operated fully (2016 to 2018). It shows that deviations from the program, notably in terms of lodgments, have worsened since the “capping” policy came into effect.
Table 3: Projections, collections and actual flows of ESLA (2016-2018)
Measure 11: Subtle increase in burden of ESLA levies
The ESLA flows have become buoyant because the levies are ad valorem and respond buoyantly to the increase in crude oil prices, which form the basis for the tax. Therefore, given a liberalized price regime and increase in crude prices from average sub-US$40 pbl (2015-2016) to US$60 plus pbl (2017 to date), the tax should have been reduced, not increased. Hence, it is obvious that the prices and revenue increases impose a higher tax burden on consumers.
Measure 12: Subtle extension of ESLA Levies through Bonds
After reneging on its elimination promise, Government has surreptitiously and effectively extended the ESLA levies from 3-to-5 years to 7-to10 years through its (August 2017) 7-year (Ghc2.41 billion) and 10-year (Ghc2.38 billion) ESLA Bonds. These Bonds also refinanced the 2016 ESLA cash flow and debt restructuring facility by the past government. The 2019 Budget also notes a “re-tap” on the 2017 10-year Bond in January and August 2018, with yields of Ghc615 million and Ghc264 million, respectively.
As noted, ESLA was as a temporary tax which, based on a joint assessment of 3-to-4 months revenue flows, MOF and Ghana Association of Bankers (GBA) used to underpin the 3-to-5 years for the Ghc250 million cash-injection and Ghc2.2 billion restructuring of the debt that VRA owed to 12 domestic banks. A second unutilized draft term sheet for US$600 million was also based on a 5-year tenor. Given market credibility, the levy extends automatically to 7 and 10 years under the replacement Bond facility.
Measure 13: Apparent shift from using ESLA to support bailout costs
The Annual Report on the Management of the Energy Sector Levies and Accounts (Year 2016) highlights the goals of ESLA as follows:
“The Act (i) consolidates existing Energy Sector Levies and defines a framework to correct imbalances in the collection, distribution, and utilization of the levies; (iii) ensures the financial viability of energy sector State-Owned Enterprises (SOEs); (iv) facilitate investments in the sector; and (v) mitigate against market, credit and liquidity risks of energy sector SOES and their counterpart creditor banks” (par. 2, p 6; emphasis added).
The 2017 Report notes the importance of using ESLA to leverage the markets to resolve “the debt overhang that increased the exposure … to credit and liquidity risk and, consequently, impacted significantly on the balance sheets of their counterpart creditor banks”. Curiously, the 2018 ESLA Report (p.1) does not mention the banking sector bailout (pp.1 and p12).
“ESLA was passed … mainly to address the huge debt burden and operational challenges facing State Owned Enterprises (SOEs) in the Energy Sector, support power generation and supply sustainability, subsidize premix and stabilize petroleum prices, support road maintenance, as well as fund the activities of the Energy Commission”.
This omission may not be accidental, given the attempt to exclude the ESLA Bond (and underlying bailout costs) from the public debt and fiscal deficit, through Budget disclosures that are mainly in appendices and footnotes.
Measure 14: Reduction of some ESLA levies
The 2017 Budget reduced two (2) ESLA levies: National Electrification Scheme Levy from 5 percent to 2 percent; and the Public Lighting Levy from 5 percent to 3 percent. These are popular but not fiscally progressive since they precede ESLA and are bases for the popular Self-Help Electrification Program (SHEP) and assistance for MMDA public lighting.
Measure 15: Diversion of ESLA funds for other fiscal uses
The ESLA reports note its unauthorized use to settle commitments outside the energy and road sector remit for the law. The exceptional payments include pension arrears in 2016, which compared to the “capping” earmarked funds for mainstreaming, may not be legal but establish the importance of using ESLA to satisfy an expanded fiscal mandate that cannot be met from existing falling revenues.
Parliament passed the National Fiscal Stabilization Levy (NFSL) and Special Import Levy (SIL) in 2013 as temporary taxes, among other measures, to reduce huge subsidy and wage (Single-Spine Pay Policy) arrears. The use of temporary taxes to make corrections in austerity programs has two precedents under the Presidents Rawlings and Kuffuor administration.
Measure 16: National Fiscal Stabilization Levy (NFSL)
Recent amendments to the Income Tax Act (2015) have extended the 5 percent NSFL on profits before tax from 2013 through 2019. The amendments relate to collection, enforcement, refund and penalties of the NFSL.
Measure 16: Special Import Levy (SIL)
GRA charges SIL at any Port of Entry at 2 percent on the Cost, Insurance and Freight (CIF) value of the goods imported into the country, with reduction in rate from 3 percent and sunset clause of 3 years, to 2 percent. Originally, NFSL and SIL were to lapse in 2017 but due to the “commitment of the Government to continue to carry out necessary social programs, it was decided to extend both levies to 2019”.
Firstly, the decision to retain the two taxes after crude oil and gas prices and output had improved points to expenditure pressures. Secondly, the decision to change the objective and mainstream SIL as budget source for social intervention is a major departure from using the temporary taxes to augment other measures in periodic austerity programs.
Excise duty on petroleum (Measure 17):
In 2017, the government reduced the Special Petroleum Excise from 17.5 percent to 15 percent and further to 13 percent—when crude oil prices started rising from the low US$40 pbl in the late-2014 to 2017. The multiple goals of the measure include—
replacement tax policy, the goal was to change the petroleum excise regime from specific to ad valorem—which has since reverted to specific; adoption of counter-cyclical pricing policy to support the creation of petroleum buffers to improve economic management.
filling the budget void and protecting the economy from the spate of recessions in several Sub-Saharan African (SSA) states—due to falling in commodity prices; and making the petroleum excise fairer, in relations to other products such as tobacco (rate), alcohol (rate) and soft drinks (rate).
The change to 17.5 percent excise duty rate does not make the tax new and, also the reduction in rates in 2017 seems premature. The economy had not recovered fully and the new administration had to meet many ambitious promises. Third, as a punitive tax, petroleum excise is used to protect the environment and, therefore, it is odd to replace this broad-based tax with an increase in DVLA inspection (user) fee.
Besides the streamlining of the Petroleum Excise Taxes, the key policy thrust of the taxes covered in Part 2 is their use as temporary levies in resolving cyclical downturns (i.e., SIL and NFSL) in austerity programs or specific challenges (i.e., ESLA). In this context, it is difficult to defend their retention, extension and expansion, given the recovery in petroleum and other commodity prices and virtual tripling of petroleum outputs from 2 additional oil fields. The only explanation for Measures 10 to 17 is their fortuitous use to raise revenues to meet over-ambitious expenditure programs that keeps widening gaps in fiscal deficit, borrowing and public debt.
Businesses have warned against the introduction of new taxes in the midyear budget review because it will be counterproductive and could destabilise the business community.
Rather, they are urging the Finance Minister Ken Ofori-Atta to review a number of policies they claim are having negative repercussions on local businesses, particularly those in the manufacturing sector.
Key among them include the 5% VAT rate introduced during the last midyear review, the reduction in benchmark values of certain products that can be produced domestically, as well as, clarity on how the environmental tax is being used to tackle the plastic menace in the country.
“The 2019 budget has been presented and implemented, so we do not expect major adjustment except that last year we were shocked with some few taxes.
“This year we are not expecting a major shift in the budget review,” Association of Ghana Industries’ (AGI) Chief Executive Officer, Seth Twum-Akwaboah said when asked about what industry is expecting ahead of the July 29 Midyear Budget Review.
He, however, said businesses have some concerns about the 2019 budget, “We have further noted these concerns to the ministry and our expectation is that some of them will be addressed in this year’s review.”
“One of them is the benchmark values. A reduction in the benchmark values which we think is not good for manufacturers because it is not making us competitive and we expect something be done about it.
“Additionally, since last year, there has been the issue of 5% flat VAT which is affecting businesses because it is now being absorbed as tax instead of an input tax that you can claim.
“Then there is another aspect which is tax-on-tax which is about 18.5% and companies are complaining about it and we expect that it will be looked at. Others relate to plastics; what we call the environmental tax, which the producers of plastics are paying. We don’t see how it is being utilized to deal with the plastics menace and yet there is so much talk about banning plastics and all that; we want to see if there could be changes to it,” Mr Twum-Akwaboah noted.
Explaining further, he said the 5% flat VAT, for instance, should be reduced to a rate of 1% so that consumers will not have to bear any extra cost.
He added, “We strongly recommend that it should be looked at because when it is done it will make our products competitive. So, we want it reviewed downwards.”
On the benchmark values, he said, “Our position has always been clear, we have never said that it should completely be erased because there are some products that we don’t have the capacity to produce at the moment.
“But products that have local capacity, we don’t see why they should reduce the benchmark values for the foreign one to be sold cheaply compared to ours, so that is what we are asking the government to look at.”
He added that the business community would also love to hear and see more funds being made available to support local industries, especially as the African Continental Free Trade Agreement (AfCFTA) is coming into force.
This, he noted, should form part of a broader strategy to support local producers to become competitive in order to take advantage of the free Africa market.