Document of The World Bank FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED CREDIT IN THE AMOUNT OF SDR 6.6 MILLION (US$10 MILLION EQUIVALENT) TO THE REPUBLIC OF GHANA FOR A Report No GH THIRD NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE Environment and Natural Resources Sustainable Development Department Africa Region DEVELOPMENT POLICY OPERATION May 3, 2010 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange rate effective as of March 30, 2010) Currency Unit = Ghana Cedis (GHS) 1 GHS = US$ US$1 = GHS FISCAL YEAR January 1 December 31 AFD CAGD CAS CEA CEPS CF CHRAJ CIDA DFID DP DPO DSA EC ECF ECOWAS EIA EITI EKN ENR EPA EGPRC ERPFM EU FASDEP FC FCPF FIP ACRONYMS AND ABBREVIATIONS Agence Française de Développement FLEGT Forest Law Enforcement Governance Controller and Accountant General and Trade Department GDP Gross Domestic Product Country Assistance Strategy GEF Global Environment Facility Country Environmental Analysis GESS Ghana Environment Sector Study Customs and Excise Prevention GHS Ghana Cedis Service G-JAS Ghana Joint Assistance Strategy Consolidated Fund GoG Government of Ghana Commission on Human Rights and GPRS I Ghana Poverty Reduction Strategy Justice (Ghana) GPRS II Growth and Poverty Reduction Canadian International Development Strategy Agency GSD Geological Survey Department Department for International HIPC Highly Indebted Poor Countries Development of the United Kingdom Initiative Development Partner IAIA International Association for Impact Development Policy Operation Assessment Debt Sustainability Analysis ICT Information Communications European Community Technology Extended Credit Facility IDA International Development Economic Community of West Association African States ID Inspectorate Division (mining) Environmental Impact Assessment IGF Internally Generated Funds Extractive Industries Transparency IMF International Monetary Fund Initiative IMS Information Management System Embassy of the Kingdom of the (mining) Netherlands (Ghana) IRS Internal Revenue Service Environment and Natural Resources KPCS Kimberley Process Certification Environmental Protection Agency Scheme Economic Governance & Poverty LEAP Livelihood Empowerment Against Reduction Credits LDP Poverty External Review of Public Financial Letter of Development Policy Management LTU Large Taxpayer Unit European Union MC Minerals Commission Food and Agriculture Sector MDAs Ministries, Departments and Agencies Development Policy MDBS Multi-Donor Budgetary Support Forestry Commission Forest Carbon Partnership Facility Forest Investment Program MDF MDG MDRI Mineral Development Fund Millennium Development Goal Multilateral Debt Relief Initiative i

3 M&E MMDA MEST MoFEP MLNR MLFM MLGRD MLGRDE MSSP MTEF NDPC NEAP NEPAD NGO NRE NREG NRMP OASL Monitoring and Evaluation Metropolitan Municipal and District Assemblies Ministry of Environment, Science and Technology Ministry of Finance and Economic Planning Ministry of Lands and Natural Resources Ministry of Lands, Forestry and Mines (former) Ministry of Local Government and Rural Development Ministry of Local Government and Rural Development and Environment (former) Mining Sector Support Program Medium-Term Expenditure Framework National Development Planning Commission National Environment Action Plan New Partnership for Africa s Development Non-governmental Organization Natural Resources and Environment Natural Resources and Environmental Governance Natural Resources Management Project Office of the Administrator of Stool OECD- DAC PAF PEFA PFM PPB PRSC PSIA RAGB REDD REDD+ SBS SDAP SEA SDR SLM SSM TLAS TUC UNFCCC VAT VLTP VPA Lands Organization for Economic Cooperation and Development- Development Assistance Committee Progress Assessment Framework Public Expenditure Financial Assessment Public Financial Management Public Procurement Board Poverty Reduction Support Credit Poverty and Social Impact Analysis Revenue Agencies Governing Board Reduced Emissions from Deforestation and Forest Degradation REDD plus conservation, sustainable management of forests and enhancement of forest carbon stocks Sector Budget Support Sustainable Development Action Plan Strategic Environmental Assessment Special Drawing Rights Sustainable Land Management Small Scale Mining/Miners Timber Legality Assurance System Timber Utilization Contracts United Nations Framework Convention on Climate Change Value Added Tax Validation of Legal Timber Program Voluntary Partnership Agreement (Forestry) Vice President: Obiageli K. Ezekwesili Country Director: Ishac Diwan Sector Director: Inger Andersen Sector Manager: Idah Pswarayi-Riddihough Task Team Leader: John W. Fraser Stewart ii

4 GHANA NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE THIRD DEVELOPMENT POLICY OPERATION CREDIT AND PROGRAM SUMMARY... v I INTRODUCTION... 1 II GHANA S RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS... 2 III SECTOR ISSUES AND THE GOVERNMENT S STRATEGY A. FORESTRY AND WILDLIFE B. MINING C. ENVIRONMENT D. BUDGET MANAGEMENT IV JOINT DEVELOPMENT PARTNER SUPPORT TO THE GOVERNMENT S PROGRAM. 24 V A. LINK TO COUNTRY ASSISTANCE STRATEGY (CAS) B. DONOR HARMONIZATION C. RELATIONSHIP TO OTHER BANK OPERATIONS D. LESSONS LEARNED THE PROPOSED NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE DEVELOPMENT POLICY OPERATION A. OPERATION DESCRIPTION B. POLICY AREAS VI OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACT B. ENVIRONMENTAL ASPECTS C. IMPLEMENTATION AND MONITORING AND EVALUATION D. FIDUCIARY ASPECTS E. DISBURSEMENT AND AUDITING F. RISKS AND RISK MITIGATION VII ANNEXES ANNEX 1. LETTER OF DEVELOPMENT POLICY ANNEX 2. EXPECTED NREG OUTCOMES AND OUTCOME INDICATORS ANNEX 3. PROGRESS AGAINST 2009 TARGETS ANNEX 4. NREG PROGRAM MATRICES ANNEX 5 FRAMEWORK MEMORANDUM OF UNDERSTANDING ANNEX 6. FUND RELATIONS NOTE ANNEX 7. COUNTRY AT GLANCE ANNEX 8. MAP OF GHANA iii

5 TABLES TABLE 1: SELECTED ECONOMIC AND FINANCIAL INDICATORS, TABLE 2: CENTRAL GOVERNMENT BUDGETARY OPERATIONS, TABLE 3: GHANA S PROGRESS TOWARDS THE MILLENNIUM DEVELOPMENT GOALS TABLE 4: STATUS OF FORESTRY AND WILDLIFE SECTOR PRIOR ACTIONS FOR DPO TABLE 5: STATUS OF MINING SECTOR PRIOR ACTIONS FOR DPO TABLE 6: STATUS OF ENVIRONMENT SECTOR PRIOR ACTIONS FOR DPO-3 45 TABLE 7: NATIONAL BUDGET PRIMARY EXPENDITURE DEVIATION AND COMPOSITIONAL VARIANCE ( )...54 TABLE 8: NREG AGENCIES' BUDGET EXECUTION STATUS BOXES BOX 1: NREG DPO AND DPO GOOD PRACTICE PRINCIPLES BOX 2: SUMMARY FINDINGS OF RECENT STUDIES UNDER THE NREG PROGRAM BOX 3: OUTCOMES OF STAKEHOLDER AND RISK ANALYSIS BOX 4: GHANA S PUBLIC FINANCIAL MANAGEMENT SYSTEM: KEY FINDINGS FIGURES FIGURE 1: THE EXCHANGE RATE AND PRICE LEVELS STABILIZED SINCE JULY FIGURE 2: GHANA S PROGRESS AND PROSPECTS VARY WIDELY ACROSS MDGS The third NREG development policy operation was prepared by a team that included the following members from the World Bank: John Fraser Stewart (Task Team Leader and ENR Co-Sector Lead), Victoria Bruce-GoGa, Peter Kristensen (AFTEN); Carolyn Winter, (AFTCS); Rose Abena Ampadu, Salimatou Drame-Bah (AFCW1); Ismaeila Ceesay (AFTFM); Sebastien Dessus (Country Economist AFTP4); Anders Jensen (AFTRL); Allison Berg, Bryan Land, Kristina Svensson (COCPO); Edith Ruguru Mwenda, Manush Hristov (LEGAF); Rajiv Sondhi (LOAFC); Franke Toornstra (AFTRL); Alyson Kleine (WBICC). The World Bank team worked closely with Development Partner representatives participating in Ghana s Environment and Natural Resources Management Sector Group: Isabelle Arraut (AFD); Sean Doolan (DFID/Netherlands Emabassy); Jannik Vaa (ENR Sector Lead) and Emmanuel Ansong (EC); Elijah Danso, Ton van der Zon (Co-sector lead), Martin van der Linde (EKN). Peer Reviewers: Kulsum Ahmed, Lead Environmental Specialist (ENV), Gotthard Walser, Lead Mining Specialist (COCPO), and Laurent Debroux, Sr. Natural Resources Specialist (LCSAR). The team is working under the guidance of Idah Pswarayi-Riddihough (Sector Manager), and Herbert Acquay (Program Coordinator) (AFTEN); Ishac Diwan (Country Director) and Katherine Bain (Country Program Coordinator) (AFCW1). iv

6 CREDIT AND PROGRAM SUMMARY REPUBLIC OF GHANA THIRD NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE DEVELOPMENT PROLICY OPERATION Borrower Implementing Agency Financing Data Republic of Ghana Forestry Commission, Minerals Commission, and Environmental Protection Agency together with their parent Ministries (the Ministry of Lands and Natural Resources and the Ministry of Environment, Science and Technology). The program is coordinated by a high-level, inter-ministerial committee and carried out under the supervision of the State Minister for Finance and Economic Planning and supported by a Technical Coordination Committee. IDA Credit, blend terms with 35-year maturity, including a 10-year grace period Amount: SDR 6.6 million (US$10 million equivalent) Operation Type Programmatic (3 rd of 3), single-tranche Main Policy Areas Key Outcome Indicators The Third Natural Resources and Environmental Governance Development Policy Operation (DPO-3) focuses on: (a) ensuring predictable financing and sustainable management of the forest and wildlife resources and effective forest law enforcement; (b) improving mining and forestry sector revenue collection, management, and transparency; (c) addressing social issues in forest and mining communities; and (d) mainstreaming environment into policies for economic growth. 1. Strengthen institutions and governance as evidenced by: (a) 10% increase in legal wood supply to domestic markets; and (b) first Forest Law Enforcement Governance and Trade (FLEGT) license issued. 2. Sustainably finance and promote investment in forestry sector as evidenced by: (a) timber revenues increased by 15%; and (b) plantation forest area increased by 15%, through increased private investment. 3. Reduce social conflict issues in mining communities and improve support to small scale miners (SSM) as evidenced by (a) design of a survey tool and carrying out of at least one survey, (b) SSM established through three co-operatives in mining areas with improved performance. 4. Improve mining sector revenue collection, management, and transparency as evidenced by: (a) fiscal model applied to three mines, resulting in improved overview of revenues due to the Government of Ghana and a reduction of the revenue gap ; (b) up v

7 Program Development Objective(s) and Contribution to CAS Risks and Risk Mitigation Operation ID to date data on mining incomes, royalties and local revenues and their distribution published at the district level; and (c) survey tool to track perception of use of mining revenues at district and municipal level designed, and at least one survey undertaken. 5. Promote investment in climate change adaptation and mitigation as evidenced by the preparation of one long-term investment plan. 6. Strengthen national environmental impact assessment system through: (a) updated legislative instrument on Strategic Environmental Assessment, including sector guidelines for oil, mining, forestry, energy, transport sectors and consultation and disclosure procedures for environmental assessment; and (b) 60% of Environmental Impact Assessment (EIA) applications processed within the prescribed time frame and with the requested consultation and disclosure procedures. The objectives of the three operations in this DPO series are to: (a) ensure predictable and sustainable financing for the forest and wildlife sectors and effective forest law enforcement; (b) improve mining sector revenue collection, management, and transparency; (c) address social issues in forest and mining communities; and (d) mainstream environment into economic growth through Strategic Environmental Assessment (SEA), Environmental Impact Assessment (EIA), and development of a climate change strategy. The CAS sets out the broad objectives of increasing growth and decreasing poverty and inequality, to be achieved with the help of the Ghana Joint Assistance Strategy and a series of World Bank programs, including Poverty Reduction Support Credits (PRSCs) and other DPOs such as Natural Resources and Environmental Governance (NREG). Primary risks to the proposed operation include: (a) political risks, (b) macroeconomic risks, (c) financial risks, (d) environmental risks, (e) social risks, and (f) risks of misperception. The DPO series has put in place mitigation measures to address these potential risks through: (a) promotion of dialogue and positive interaction between relevant stakeholder, (b) establishment of mechanisms to adjust expenditure to the level of available financing; (c) close monitoring of the release of funds to other government agencies; (d) undertaking an environmental evaluation of targets and triggers and the holding of annual progress reviews; (e) use of Poverty and Social Impact Analysis, increased social accountability and transparency, and payments from carbon storage promoting activities; and (f) updating key stakeholders regarding objectives and positive outcomes. P vi

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9 GHANA THIRD NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE DEVELOPMENT POLICY OPERATION (DPO-3) Date: May 3, 2010 Country: Republic of Ghana Operation: Ghana Natural Resource and Environmental Governance - DPO Operation ID: P Team Leader: John W. Fraser Stewart Sector Manager/Director: Idah Pswarayi- Riddihough Country Director: Ishac Diwan PROGRAM DOCUMENT DATA SHEET Lending Instrument: Development Policy Lending Board Approval Date: May 27, 2010 Effectiveness Date: September 30, 2010 Closing Date: June 30, 2011 Sectors: Mining and other extractive (33%); Forestry (33%); Other industry (17%); General agriculture, fishing and forestry sector (17%) Themes: Environmental policies and institutions (); Biodiversity (); Climate change (); Rural policies and institutions (); Other rural development () Environmental screening category: Special Development Policy Lending: [ ] Yes [X] No Crisis or Post-Conflict Situation (exception to OP8.60): [ ] Yes [X] No Programmatic: [X] Yes [ ] No Deferred Drawdown Option: [ ] Yes [X] No Subnational Lending: [ ] Yes [X] No Operation Financing Data [] IBRD Loan [X] IDA Credit [] Grant [] Other: Total Bank financing (US$m.): Proposed terms: IDA blend country terms, with a maturity of 35 years, including a ten-year grace period. Tranche Release Information List binding conditions as stated in the Legal Agreement. Does the operation depart from the CAS in content or other significant [ ]Yes [ X] No respects? Does the operation require any exceptions from Bank policies? [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X ] No Operation development objective: The objectives of the three operations in this DPO series are to: (a) ensure predictable and sustainable financing for the forest and wildlife sectors and effective forest law enforcement; (b) improve mining sector revenue collection, management, and transparency; (c) address social issues in forest and mining communities; and (d) mainstream environment into economic growth through Strategic Environmental Assessment (SEA), Environmental Impact Assessment (EIA), and development of a climate change strategy.

10 INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED THIRD NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE DEVELOPMENT POLICY OPERATION FOR THE REPUBLIC OF GHANA I INTRODUCTION 1. Background. This program document presents a proposed third, in a series of three, development policy operation (DPO-3) to the Republic of Ghana for SDR 6.6 million (US$10 million equivalent) to support the Government of Ghana (GoG) as it implements reforms under the Natural Resources and Environmental Governance (NREG) program. The reforms will focus on the forestry and wildlife, mining and environmental protection sectors. 2. Program Objectives. The objectives of the three operations in this DPO series are to (a) ensure predictable and sustainable financing for the forest and wildlife sectors and effective forest law enforcement; (b) improve mining sector revenue collection, management, and transparency; (c) address social issues in forest and mining communities; and (d) mainstream environment into economic growth through Strategic Environmental Assessment (SEA), Environmental Impact Assessment (EIA), and development of a climate change strategy. 3. Rationale and Links to the Government s five year Program. This programmatic DPO series supports the first three years ( ) of GoGs five year ( ) NREG program to address governance issues in the forestry and mining sectors and improve environmental management. Currently forestry, wildlife and mining are key to Ghana s economy and share common challenges, including revenues that are not well captured and large numbers of people dependent on the sector for their livelihood. In addition, environmental policy (via the Environmental Protection Agency, EPA) needs to be strengthened to effectively control pollution, and to reduce long-term negative health and economic impacts due to environmental degradation and climate change. Ghana has recognized the need to address these important issues. The Growth and Poverty Reduction Strategy (GPRS II), extended to 2010, has the overarching goals of sustaining economic growth of at least 6 percent per year to attain middle-income country status and surpass the 2015 Millennium Development Goal of halving poverty levels to 26 percent of the population and reducing inequalities. 4. The GPRS II has three distinct pillars private sector competitiveness, human resource development, and good governance and civic responsibility with priorities for environmental management identified through an SEA. The DPO focuses on supporting the Government s plans to invest in demand and supply-side approaches in order to improve governance in the natural resources sector and specifically target improved revenue management, financial flows and livelihoods in the forestry, wildlife and mining sub-sectors. The DPO will support GoG actions that enable dialogue with complementary funding facilities for expanded civil society engagement in natural resources governance. 1

11 5. Long-Term Development Plan. A draft Long-Term Development Plan was tabled in June 2008, and its orientations are still to be confirmed by the new administration, which took office in February Environment and natural resources continue as elements within wider national objectives on growth. No major change in strategic direction is foreseen, as the Plan is expected to remain centered on Ghana s objective of becoming a middle-income country and reaching all MDGs by The use of oil revenue constitutes a new factor to be considered in this planning perspective. 6. Expected Outcomes. The expected outcomes at the end of the DPO series include: (a) improved management of government revenues and finances in the forestry and mining sectors; (b) reduced illegal logging; (c) reduced social conflict in forestry and mining communities; and (d) integration of environmental considerations into policy formulation and implementation across government, including risks associated with climate change. (See Annex 2 for details on the expected outcomes and associated indicators). 7. Development Partnership Arrangements. A Framework Memorandum of Understanding (Annex 5) signed by GoG and participating Development Partners (DPs) Agence Française de Développement (AFD), the United Kingdom s Department for International Development (DFID), the European Commission (EC), the Embassy of the Kingdom of the Netherlands in Ghana (EKN), and the International Development Association guides the GoG/DP collaboration in support of the NREG program. 1 The Framework Memorandum sets out the process for joint agreement and assessment of a three-year rolling Performance Assessment Framework (PAF) and outlines a review process that is aligned with the broader Multi-Donor Budget Support (MDBS) program. II GHANA S RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS A. RECENT ECONOMIC DEVELOPMENTS 8. The Government elected in January 2009 inherited a difficult macro-economic situation, brought on by a series of shocks which exacerbated a structural trend of widening fiscal imbalances. Rapid fiscal expansion in 2008 and the sudden closure of access to international capital markets in September 2008 resulted in a widening current account deficit and a contracting capital account surplus. By end-2008, fiscal and current account deficits, including grants, culminated at 14.5 and 18.7 percent of GDP, respectively. While fiscal expansion was prolonging trends observed since 2005 with a public sector wage bill increasing from 8.5 to 11.3 percent of GDP between 2005 and 2008 it was also the result of a combination of severe exogenous shocks, including floods and droughts in late 2007, a rise in world food prices, which prompted the Government to introduce food tax exemptions, and a rise in oil prices, which led the Government to purchase oil on behalf of utilities, in the absence of effective 1 Even if not providing financing through the NREG Sector Budget Support program, all participating DPs in Ghana s Environment and Natural Resources Management (ENRM) Sector Group have observer status in the NREG program. 2

12 tariff adjustment mechanisms. The electoral cycle also contributed to the fiscal expansion, as observed during previous elections. Deficits and demand pressures strongly contributed to the depreciation of the Ghana Cedi, which lost more than 40 percent of its value against the US dollar from June 2008 to June 2009 (figure 1), and to accelerated consumer price inflation, which culminated at 20.7 percent (year-on-year) in June Figure 1: The Exchange Rate and Price Levels Stabilized Since July Jun 08 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jun 09 Aug 09 Oct 09 Dec 09 Feb 10 Consumer Price Index (June 2008=1) Exchange Rate Index (GHc:US$, June 2008=1) Source: World Development Indicators. 9. In response, the Government immediately adopted a multi-year fiscal stabilization plan. The strategy comprised immediate actions in 2009 to restore expenditure control and pave the way for structural reforms in the public sector and in energy in These actions and reforms aim to stabilize the debt to (non-oil) GDP ratio from 2010 onward. These intentions were reflected in the Budget Law 2009 approved by Parliament in March 2009 (which targeted a 9.4 percent of GDP fiscal deficit in CY09), as well as in the Budget Law 2010 laid out before Parliament in November 2009, which targets a 7.5 percent of GDP fiscal deficit in CY The International Monetary Fund (IMF) supports the Government s fiscal stabilization plan. On July 15, 2009, the IMF Board approved a 3-year arrangement under the Poverty Reduction and Growth Facility (PRGF) for Ghana in an amount of US$600 million to support the Government's economic program to tackle macroeconomic imbalances. A joint first and second review of the PRGF by the IMF board is scheduled for May Through the Economic Governance and Poverty Reduction Credit (EGPRC), IDA has also been supporting structural reforms to restore budget discipline and tackle long-standing public sector and energy issues, while protecting the poor. The DPO was approved on June 30, 3

13 2009 by the World Bank Board of Executive Directors, for a total amount of US$300 million equivalent to be disbursed in two successive tranches of US$150 million each. 2 Efforts supported by the EGPRC concentrated on measures to: (i) establish a treasury single account, improve compliance with the public procurement law, correct any budget deviations (fiscal deficit, propoor expenditures), publish fiscal accounts, and submit to Parliament the Freedom of Information Bill; (ii) reconstitute the boards of energy-related utilities and regulatory authority, adopt an electricity sector financial recovery plan, adopt legislation on oil and gas regulatory framework and fiscal regime, implement a net hiring freeze in the public sector, eliminate ghost workers in health and education services, classify half of subvented agencies in preparation for their rationalization, divestiture, or commercialization; and (iii) extend the number of LEAP (cash transfer program) beneficiaries and review the effectiveness of pro-poor expenditures. 12. Since mid-2009, the economy has shown strong signs of stabilization, while weathering the impact of the global financial crisis. Following large expenditure slippages in 2008, both the fiscal and current account deficits were significantly reduced in the course of 2009, under the impact of positive exogenous shocks (high hydroelectric reserves with good rains, low oil prices, high cocoa and gold prices, good cocoa harvest) and significant fiscal stabilization efforts and achievements (see Table 1 and 2). The fiscal deficit reached 9.7 percent of GDP in 2009 (against 14.5 percent a year earlier) while the balance of payments current account registered a 5.1 percent of GDP deficit (against 18.7 percent a year earlier). Since July, the exchange rate stabilized and even slightly appreciated against the US$ (following a 45 percent depreciation since June 2008). Consumer prices also broadly stabilized, growing at an annual pace of 4.0 percent over the period July 2009-February As such, the year-on-year inflation target set forth by the Bank of Ghana for December percent - was almost attained (15.9 percent), and within the inner range agreed upon with the IMF. By March 2010, 6-month T-Bills were subscribed at 15.7 percent, down from 26.4 percent a year earlier. 13. Indirect indicators suggest a significant deceleration in GDP growth in Estimates for 2009 put real GDP growth below 4 percent in real terms, down from an estimated 7.3 percent in A number of indirect indicators tend to support this estimate, from indirect tax revenue and import demand to energy supply and private sector credit growth. And while exports (gold, cocoa) continued to enjoy high world prices, growth in domestic demand is likely to have decelerated, under the combined impact of fiscal stabilization, tighter credit conditions, and lower private transfers and foreign direct investments. Latest data suggest that the economy 2 The first tranche was disbursed upon effectiveness in July By April 2010, prior actions regarding (i) the adoption of corrective measures in 2009 to meet fiscal deficit and pro-poor expenditure targets, (ii) the submission of the freedom of information bill to the Parliament, (iii) the classification of pro-poor expenditures, (iv) the approval by Cabinet of the electricity financial recovery plan, (v) the elimination of ghost workers from the Ghana Education Service, (vi) the appointment of a Minister of State for Public Sector Reform, (vii) the initiation of employment audits in all MDAs and (viii) the classification of Subvented Agencies for divesture and commercialization were considered met by the World Bank staff, pending receipt of appropriate means of verification. Progress was also significant on the remaining prior action, that is, the adoption by Cabinet of the fiscal and regulatory frameworks for the oil and gas sectors. 3 GDP estimates are based on indirect indicators of supply and a 17-year old base year, 1993, possibly not reflecting structural economic changes which occurred since. National accounts are currently being re-based by the Ghana Statistical Services, and this endeavor is likely to entail significant upward revisions in GDP levels. 4

14 started to regain strength towards the end of 2009, rebounding from the sharp deceleration in the first half of Not being greatly exposed to international financial markets (on both assets and liabilities sides), Ghana s financial sector (mostly banks) was not directly affected by the global financial crisis. The banks balance sheets continued to expand rapidly in 2009 (31 percent increase between December 2008 and December 2009), while significantly elevating capital adequacy ratios. 4 Yet, GDP growth deceleration, exchange rate depreciation, related currency mismatches, and large public arrears likely contributed to rising Non Performing Loans (NPLs), which attained 14.9 percent of total loans in 2009 (up from 7.7 percent a year before). Table 1: Selected Economic and Financial Indicators, (Annual percentage change; unless otherwise specified) National accounts and prices Real GDP Real GDP (non oil) Real GDP per capita Consumer price index (annual average) External sector Exports, f.o.b. (percentage change, in US$) Imports, f.o.b. (percentage change, in US$) Export volume Import volume Terms of trade Ghana Cedis (new) per U.S. dollar (end of period) Money and credit Net domestic assets Real private sector credit (% annual changes) Broad money (excluding foreign currency deposits) (Percent of GDP; unless otherwise specified) Investment and saving Gross investment Private investment Central government investment Gross national saving Private savings Central government savings Foreign savings (Percent of non-oil GDP; unless otherwise specified) Government operations Total revenue and grants Total expenditure including arrears Overall balance Net domestic financing External sector 4 The ratio of risk-weighted capital to risk-weighted assets increased from 13.8 to 18.2 percent December 2008 and December

15 Current account balance (including official transfers) Gross international reserves (millions of US$) 2,837 2,036 3,165 3,576 4,526 5,902 Total donor support (millions of US$) 1,171 1,478 1,703 1,515 1,443 1,064 Memorandum items: Nominal GDP (billions of GHc, including oil) Source: Source: IMF, April Table 2: Central Government Budgetary Operations, (Percent of non-oil GDP) Total revenue and grants Direct taxes Indirect taxes Trade taxes Nontax revenue Grants Total expenditure Wages and salaries Goods and services (*) Subsidies to energy (**) Transfers Reserves fund Domestic debt interest costs Foreign debt interest costs Domestically financed capital expenditures Foreign financed capital expenditures Arrears clearance and VAT refunds Primary balance Overall balance Domestic debt External debt (***) Source: Source: IMF, April (*) includes wage allowances category 1 reclassified in 2010 as part of item 1. (**) includes the lifeline program and oil safety nets to protect vulnerable households against energy price variations. (***) does not include savings in oil funds. 6

16 B. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 15. By April 2010, Ghana was considered by the IMF to have met all but two of its quantitative targets under the Extended Credit Facility (ECF) in 2009: the September ceiling on the fiscal deficit and the continuous limit on non concessional borrowing, which was breached in November, when a State Owned Enterprise liability was taken over by the budget. Estimates for the end-2009 point to a fiscal deficit at 9.7 percent of GDP (on a cash basis), that is, slightly above the fiscal target of 9.4 percent of GDP set forth in the Budget Law Higher than anticipated domestic interest costs and lower than anticipated grants and tax revenue contributed to the slippage. In contrast, primary expenditures (goods and services, transfers and domestically financed investment expenditures notably) were severely compressed (although the share of pro-poor expenditures was protected 5 ) with regard to the Budget Law. Measured on a commitment basis, the fiscal deficit was about 11.5 percent of GDP in 2009, down from an estimated 20.9 percent in 2008 once included arrears and outstanding commitments The 2010 Budget Law, 7 which was submitted to Parliament on November , foresees a fiscal deficit at 7.5 percent of GDP in While structural reforms in energy (the implementation of the electricity financial recovery plan to avoid the recurrence of subsidies to utilities), public sector (conduction of payroll audits and elimination of ghost workers, restructuration of subvented agencies, civil service reform for effective decentralization and improved performance management) and public financial management (treasury single account, integrated financial management and information system, effective cash management and commitment control systems, inclusion of all ministries, departments and agencies (MDAs) in the payroll management system) are expected to prevent the re-occurrence of expenditure slippages, most of the fiscal adjustment is budgeted to stem from additional tax and non tax revenue. The latter is expected from the removal of important tax exemptions, the conversion of excise to ad-valorem taxes (to avoid inflation erosion), increased royalties from the mining sector, higher dividend distribution from State-Owned Enterprises, and better alignment of user fees with costs. 17. Nonetheless, discussion with the IMF Staff subsequent to the Budget presentation led to the identification of additional measures in anticipation of a possible revenue shortfall, given the optimistic revenue assumptions retained in the budget law and potential contingent 5 The share of pro-poor expenditure in total expenditure stood at 26.8 percent by end-september 2009, against 24.9 percent targeted for the full year In comparison, the share of actual pro-poor expenditure in total expenditure stood at 22.3 percent in 2008 (against 24.5 percent targeted). 6 The review at Parliament in August 2009 of the budget 2009 execution at mid-year revealed a stock of public expenditure arrears, outstanding commitments and contingent liabilities to State Owned Enterprises by end-2008 largely exceeding that budgeted to be cleared in 2009 (GHc 1.80 billion against GHc 0.54 billion budgeted). By end- 2009, the stock had gone up to an estimated amount of GHc 1.85 billion, the result of a decline in arrears to the private sector and liabilities to SOEs almost exactly offset by an increase in outstanding commitments vis-à-vis the Statutory Funds (National Health Insurance Scheme, Social Security, Ghana Education Trust Fund, Road Fund, District Assembly Common Fund, HPIC and MDRI related funds), which are legally funded through fixed shares of tax revenues. 7 The 2010 Budget refers throughout the full Program Document to the Budget Statement and Economic Policy, and the Appropriation Act, approved together by the Parliament in December

17 liabilities. 8 The Government and the IMF also agreed to revise upwards the 2010 fiscal deficit target (from 6.0 to 8.0 percent of GDP under the proviso that no new arrears will be accumulated) initially envisaged at the signature of the ECF, so as to accommodate for the liquidation over time of the stock of expenditure arrears and outstanding commitments uncovered afterwards. Such a revision was nonetheless not affecting the targeted fiscal deficit for 2011, at 4.5 percent of non-oil GDP. 18. The Government strategy is nonetheless not immune from risks. The feasibility of the fiscal adjustment is endangered by a number of internal factors. Risks lie in particular in Government s ability to negotiate with unions a within-budget public wage increase and a gradual implementation of the single spine reform 9 in 2010, to contain the recurrence of energy subsidies 10, and to succeed in significantly raising tax and non tax revenue. In the event of this, the Government would have little choice but to de facto contain transfers to the Statutory Funds, either through accumulating new arrears or introducing greater flexibility in the fiscal rules governing these funds. On the other hand, likely oil revenue (with first oil expected in the fourth Quarter of 2010) - not accounted for in the budget 2010, as well as stronger than anticipated economic recovery, could facilitate the adjustment. 19. As part of a multi-year stabilization plan, the International Monetary Fund considers the fiscal deficit target of 8.0 percent of GDP for 2010 financeable. IMF staff considers the fiscal and external deficits as financeable given donors commitments for 2010, including US$200 million from a new World Bank Development Policy Operation scheduled to be submitted to the Board in 2010 and the release of the EGPRC second tranche (US$150 million). 20. The implementation of the Government s economic stabilization and reform program should minimize risks of external debt distress. Preliminary updates to the joint Bank-Fund debt sustainability analysis (DSA) using the latest debt data and projected financing flows suggest that Ghana remains at moderate risk of debt distress, in line with the 2008 and 2009 DSAs. In the baseline projections, external debt indicators remain below the threshold levels for debt distress. These results depend on the planned sustained reduction of the fiscal deficit to low levels; debt dynamics based instead on the continuation of fiscal deficits at the average levels of recent years would quickly exceed the DSA threshold levels. Stress tests also indicate that the DSA outlook is sensitive to the economic growth and borrowing costs assumptions. The debt-to-gdp indicator is expected to be revised downwards over the course of 2010 as a result of the national accounts rebasing exercise which is projected to result in an upward revision to nominal GDP (of approximately 50 percent). Importantly, however, this would not affect the debt service to export and revenue ratios over the coming decade. 8 In particular, the financial situation of TOR (and ability to operate) was clarified by a GHc 445 million equity injection from the Government in March 2010, which allowed the refinery to settle its debt with GCB. The financing of the operation was obtained with the issuance of a Ghana Cedi denominated 3-year Treasury Bill for non residents carrying a 15.0 percent annual interest. 9 The reform aims at unifying salary scales across the various public sector entities. Since it is not intended to negatively affect anyone s salary, the implementation of the reform could be fiscally expensive. 100 million Ghana Cedi was budgeted in 2010 to start its implementation, to be completed over a five-year period. MoFEP calculations suggest that the full implementation of the reform could entail a wage bill at 14 percent of GDP by In March 2010, the Cabinet agreed to accept an increase in electricity tariffs of 33 percent, to be implemented no later than June 1,

18 21. Debt sustainability is also predicated on prudent non concessional borrowing. Following the issuance of US$750 million worth of Eurobonds in 2007 (to finance additional electricity capacity and road networks), Ghana borrowed in 2008 the equivalent of US$585 million to finance projects for rural electrification, electricity capacity, housing and health. These projects were believed to carry important development benefits, even if insufficient quantitative information prevented World Bank staff from assessing their economic and social returns. As such, the non concessional borrowing policy note distributed to the Board of Executive Directors in January 2010 recommended that (i) IDA continue to provide Ghana its full IDA allocation on blend terms in FY10 and (ii) the policy should be reviewed before any new lending in FY Early information from Ministry of Finance and Economic Planning (MoFEP) indicates a total amount of US$477 million worth of non concessional borrowing in Ghana s macroeconomic framework is assessed as adequate for the purpose of the proposed operation. The fiscal stabilization objectives set forth in the 2010 Budget, the nature and pace of actions taken by the Government in 2009 to regain control of the fiscal situation on a sustainable basis and the complementary financial assistance from donors provide the conditions for the proposed operation to meet its objectives, and justifies the use of IDA resources for the current sectoral development policy operation. C. POVERTY TRENDS AND PROGRESS IN SOCIAL AND HUMAN DEVELOPMENT 23. Income Poverty and Social Protection. Ghana recorded very significant poverty reduction between 1999 and The estimated proportion of the poor in the total population went down from 39 percent in 1999 to 29 percent in While all major regions recorded reductions in poverty, some achieved them much more rapidly than others. By now, the bulk of poverty has become concentrated in the three northern regions which now comprise more than half of the poor (against a fourth of Ghana s population). Efforts to address the special needs of these lagging regions had been initiated in the recent past, and there are ongoing efforts to amplify them in the context of an ambitious Savanna Accelerated Development initiative which is supported by several Development Partners (DPs) including the Bank. The initiative aims to increase agricultural productivity and promote a more sustainable management of its natural resources. The initiative will ensure tight coordination and better targeting of public and private (e.g. NGOs) activities, in order to achieve durable poverty alleviation. 11 The recommendation is based on the following factors: (i) market conditions have changed fundamentally; (ii) additional external financing sought by the Ghanaian authorities aimed at supporting ongoing development projects is needed to sustain economic growth and assist in meeting the MDGs; (iii) a graduated response permits time to assess developments as they unfold, including projected oil exports beginning in 2011; and (iv) there are benefits associated with IDA s continued full engagement with this country as it makes sectoral policy choices and builds up its own capacity to evaluate the expected returns on its public investments. 12 Poverty rates are computed using the national poverty line. Estimates using the international poverty line of US$1.25 a day put the poverty rate at 30 percent in 2006, down from 39 percent in

19 24. Since 2006, various factors could have impacted poverty positively or negatively. Between 2006 and 2009, per capita real consumption grew by almost 30 percent (source: IMF), which, if equally shared across households, should have generated substantial poverty reduction gains (assuming unchanged distribution, the headcount index would have approached 20 percent by end-2009). However, important uncertainties regarding the measurement of private consumption and its distribution among households and regions, and the fact that some recent shocks might have disproportionally affected the poor (droughts and floods in the Northern regions, food price increases in cities) could mean lower actual poverty reduction gains. 25. In 2010 income poverty could rise further, as per capita private consumption growth is expected to fall. Because lower growth and the planned fiscal adjustment entails higher energy tariffs and increased taxation, staff forecasts aggregate per capita real private consumption to stagnate in 2010, which would result in income poverty rising assuming unchanged income distribution. This underlines the importance of protecting vulnerable households from the downturn in economic activity through targeted measures, such as a further extension of the cash transfer program LEAP to new beneficiaries and the protection of pro-poor public expenditures as the budget contracts. The Government s recent review of existing social protection mechanisms indeed suggest that LEAP offer the greatest guarantee of reaching the poor as relatively well targeted 13, even if implementation costs remain high and could be reduced as the program expands (and other programs adopt similar targeting mechanisms, through the adoption of the single register, See Section 4B). On the other hand, tax exemptions granted to consumer goods and services (food imports, electricity, petroleum) or inputs (fertilizers, diesel) mostly benefit non-poor. 26. Millennium Development Goals. The review of progress towards the Millennium Development Goals (MDGs) depicts a picture of quick progress on some MDGs. The income poverty, hunger, primary completion, gender parity at school and access to water goals (MDG1a, MDG1b, MDG2, MDG3 and MDG7a respectively) are on track. 14 These services have been extended to millions of poor in the past decade, and protecting the gains of the past must be a key priority for the next years. At the same time, other important MDGs, such as sanitation (MDG7b), child (MDG4) and maternal mortality 15 (MDG5) are still off-track and require more efforts. While progress on health-related MDGs would need to rely mostly on efficiency gains (and goals to possibly be re-evaluated downwards, given the growing recognition at the global level of their overly ambitious nature 16 ), a case is to be made to raise resource allocated to 13 World Bank staff calculations suggest that with 60 percent of its beneficiaries below the poverty line, LEAP has the highest targeting efficiency among Ghana s social programs and subsidies. 14 When at least two observations are available after 1990, with a sufficient number of years separating them, the World Bank determines whether a country is on or off track to meet a given MDG by To do so, it compares the progress recorded so far with that needed to reach the MDG, under the assumption that progress becomes increasingly difficult the closer countries get to the goal. Technically, this is equivalent to comparing the annual growth rate between 1990 and today with the constant growth rate required to reach the MDG in 2015 from the situation in Given the difficulty to estimate and monitor on a regular basis maternal mortality, an input indicator birth attendance by skilled health staff is retained for measuring progress. In 2007, the maternal mortality rate was estimated at 451 deaths per 100,000 live births. 16 See Global Monitoring Report 2009, World Bank, Washington D.C. 10

20 sanitation, for its own sake given lack of progress so far, and likely large impact on other MDGs health, education, and income-poverty notably. 17 Table 3: Ghana s Progress towards the Millennium Development Goals Observation Initial Most Recent MDG1a. Poverty headcount ratio, national poverty line (% of population) MDG1b. Malnutrition prevalence, weight for age (% of children under 5) MDG2. Primary non-completion rate, total (% of relevant age group) MDG3. Ratio of girls to boys in primary and secondary education (%) MDG4. Mortality rate, under-5 (per 1,000) MDG5. Births not-attended by skilled health staff (% of total) MDG7a. Improved water source (% of population without access) MDG7b. Improved sanitation facilities (% of population without access) Source: World Development Indicators and Ghanaian Authorities. 27. Health. In 2008, the holistic assessment of the health sector showed overall green satisfactory performance. Such a performance is also measured by the comparison of the last two demographic and health surveys (DHS) in 2003 and The progress achieved over this period is impressive: under-5 mortality was reduced from 111 deaths per 1,000 births to 80, the proportion of malnourished under-5 children was reduced from 18 to 14 percent, and the proportion of medically assisted deliveries went up from 47 to 59 percent. Health progress results to a large extent from the creation and continued increase in coverage under the National Health Insurance Scheme (NHIS), reaching 12 million people by October Pro-poor progress during the food and fuel crisis was supported by public subsidies that paid some of the insurance premium due by the poor. 28. Education. In line with the Education Sector Development Strategy adopted in 2003, progress in terms of access to primary education has been significant. Gross primary enrollment rates went up from 86 to 95 percent between 2003/4 and 2008/9, while net primary enrollment rates went up from 56 to 88 percent over the same period. Over the years, increased efforts at building new schools in deprived districts, and increased attention to gender parity, have allowed for an extension of progress in access in primary education by vulnerable populations. 18 The demand side was supported with the initiation of a school feeding program in poor regions, and by the development of conditional transfers in the context of the LEAP program (which also involves incentives to improve nutrition). 17 See A Sourcebook for Poverty Reduction Strategies, 2002, World Bank, Washington D.C. 18 Policy attention is now increasingly shifting to quality. Ghanaians students rank poorly in international mathematical and science tests (TIMSS), and national tests conducted in 2007/8 suggest that only 26 and 11 percent of primary graduates are respectively proficient in English and in mathematics. 11

21 29. Water and Sanitation. Meeting the Millennium Development Goal on water and sanitation means that about 0.4 million more people need to gain access to water and 1.3 million to sanitation, every year between now and Investment in rural water facilities rose since 2003, and as a result access to safe water went up from 55 percent of the rural population in 2003 to 76 percent in In the meantime, though, the share of urban population with access to safe water declined, from 83 to 79 percent. Furthermore, progress in sanitation has been very slow, and this has continued to tax progress in non-income poverty outcomes. The challenges for the future include not only larger budgets and improved institutional capacity in the sector, but also tackling issues of sustainability of service delivery, including proper operation and maintenance of water and sanitation facilities. Figure 2: Ghana s Progress and Prospects Vary Widely across MDGs MDG7b: Access to sanitation MDG7a: Access to safe water MDG5: Maternal mortality MDG4: Child mortality MDG3: Gender parity at school MDG2: Primary education MDG1b: Hunger MDG1a: Income poverty 0% 20% 40% 60% 80% 100% 120% Distance to goal achieved by 2008(*) Distance to goal to be achieved by 2008(*) to be on track Source: World Development Indicators and Ghanaian Authorities. Note: (*) or most recent available year, see Table 3. III SECTOR ISSUES AND THE GOVERNMENT S STRATEGY 29. Government is pursuing improved transparency and revenue management in the natural resources sectors. A number of governance challenges adversely affect the revenue 19 Source: Status of Ghana s Water and Sanitation, Ministry of Water Resources, Works and Housing, Accra, June

22 generation potential, management, and sustainability of the natural resources sectors. This section of the program document outlines the challenges and their impact on economic growth and environmental protection in the three focal areas of the DPO series - forestry and wildlife, mining and environment - and the Government s strategy to address them. The Government s Letter of Development Policy for sectors supported by this DPO (Annex 1), outlines its approach to governance of natural resources forming a solid base for improving the ability of the country to benefit from use of its mineral resources, and conservation and sustainably harvesting its renewable resources. As part of the new GoG s program of reform, the intention is to strengthen its multi-stakeholder Extractive Industries Transparency Initiative (EITI) Board, and develop its work program, including extension of the EITI principle to other sectors such as oil, forestry and fisheries. This extension of EITI signals the Government s commitment to adopt a value chain analysis approach to guide improved natural resources management and governance. Valuable lessons can be learned from existing sectoral practice. For example, the Forestry Commission publishes timber royalty receipts and disbursements every quarter. The Minerals Commission has developed guidelines for the use of mining royalties by Districts, and is planning to set up decentralized EITI offices to strengthen accountability at the local level. A wider circulation of these publications is however required to make them more useful tools for accountability. 30. Ghana has a strong record of social accountability and transparency mechanisms across a range of sectors. This has been evident under NREG where, inter alia, a participatory process substantively influenced the forestry sector Voluntary Partnership Agreement (VPA) and civil society has been consulted on the minerals and forestry policy matrices. It is envisaged that non-state actors will also engage with the Inter-Ministerial Forum/Environment Advisory Council. To further enable civil society demand for accountability around NREG, an interim civil society facility (Kasa Speak Out in Twi), is being funded by the Embassy of the Kingdom of the Netherlands (EKN) ( 1.6 million for ). A dedicated fund is also being provided by the European Commission (EC) ( 1.25million for ) to enable civil society, industry and local authorities to engage in a Governance Initiative for Rights and Accountability in Forest Management (GIRAF). A new multi-donor civil society facility, Ghana Accountability and Responsiveness Initiative (GHARI), may include some elements on natural resources and environment following inception in Civil society has active membership of the Ghana EITI Steering Committee and in the emerging committee dealing with forest carbon and Reduced Emissions from Deforestation and Degradation (REDD), while an expanded dialogue across civil society and other non-state actors is emerging on climate change, with the establishment of a civil society climate change working group and the advent of new actors such as Climate Action Network Ghana. The intent of these initiatives is to further develop the capacity of civil society to engage in evidence-based policy advocacy and to enable non-state actors to interact more systematically with state institutions responsible for natural resource and environmental governance. A. FORESTRY AND WILDLIFE Governance Challenges 31. The need to curtail illegal logging, largely for the domestic market, establish sustainable forest management, and improved capture of revenues, are the main governance 13

23 challenges in the forestry sector. Factors contributing to forest degradation and loss in Ghana have been well documented. Although the introduction of a new verification system, developed under the Voluntary Partnership Agreement (VPA) between Ghana and the EU, will do much to reduce the loss of revenue through illegal logging to supply export markets, the challenge of addressing illegal supply to the domestic market should not be underestimated. Increasing demand for cheap lumber for local markets, combined with poor incentives for communities to maintain and manage forests outside forest reserves, is a major stimulus for illegal harvesting and associated forest degradation. The challenge is compounded by a lack of reliable statistics on unofficial trade, covering the domestic market and overland trade with neighboring countries. Establishing how a legal and sustainable local supply can be achieved and what level of processing for export is appropriate are pressing concerns. Further attention is also required to create the right incentives for communities and farmers to sustainably manage forest and wildlife resources. Additional challenges lie in implementing and maintaining secure and predictable financing for the sector. Achievement of revenue collections by the Forestry Commission should be in line with previously set expectations and targets, and the contribution of redistributed benefits to poverty alleviation needs to be further secured and confirmed. Payments for environment services in emerging programs such as REDD are likely to play an increasingly important role. Longstanding challenges remain the effective implementation of existing policy, legislation and regulations and the institutional capacity and strengthening required for this at all levels, including communities. Government s strategy 32. Improving forest governance will commence first by establishing capacity and procedures applied to timber bound for export market, and then turning to timber on the domestic market. The stated overall aim of the 1994 Forest and Wildlife Policy was, Conservation and sustainable development of the nation s forest and wildlife resources for the maintenance of environmental quality and perpetual flow of benefits to all segments of society. The Policy set out several strategies through which this aim would be achieved, including: (a) revision of forest reserve management planning procedures for sustainable forest management, including development of biodiversity conservation and environmental protection in the high forest zone; (b) establishment of databases and information communications technology (ICT) linkages to facilitate decision-making and policy analysis; (c) local community participation in the management of forest and wildlife resources with rights to consultation, access and benefits; (d) private sector investment in plantation development, focusing on the conversion of the timber industry into a low volume, high value industry; and (e) legislative reform in support of these strategies. 20 In 1996, the GoG launched a Forestry Development Master Plan to guide the execution of the Policy to The Master Plan is currently being updated and revised. 33. Illegal logging for the domestic market is leading to overharvesting and loss of revenue. According to the Master Plan the annual sustainable harvest is 1 million m3, which mainly 20 Developments and Setbacks in Forest Conservation: The New Political Economy of Forest Resource Use in Southern Ghana, E. Kofi Smith, Technical Director MLF,

24 supplies a timber industry that is primarily focused on export markets. Monitoring the origin of timber bound for export markets will be easier to accomplish in the first instance. Domestic consumption, which mainly derives from illegal sources, greatly exceeds the sustainable harvest. Since 1992, there has been an upsurge of illegal felling in reserves and on off-reserve lands, and measures by the Forestry Commission to control this phenomenon have been ineffective, and forest resources have been depleted. The Master Plan outlines obsolete laws and regulations, limited financial resources and the inadequacy of line agencies and their working conditions, and constraints to its implementation. These factors are particularly critical under the existing socioeconomic situation of pervasive poverty that contributes to agricultural encroachment of forest reserves and in particular - illegal timber operations. Three key elements of the Master Plan supported under NREG are: (i) ensuring the legality of timber (which will be addressed under the Voluntary Partnership Agreement, linked to prior actions under DPO 1 and 2), (ii) the need to ensure sustainable financing for the sector (supported by a prior action under DPO 1), (iii) improving the quality of forest management (supported by prior action in DPO 1 and 2), and (iv) ensuring transparency in distribution of resources to forest communities (supported by a prior action under DPO 2). Critical Approaches 34. Under the Voluntary Partnership Agreement (VPA) with the EU Ghana has committed to ensure that all timber exported from Ghana to Europe is of legal origin. GoG s commitment to a more comprehensive approach to sector reform was tested during an Africa Forest Law Enforcement and Governance conference held in Yaoundé, Cameroon in 2003, where the concept of a VPA with the EU for the export of verified legal timber was first discussed. The VPA mechanism forms part of the EU s Forest Law Enforcement, Governance and Trade (FLEGT) Action Plan to tackle the causes of illegal logging. Central to these agreements is a commitment by tropical timber-producing countries to verify the legality 21 of their timber exports to the EU in exchange for which the EC and EU member states contribute toward the cost of putting in place the required verification systems. These agreements were also promoted as a means of strengthening sector governance more broadly. In December 2006, GoG initiated formal negotiation process with the EU, defining the scope of the negotiations to address illegal logging not just for export to the EU, but to all exports and the domestic market as well. Through the VPA process, GoG recognized an opportunity to further their sector reform agenda more broadly. Issues relating to strengthening of rights of access to resources also forms part of the legislative reform agenda set out under Ghana s VPA. The NREG framework for the forest and wildlife sector, therefore builds on the reform agenda set out as part of the VPA negotiation process. International Agreements 35. In September 2008, Ghana became the first tropical timber-producing country to sign a VPA with the EU. In January 2010 the first Ghana/EU meeting of the Joint Monitoring Review 21 The definition of legality is derived from a subset of Ghana s laws relating to timber harvesting, transport, and processing. 15

25 Mechanism met to discuss implementation of the Agreement, the process of appointing an independent monitor, and arrangements for monitoring the impacts on local livelihoods. The reform agenda set out as part of this Agreement (described above) and in particular the multistakeholder consultations on which this reform agenda was based, has laid the foundations for other processes such as those for Reducing Emissions from Deforestation and forest Degradation (REDD) that require strengthening of forest governance as a prerequisite for successful implementation. Ghana is a recipient of support from the World Bank administered Forest Carbon Partnership Facility to develop its national strategy and plan for REDD, which will be developed through a consultative process in the coming year (REDD+ includes broader components on conservation, forest carbon and sustainable forest management). While modalities and values are yet to be developed, payment for REDD could provide additional economic incentives for sustainable forest management, and will further bolster NREG objectives. The development of Ghana s national strategy for REDD will build on the experience of the broad consultations and civil society participation in preparing the VPA, and will be institutionalized in the context of NREG. More recently, Ghana has been selected as a pilot participant in the Forest Investment Program (FIP) under the Strategic Climate Fund (SCF) Trust Fund, with a view to strengthening steps towards transformational change in Ghana s forest related policies and practices. B. MINING Governance Challenges 36. Transparency in establishing mineral development agreements, and capacity to assess mineral revenues owed to government. Gold production has increased significantly in recent years, reaching 3.13 million ounces in 2009, representing the largest source of export revenues for Ghana. Ensuring the corresponding increase in revenues and strengthening the development impact of the sector remain however a work in progress. This is mainly due to the multiplicity of players with strong vested interests, weak accountability mechanisms, and weak capacities. Nevertheless, the Minerals Commission has done significant work during the last year to put in place a modern mineral rights cadastre (licensing system), and draft regulations to facilitate its implementation of the new Minerals and Mining Act (2006) Act 703. In addition, as per the proposed Budget Law of 2010, the Government has proposed a revision to the mining royalty rate to a fixed 5%. Questions remain however as to how the Government would implement this in cases where companies have fiscal stability agreements on current and potential future investments. As such, the process of negotiation and the level of transparency with regard to access to resources and in particular, favorable conditions for large scale investors need to be improved. Furthermore, there is a possibility that GoG is not collecting the amount of taxes and royalties agreed in the minerals development agreements and in the law. This is mainly due to lack of coordination and capacity of relevant government agencies to project revenues and operating costs for individual mines, which in turn determines the levels of royalty to be paid. 37. Revenue distribution to municipal and district levels and social conflict in mining communities. Since 1993, 10 percent of mineral royalties is set aside in the Minerals 16

26 Development Fund to finance mining sector institutions at the national and local levels in areas where mining operations are conducted. 22 However, the Minerals Development Fund is not yet codified in law (though submitted to the Attorney General s Office in 2009) and thus money is not systematically distributed to the mining agencies. Similarly, transparency in the allocation and use of monies accruing to District Assemblies and Traditional Authorities is not fully satisfactory. Partly due to this lack of transparency of the amounts and uses of revenues that flow to the mining Districts and Municipalities, and partly due to uneven social responsibility practices by mining companies, relationships between communities and mining companies are often strained. Communities have grown increasingly wary of new mining investments. The major complaints against mining companies from communities include those related to lack of compensation for land or agricultural productivity, alleged human rights abuses by mining company private security forces, and environmental and noise pollution. 23 Government s strategy 38. The Mining Policy Document is clear and comprehensive. Ghana s 1992 Constitution states that all sub-soil or surface minerals are, the property of the Republic of Ghana and shall be vested in the President on behalf of, and in trust for, the people of Ghana. The Constitution also provides for the establishment of a Minerals Commission, to help regulate and manage the utilization of minerals in Ghana. The Mining Policy Document developed by the Minerals Commission outlines sixteen guiding principles for the sector, including inter alia ensuring that Ghana s mineral endowment is managed sustainably and an equitable sharing of financial and developmental benefits of mining between investors and all Ghanaian stakeholders. It also encourages local and foreign private sector participation in the exploration and exploitation of mineral resources; recognizes the need for a stable regulatory environment, access to and security of tenure of areas of mineral potential, and a stable, competitive, and fair fiscal regime. The new Mineral and Mining Act (703) was passed in 2006, with regulations submitted to the Attorney General s Office in late Regarding the administration of mining laws and regulations, it focuses on the application of modern principles of transparency and accountability; as well as acting in harmony with regional and international partners. Furthermore, the policy aims at achieving a socially acceptable balance between mining and physical and human environment and ensuring internationally accepted standards of labor, gender-balance, health, mine safety, human rights, community relations, and environmental 22 Ten percent of mineral royalties are allocated to the Mineral Development Fund for the purpose of helping to sustain Ghana s public mining sector institutions. Of the remaining 90 percent of mineral royalties that do not flow to the Mineral Development Fund, 80 percent flow to the central Treasury and 10 percent flow to the Office of the Administrator of Stools and Lands and to mining communities. This is not done through the Mineral Development Fund; rather, the Internal Revenue Service (which collects the royalties) transfers funds to the Office of the Administrator of Stools and Lands, and this office transfers funds onward to the District Assemblies, Stools, and Traditional Authorities according to the following formula: of the 10 percent set aside for the Office of the Administrator of Stools and Lands and mining communities, 10 percent stays with the Office of the Administrator of Stools and Lands and 90 percent is distributed to District Assemblies (55 percent of the 90 percent), Stools (25 percent of the 90 percent), and traditional councils (20 percent of the 90 percent). 23 The State of Human Rights in Mining Communities, Commission on Human Rights and Access to Justice, March

27 protection; and it encourages mining companies to develop participatory and collaborative approaches in their relationship with neighboring communities. Critical Approaches 39. Ensuring that the revenue due to Government from its mining operations is fully captured, and reducing social impacts on mining communities are priorities. NREG is supporting the Minerals Commission as it operationalizes the 2006 Minerals and Mining Act (Act 703) and addresses sector challenges that have developed over several decades. Two particular challenges stand out: social impacts in mining communities both from large-scale and small-scale mining operations - and ensuring that the revenue due to Ghana from its mining operations is fully captured. In response, the Minerals Commission, through extensive stakeholder consultations, has developed Social Responsibility Guidelines for Mining Companies and Communities. These guidelines provide good practice guidance to large-scale mining companies on how to engage and interact with mining communities. The objective is to reduce conflicts, which would then be tracked through an annual community survey. The Minerals Commission is also working to identify specific areas to set aside for small-scale mining to facilitate legalization and registration of such miners, while at the same time, to make it easier to provide technical and other training, for example, in environmental management, pitclosure, and alternatives to mercury use. In some regions, the Minerals Commission is also initiating alternative livelihood programs. 40. Measures to improve revenue collection, improve the transparency of distribution of revenues at the local level, and improve the regulatory framework for the sector are underway, and supported by NREG. Operations and capacity of the Mining Revenue Task Force was further strengthened during The Task Force brings together key agencies across government responsible for mining sector revenue policy formulation, assessment, collection, administration, and auditing, for a collaborative approach to ensuring that Ghana receives the revenue due under law from the exploitation of its mineral resources. Furthermore, bringing clarity to the distribution of revenues particularly at the local level is the subject of guidelines developed by the Minerals Commission, and intersects with Ghana s implementation of EITI. The regulatory framework that underpins the 2006 Minerals and Mining Act (Act 703), which was submitted to the Attorney General s office in December 2009, includes fiscal, health, safety, technical, and other aspects, updating compensation, closure and post-closure policies, and updating environmental standards (working with the Environmental Protection Agency). The Minerals Commission is cognizant of the need to ensure the requisite skills to deal with the wide range of challenges facing the sector, and has included training as an integral part of its approach. The Minerals Commission has also committed to the establishment of a unit dedicated to social and environmental issues in recognition of this critical challenge. International Agreements 41. Ghana is party to a number of important international and regional agreements and partnerships related to better management of mineral resources. Since 2003, Ghana has been implementing EITI, having produced three reports to date on the mining sector. Among the first 18

28 countries participating in the initiative, Ghana has submitted a good-quality EITI Validation Report in February 2010, meeting the deadline set by the international EITI Board. In its work plan for , GoG has also stated its commitment to incorporating oil in the EITI process as revenues from the sector start to flow in earnest. Ghana also participates in the Kimberley Process Certification Scheme (KPCS) to ensure origin of diamonds, and by registering smallscale diamond miners in line with the scheme. However, with the decline in demand for diamonds on the global market, many artisanal and small-scale miners have turned to gold mining instead. Ghana has chaired the African Mining Partnership (AMP), led by African mining ministers, to champion and coordinate mining and mineral-related initiatives under the auspices of the New Partnership for Africa s Development (NEPAD). In February 2009, AMP merged officially with the African Union Conference on Ministers Responsible for Mineral Resources Development and will thus be directly linked to efforts to implement the Africa Mining Vision Similarly, Ghana played the leading role in the creation of ECOWAS Directive on the Harmonization of Guiding Principles and Policies in the Mining Sector, with the objective to adopt a common mining code for West African countries by Member States have up to July 1, 2014 to comply with the Directive. C. ENVIRONMENT Governance Challenges 42. Consolidating fragmented environmental institutions into the new Ministry of Environment, Science and Technology (MEST). With the re-creation of the Ministry of Environment, Science and Technology following the establishment of the new Government in 2009, the Government has pursued a restructuring of institutions responsible for overseeing the environmental agenda in Ghana. Existing entities, including the Environment Protection Agency (EPA) and new entities including the Ghana Environmental Conventions Coordinating Authority (GECCA), and possibly upgrading the National Climate Change Committee to a Commission with a stronger mandate are part of this process of reform with clarified roles and responsibilities of the units as well as for key staff. This is process of change that should be expected to take time as it inevitably requires changes in authority and financing of agencies. 43. Key challenges include the increasing need to improve environmental assessment across sectors. The Environmental Protection Agency (EPA) is the lead agency responsible for pursuing this, with a mandate to establish effective partnership and collaboration with relevant institutions and agencies, including the judiciary. The key service delivery process is the Environmental Impact Assessment (EIA), which is required for the issuance of permits and certificates as well as monitoring of Environmental Management Plans. The demand for permits and certificates has, since the enactment of the 1994 EPA Act, been growing steadily. Applications for permits and certificates increased from 515 in 2002 to 1,555 in 2005, with about 50 percent coming from the Greater Accra region. Development of sectoral guidelines to guide EIA at regional and district level is an important element of a precautionary approach to pollution prevention and ensuring good environmental governance. However, enforcement of 19

29 compliance remains a challenge for EPA, partly due to resource constraints, which the program also addresses in the long-term. 44. Mainstreaming climate change adaptation into development. During 2009 and leading up to the United Nations Framework Convention on Climate Change Conference of Parties meeting in Copenhagen (UNFCCC COP15), several studies were undertaken to enhance the preparedness to climate change, including a draft adaptation strategy, and a proposal for the preparation of a low-carbon growth trajectory. The Bank contributed the consultation draft Economics of Adaptation to Climate Change (EACC). However, with the multitude of possible future instruments and opportunities for mainstreaming now emerging following UNFCCC COP 15, Ghana must strengthen its preparedness in order to stay attractive to climate financing and carbon investors. The creation of a National Framework for Climate Change would help organizing the relevant ministries and agencies to each play their role, including particularly Ministry of Environment, Science and Technology, Ministry of Lands and Natural Resources, Ministry of Energy, and Ministry of Finance and Economic Planning. 45. Governance of natural resources. The new Ministry of Environment, Science and Technology has taken the lead in the creation of the Environment and Natural Resources and Advisory Council (ENRAC), which will become a body of a dozen people under the Vice President, and reporting to the Cabinet on key decisions required for environmental governance. This is a bold and needed step to create the awareness of policy-makers on the key issues affecting economic growth and prosperity of the country in the long-term. This new body will need to become operational in early 2010 and will be a strong elements of the country s commitment to environmental governance. 46. Strengthening the link between the funding needs and allocations, and clarifying institutional roles at the national and local level. Establishing a robust link between a core environmental mandate (defined through refined institutional responsibilities in MEST) and financial flows (revenues and public finance allocation) will enable a more comprehensive dialogue between Ministry of Environment, Science and Technology, and the Ministry of Finance and Economic Planning on budgetary allocations and delivery. Enhancing the relationship with the judiciary and other sectoral agencies will also be essential for effective EIA delivery, and cross-sectoral coordination with other ministries will be required to mainstream climate change into sectoral policies. In addition, there is a need to build decentralized environmental capacity at district level to provide effective management and governance to complement central and regional structures, and in particular to the Western Region where new oil discoveries may now be put in production. However, there is still uncertainty about the structures that would best take on board these decentralized tasks. Currently, natural resources and environment departments are being proposed through the Local Government Service, although the functions, staff, and funds for these remain to be defined. Departments will need to be assigned and equipped by the EPA, in conjunction with other relevant sectoral Ministries, Departments and Agencies (MDAs). Government s Strategy 20

30 47. The Ministry of Environment, Science and Technology (MEST). The Government strategy on natural resources governance is expressed in the Letter of Development Policy (see Annex 1). This letter provides emphasis on sustainability and on governance of natural resources use. Further, the Government is also pursuing expansion of the EITI steering committee to include revenue reporting from the petroleum sector, and remains committed to an Extractive Industries Value chain Approach. In addition to these two important foundations, the MEST is strengthening its strategy implementation on the research side through the Council for Scientific and Industrial Research (CSIR) with thirteen research institutes each of which has a mandate covering specialized areas such as animal, building & roads, food forestry, plants, soil, and water. On the climate change front, the Government is developing a national framework on climate change, including an objective on low carbon growth, which will anchor Ghana s sustainable development agenda. This will focus not only on the industrial and the transportation sectors but also will ensure energy efficiency in households. MEST is also proposing to establish a Climate Fund that will support mitigation and adaptation actions. The climate fund is likely to have an open window for the establishment of a gender fund to assist women and children and other vulnerable groups. 48. The EPA strategic plan is currently being reviewed and updated. The directive principles of state policy of the 1992 Constitution include an article on the need to, protect and safeguard the environment for posterity. An overall policy framework is provided by the 1991 National Environment Policy, while the 1991 National Environment Action Plan (NEAP) 24 will supported by a Sustainable Development Action Plan (SDAP) with NREG support. The EPA, according to its mandate and the EPA Act (Act 490, 1994), is a key actor in environmental protection in Ghana. EPA s 2003 strategic plan, which is currently being redrafted and updated, sets out its overarching objectives, guiding principles, regional and departmental objectives. 49. Need for a new consolidated strategy for environment. Given new development issues in Ghana, including extractive industries (and in particular the petroleum sector) and climate change issues and opportunities, mentioned above, there is need for the country to conclude on setting annual priorities for key development issues to address year by year. The priority issues being addressed through the NREG program are described in more detail in the policy matrix for 2010 (Annex 4). Critical Approaches 50. Ghana is being progressively recognized as a leader in the use of strategic environmental assessment and advancing the climate change agenda. The NREG approach has drawn on lessons from both the Ghanaian and Tanzanian experience of environmental 24 The NEAP covers (a) integration of environmental consideration into sectoral, structural and socio-economic planning at all levels; (b) maintenance of ecosystem and ecological processes essential for the functioning of the biosphere; (c) guidance for healthy environmental practices in the national development effort; and (d) seeking common solutions to environmental problems in West Africa, Africa, and the world at large. The latter specifically addresses obligations and contributions under Multilateral Environmental Agreements to which Ghana is party. 21

31 mainstreaming within national development planning. 25 Following early experience with the National Development Planning Commission (NDPC) in conducting a Strategic Environmental Assessment (SEA) around the GPRS, the EPA has institutionalized SEA practice, applying this at both sectoral and district levels. Ghana is now recognized as a leader among developing countries in this regard. 26 Recommendations from an independent review of SEA practice in Ghana have highlighted the need for ex-ante SEA and systematic follow up of findings. International Agreements 51. Ghana is party to many multilateral environmental agreements that determine both international and national response measures. In 2009, the Ministry of Environment, Science and Technology established the Ghana Environmental Conventions Coordination Authority (GECCA) with responsibility for managing affairs with the Biodiversity Convention, Climate Change Convention, Desertification Convention, and the Stockholm Convention. Ghana has been particularly active with the Climate Change Convention as an influential party within the African Group, and in wider structures such as the Adaptation Financing Board, Ghana is making a particularly substantial contribution in the area of Technology Transfer under the international negotiations under the UNFCCC. Ghana associated with the Copenhagen Accord under the UNFCCC at an early stage. Governance Challenges on Climate Change 52. Although MEST and EPA are promoting the need to address climate change, a coordinated response across GoG remains to be developed. The widespread flooding in 2007 indicated that Ghana s current capacity to predict and respond to climate-related risks is inadequate. To enable climate-resilient development, Ghana needs to develop national and sector specific responses through policies, legislation, strategies and programming. In particular, Ghana needs to tailor its response to climatic risk in a strategic manner, incorporating both geographic and social dimensions, to ensure a rapid response in higher risk areas such as the northern region which is prone to flooding, and the vulnerable coastal areas. Under the new government, the country is increasingly acknowledging the cross-sectoral nature of the climate change agenda, and envisages the creation of a National Framework for Climate Change to include adaptation, mitigation, and low carbon growth, and also intends to establish a REDD+ Secratariat. Details for these initiatives will be elaborated during Critical Approaches on Climate Change 25 Environment at the Heart of Tanzania's Development: Lessons from Tanzania's National Strategy for Growth and Reduction of Poverty MKUKUTA, IIED, The OECD-DAC Task Force on SEA is preparing a case study on the evolution of Ghanaian practice and linkage to country systems around SEA and the NREG program, while the October 2008 World Bank Workshop on Country Environmental Analysis in Paris featured extended discussion on Ghana. Ghanaian experience is also influencing a new program on environmental integration with Government of Zambia, IIED and in-country development partners 22

32 53. Coordination across sectors will be key to improving environmental management, and preparing to manage the impacts of climate change and variability. Ongoing research on climate impacts will contribute towards the development of the national adaptation strategy. Further quantification required on socio-economic impacts and on climate models is being articulated in the Economics of Adaptation to Climate Change study which is expected to be finalized in Improving the early warning systems will require the strengthening of the Ghana Meteorological Agency to be able to perform this function, by collecting the relevant data and also engaging in sub-regional, regional, and global observation networks. An increasing awareness and commitment to develop and adopt climate change policy on the part of MoFEP suggest that climate change issues can now be addressed at both political and technical levels, thereby increasing the prospects for integrating climate change strategies effectively into sectoral and national development planning. D. BUDGET MANAGEMENT 54. Budget management by the NREG agencies has been improving over the last year, but a lot remains to be done to achieve desired measurable outcomes. Promoted by the sector budget support approach (with DPO as one instrument), the agencies are moving to comprehensive budget frameworks. Under DPO1 and DPO2, the agencies continued to work with a specific NREG-program budget, linked to program objectives and targets. Under DPO3, agencies intend to mainstream the NREG program in the annual working plan of the agencies, and the agencies will no longer work with specific SBS-NREG-budgets. They receive funding from GoG to execute their work program, in addition to internally generated revenues (levies and fees). Under DPO2 and DPO3 the policy matrix has been considerably rationalized and now focuses on the key strategic policy and institutional issues. 55. Multi-annual budget frameworks of the three agencies are not yet very detailed, and need to be further strengthened. With the support of technical assistance from the Royal Netherlands Embassy, MDAs involved in the NREG program have formulated an action plan for strengthening financial programming and financial management. The action plan focuses on improving the quality and comprehensiveness of the agencies budgets and the multi-annual budget frameworks, ensuring that audits are produced in a timely manner covering all expenditures, developing strategies to exploit the revenue generating capacity of the respective sectors, training staff in procurement planning and cash flow projections. An analysis of the agencies annual and multi-annual budgets is detailed in a policy note, and is an important aspect of the annual policy dialogue. 56. Government funding levels of the sectors have increased. The increased budget allocations to the agencies and strengthening of the budget management capacity are expected to lead to more effective functioning of the agencies, which will help them to considerably improve the collection of levies and fees and improve the effectiveness of their governance functions in the immediate future. GoG will need to ensure that the three agencies continue to be adequately financed through Internally Generated Funds and/or GoG sources. For the Minerals Commission, for example, which (with exception of the Inspectorate Division) did not receive any GoG funding prior to NREG, GoG resources will become their most significant source of funding. 23

33 IV JOINT DEVELOPMENT PARTNER SUPPORT TO THE GOVERNMENT S PROGRAM A. LINK TO COUNTRY ASSISTANCE STRATEGY (CAS) 57. CAS Objectives. The NREG DPO 3 program is aligned with the FY08-11 CAS and also the revised results matrix in the CAS Progress Report (extending the CAS period until the end of FY12) and the new Medium-Term National Development Policy Framework The CAS sets out the broad objectives of increasing growth and decreasing poverty and inequality, to be achieved with the help of the Ghana Joint Assistance Strategy (G-JAS) and a series of World Bank programs, including Economic Governance & Poverty Reduction Credits (EGPRC) and other DPOs such as the Agriculture DPO. The G-JAS has a substantial chapter on environment, reflecting the findings of the Country Environmental Analysis (CEA). The environment as a key priority for development was thus accepted at the highest level of the donor community and marks an important step forward toward joint NRE programs. In line with the donor harmonization agenda and Ghana s good track record of PRSC implementation, close to 50% of lending under the CAS is currently in the form of DPOs. 58. Natural Resources and Environment and the CAS. The revised results matrix of the CAS progress report is structured along the lines of the Medium-Term National Development Policy Framework and identifies individual sectors as the entry point of interventions rather than the three pillars in the GPRS II. The section on sustainable management of natural resources in the CAS is substantial and covers the three sectors under the NREG program: forestry, mining and environment and outcomes and milestones to be achieved during the remaining CAS period. The CAS recognizes that sustainable NRE management is urgent, and prioritizes the reform and capacity building of key natural resource & environmental agencies as central to improving environmental governance and safeguarding the environment. CAS priorities further include the need to improve: (a) transparent fiscal and revenue frameworks in natural resources management; (b) the analysis and governance of extractive industries through a value chain approach (an expanded EITI); (c) engagement and dialogue with civil society organizations and local communities, mainstreaming social accountability throughout the portfolio, and in monitoring and evaluation of projects and programs; (d) increased coordination between natural resource/environment ministries and agencies; (e) increased attention to climate change mitigation and adaptation; (f) sound environmental management of the oil and gas sectors, and (g) an improved platform for data and information to support evidence based policy making. The CAS Progress Report confirms the engagement in the NRE sector and the intention of continuing sector budget support to the EI Value Chain Approach with a DPO planned in FY11, which will build on the mid-term review of the NREG series currently planned for the first quarter of FY11. B. DONOR HARMONIZATION 24

34 59. Bank/Fund Collaboration. The IMF and World Bank teams collaborated closely since the design and launch of the PRGF and EGPRC in early Following the agreed institutional division of labor between the Bank and the IMF, there is a common understanding of the macro situation and the World Bank is taking the lead in the areas of energy, public sector reform and safety nets. The IMF and World Bank teams are also closely collaborating on issues of public financial management with a clear division of labor on the policy actions identified. 60. DP Support. GoG s NREG program is supported by five DPs AFD, DFID, EC, EKN, and the World Bank with such support designed and implemented jointly with GoG from the outset. The cooperation between DPs began with joint analytical work (CEA, Ghana Environment Sector Study) and joint sector dialogue via the ENR Sector Group. During preparation and implementation of the series, joint missions were undertaken and a joint program document developed. Simultaneously, VPA negotiations proceeded with EC and DFID support. A joint Framework Memorandum (Annex 5) states how DPs and GoG will work together under the NREG program. DPs have harmonized support by using a joint PAF, and undertaking a joint assessment of the PAF. 61. While Bank support for DPO-3 will be US$10 million equivalent, to be disbursed in a single tranche on effectiveness, the following development partners will also provide a total of approximately US$16.6 million per year to support the five year government program: EKN: approximately 7 million per year over five years ( ); DFID: approximately 2.1million per year for three years starting in 2009 ( ); AFD: approximately 1 million per year over five years ( ); EC: approximately 4 million per year over three years starting in 2010 ( ). 62. Other DP support, and the shift from project to budget support. DP project support in the forestry and wildlife sector is being largely phased out in favor of budget support under NREG. However, the Fonds Français pour l Environnement Mondial financed a 1.2 million biodiversity and forestry project, which ended in December 2009, and the EC s US$12 million Protected Areas Development Program, which ended in The Netherlands approximately US$25 million project funding in the forestry sector ended in EC s 40 million Mining Sector Support Project ended in the second half of 2009, and thereafter support to the sector will be channeled through NREG. Complementary to NREG, CIDA is supporting a Ghana Environmental Management Program (C$8 million) to strengthen EPA and its parent Ministry s capacity and combat desertification in the northern Ghana. NREG-related Bank project support is discussed in Section IV.C. The DP group on oil is the main mechanism to ensure, at GoG s request, a coordinated approach to respective DP interventions. Norway continues to be the lead DP providing technical support in the oil sector, with the World Bank and USAID. Norway and NREG DPs are coordinating closely in regard to environment and oil and respective interactions with EPA in the light of the targets on environmental guidelines and the SEA on oil in the NREG PAF. Ensuring a coherent approach is particularly important in light of new initiatives that are 25

35 intended to pilot, scale up and learn from new approaches on enabling sectoral responses to climate change challenges. 63. Environment and Natural Resources Sector Group. Sector Groups have been established in Ghana to improve GoG/DP dialogue and coordination. The Environment and Natural Resources Sector Group was established in 2004, and its membership includes the key Government institutions responsible for mining, forestry and environmental management, MoFEP and Development Partners with an interest in supporting improved environmental and natural resources management. The Sector Group s three main objectives are to (a) conduct continuous sector policy dialogue between GoG sector representatives and interested DPs; (b) review the performance of the ENR sector at least once each year and exchange views on progress toward agreed outcomes and actions that contribute to improved sector performance; and (c) improve harmonization and alignment of GoG s and DPs procedures, projects, programs, and skills to improve the efficiency of implementation of GoG s sector policies and strategies. The Technical Director for Forestry in the Ministry of Lands and Natural Resources and the Executive Director of the Environmental Protection Agency are currently co-chairs of the Sector Group on GoG s side, while the EKN has taken over in April 2010 as sector lead, on the DP side. Civil Society representatives attend Sector Group meetings on a quarterly basis and participate in the Annual Sector Review. Within the wider donor architecture in Ghana, the Sector Group is the first contact point for information and analysis of achievements in the sector. It maintains a strong link with the MDBS group and contributes directly into the MDBS dialogue. 64. Links to the Multi-Donor Budget Support (MDBS). The MDBS is a general budget support modality in the highly harmonized donor community in Ghana. The Bank s Economic Governance and Poverty Reduction Credit, the Agriculture DPO and NREG are part of the MDBS and are assisting GoG to implement GPRS II and its successor, the Medium-Term National Development Policy Framework. NRE priorities and expected outcomes under the MDBS Performance Assessment Framework (PAF) build on the commitment and momentum created under the MDBS in previous years to safeguard the environment, and expanding the scope and content of NRE in national fora and donor dialog. Under C3 and the heading "Improve Cross-sectoral Natural Resources and Environmental Management", the PAF outcome is the enhanced inter-sectoral coordination, improved sector-wide partnership and accountability in view of enhanced coherence in policies and decision making, integration of environmental issues into policy, plans and budgets. The target for 2009 was the establishment of the Environment and Natural Resources Advisory Council (ENRAC) to provide cross-cutting policy direction on environmental and natural resources management, and creation of a platform to discuss and inform on these issues. Inauguration for the Council was planned for April The targets for 2010 and to 2011 are further steps to achieve the stipulated outcome of coordination, partnerships and accountability. Under NREG, the establishment of monitoring and evaluation systems in the Ministry of Lands and Natural Resources and the Ministry of Environment, Science and Technology, is linked to and complementary to the PAF trigger under E1 and the heading to Strengthen the M & E system for This trigger calls for the production of annual progress reports for six ministries which include key indicators based on the formulation of M &E plans to monitor the sectoral development plans. 26

36 C. RELATIONSHIP TO OTHER BANK OPERATIONS 65. Bank projects that support improved natural resources and environmental governance include - The Agricultural Development Policy Operation, which provides sector budget support for policy and institutional reforms that contribute toward promoting sustainable management of natural resources in agricultural lands. In the context of oil and gas, the Energy Development and Access Project (GEDAP) is holding consultations on adoption of oil and gas regulatory and revenue management frameworks and planned to have frameworks in place by the end of the CAS period. The Land Administration Project (US$55 million, of which US$20.5 million IDA contribution), which supports Government s land administration reform by harmonizing land policies and the legislative framework with customary law; undertaking institutional reforms to improve the land administration system; and establishing an efficient system of land titling, registration, and land use planning. Under the Community-Based Rural Development Project (IDA, US$60 million - a project aiming at increasing rural income, improving rural infrastructures, and access to key support services) one component specifically supports natural resource-based development. Also, in the context of the TerrAfrica Global Partnership Program, the Bank provides technical advisory services to strengthen the analytical underpinnings and the capacity of various Governmental institutions to oversee the development and implementation of sustainable land management activities. In the pipeline are (1) an oil and gas capacity building project (2) an initiative on social accountability and to mainstream the approach in the portfolio and increase the demand-side governance through funding from the Governance Partnership Facility (2) a project to promote the expanded application of EITI value chain approach identifying priorities for improved governance in the oil and gas sectors, and (3) statistical capacity building projects in support of evidence-based policy-making. Ghana has also been selected as a FIP pilot and a Readiness Preparation Proposal has been submitted to support Ghana s REDD initiatives. 66. Links to Other DPOs. Specific links via targets in the MDBS and the EGPRC are described above. More generally, the two sector DPOs - NREG and agriculture - rely on macroeconomic assessments and debt sustainability analysis carried out under the EGRPC Government-wide issues related to revenue and expenditure frameworks, budget allocations, and budget execution are carried out as part of the EGPRC dialogue, with sector-specific issues in these areas discussed as part of the NREG dialogue. The External Review of Public Financial Management (ERPFM) underpins this dialogue. Currently, fisheries resources are included under the agriculture DPO because institutional responsibility for fisheries is under a Department within the Ministry of Food and Agriculture, and because of the inclusion of fisheries in the national agriculture strategy (i.e., the FASDEP). 27

37 D. LESSONS LEARNED 67. Lessons from Previous Projects. The design of the NREG program reflects lessons learned from previous Bank interventions in the NRE sectors in Ghana and other countries as set out in the program document for DPO-1. In particular, key lessons learned under the Natural Resources Management Project, completed in 2003, included the: i. Centrality of fostering country ownership and aligning with the GoG sector programs; ii. iii. iv. Importance of the strategic approach to build capacity while using country systems, including a sound monitoring and evaluation system; Need for realistic end of program outcomes; Need to leverage reforms and capacity building and to focus the policy dialogue on key governance issues; v. Importance of incorporating public participation, addressing the needs of civil stakeholders; vi. Usefulness of leveraging co-financing and harmonizing DP interventions. 68. Lessons from Global Experience. The following lessons or principles have also emerged from global experience from the development and implementation of DPOs and they have been incorporated into the design of the DPO series (see Box 3 for details): (a) reinforce country ownership; (b) agree upfront with the government and other financial partners on a coordinated accountability framework; (c) customize the accountability framework and modalities of Bank support to country circumstances; (d) choose only actions critical for achieving results as a condition for disbursement; and (e) conduct transparent progress reviews conducive to predictable and performance-based financial support. 69. Lessons from DPO-2. The second year of NREG provided lessons that have been incorporated in the design of DPO-3. In particular, the DPO continues to emphasize MoFEP-led coordination as experience has demonstrated that a central coordinating function is needed to ensure consistency in the management of the program. On the DP side, efforts toward donor collaboration and harmonization have continued. Under DPO 2, division of labor among the DPs in supervision of the program has been clarified and improved. Additionally, in an endeavor to enable the dialog to better focus on substance, a small independent team of consultants was hired under the supervision of MoFEP to work with MDAs to provide an evidence based assessment of achievements, relevance and likely impacts of implementing NREG. Box 1 provides a series of best practices which have been adopted in this DPO. 28

38 Box 1: NREG DPO and DPO Good Practice Principles Principle 1: Reinforce Ownership GoG has demonstrated strong ownership of the NREG program. The program matrix was developed by the Forestry Commission, Minerals Commission, EPA, their parent Ministries, with an active leadership role by MoFEP, and in discussion with DPs. GoG consulted broadly with key stakeholders on the program matrix. Consultations with stakeholders were carried out as part of the preparation of the NREG program, and as part of the validation of the program matrix. There is strong political will to take civil society s perspective into account. Stakeholder and Risk Analyses were launched under DPO-1 and continued under DPO-2, deepening the analysis of impacts of mining, forestry, and oil exploitation on vulnerable communities. Public disclosure. Documents related to the NREG program have been publicly disclosed to help ensure accountability and transparency, and reinforce country ownership. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The NREG program matrix, or PAF, serves as a harmonized basis for monitoring and annual review by DPs. The program matrix, jointly agreed with DPs, is used to assess GoG s progress on the reform agenda. Through it, prior actions and triggers for each year are determined and agreed with GoG and disbursements are based on achievements. The NREG program matrix combines policy-based actions and output/outcome-oriented targets for each year of the program, with means of verification and a column quantifying (whenever possible) expected outcomes. Each sector validates its matrix at the Ministerial level, confirming GoG s commitment to the program. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The reform program captured in the NREG program matrix reflects GoG s agenda and intentions. The key policy makers in each sector lead the process of developing the matrix and its actions for their respective sector. In addition, the NREG program matrix is fully aligned with GPRS II pillars. The program focuses on three key sectors. Taking Ghana s circumstances into account, the NREG program decisively focuses on forestry and wildlife, mining, and environment precisely because the three sectors have a very high potential for growth and have important social and environmental welfare implications. Sustainable oil exploitation is part of the environmental governance focus. The NREG program complements the ongoing MDBS program. Rather than include the objectives of the NREG program in the existing MDBS (general budget support) program, the need for separate and more indepth reforms in this particular area led GoG and DPs to agree on the separate, yet complementary, NREG program. It does not overlap with the MDBS program, but picks up on important sectoral areas not addressed by the MDBS due to its focus on overall public sector management. The timing and modality of budget support is aligned with the country s needs. The choice to use a DPO reflects an understanding of the need to focus on governance reforms in the three sensitive sectors, and reflects the growing capacity of Ghana s PFM system. All contributing donors use the same monitoring framework, which reduces the transaction cost for the GoG. Principle 4: Choose only actions critical for achieving results as conditions for disbursement For DPO-2 and DPO-3 there are 6 prior actions and 29 targets reduced from 66 under DPO1. The prior actions/triggers are purposely limited in number and were selected because they are considered key in the agencies own policy documents. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support Under the NREG program, there are regular performance reviews. In accordance with Ghana s budget and monitoring cycle, the PAF review takes place in the first half of the year, to review progress on triggers, and the annual sector review takes place in the second half of the year, to take stock of progress and look forward. The PAF review assesses implementation progress and determines disbursements, which are contingent upon results. The reviews are conducted in accordance with Ghana s budget and monitoring cycle and in a transparent manner all stakeholders participate in the annual sector review. 29

39 70. Lessons from Implementation of the NREG DPO Series - While an in depth analysis and reflection on lessons learned over the course of this DPO series of three operations will be undertaken in the context of the ICR, development partners preliminary views on lessons learned from the series includes the following: MDA stakeholders need to fully understand the SBS modality for it to be effective in achieving its development objectives the recommendation is that sector MDAs should be sensitized at the outset through training in how Sector Budget Support functions, and how to best take advantage of the opportunities it affords. For example, through provision of training and assistance to sectors in developing multi-annual strategic plans and budgets that can be used in their dialog with the Ministry of Finance, as well as design of strategically targeted performance assessment frameworks. Transaction costs can be expected to be high in the initial years this is due to the need to build awareness and trust, and also develop operational modalities for advancing the dialog, among the various MDA actors, and with DPs and civil society. A parallel program of targeted technical assistance could enhance the pace and development impact of SBS reforms - for example through undertaking analysis necessary to identify and define the most relevant priority policy reforms needed to achieve maximum development impact, and also to build capacity of MDAs to undertake reforms and implement their programs. Meaningful reform in the NRM sectors requires leadership and support at the political level - NRM sectors are complex and reform is likely to require that strategy to address competing formal and informal interests and incentives is supported through leadership at the highest level. Performance Assessment Framework should be strategic and focused on key policy reforms - Initial design of the NREG PAF included a large number of targets that would have been more appropriately associated with traditional investment lending. This tended to obscure the dialog on key policy reforms. Public Financial Management reform cannot be fully addressed with SBS - While significant achievements were eventually made toward developing multi-year planning and budgeting at the Agency level, comprehensive improvements in PFM must be addressed systemically and are beyond the scope of SBS. Three years is insufficient time to achieve the full development impact of the SBS instrument introduction and adoption of the culture of SBS has been a major achievement of the series. It has established a solid platform of understanding and enthusiasm for the SBS modality on the part of MDAs. However, achieving the full and sustainable development impact of the instrument will require continuity of support over a longer period than three years. 30

40 E. ANALYTICAL UNDERPINNINGS 71. The Analytical underpinnings for the NREG program are described in detail in the program document for DPO-1. Key among these are the Country Environmental Analysis, the Ghana Environment Sector Study (GESS), and preparatory studies for the VPA in forestry. The Country Environmental Analysis grew out of recognition by GoG and DPs of the importance of natural resources to Ghana s economy and the alarming rate of depletion/degradation and inefficient management of these renewable and non-renewable assets. NREG is a response to the Country Environmental Analysis s findings, to strengthen environmental governance/management and mainstream policy dialogue in this area. It is the main platform for DPs to engage with GoG to address issues raised in the report related to mining, forestry and wildlife and wider environmental governance mechanisms. 72. Other studies were undertaken during the preparation of DPO-1 and DPO-2, to inform policy directions. They include a Public Revenue Analysis of the Forestry, Mining, and Environment Sectors, to determine what can be done to enhance further the revenue generation from these sectors; a Review of Budgets, Expenditures, and the Financial Management System of the Natural Resources and Environment Sector; Translation of the NREG Matrices into Action Plans and Budgets, beginning with the costing of 2008 and 2009 actions in the matrices; and a Stakeholder and Risk Analysis, undertaken as the first phase of Poverty and Social Impact Analysis (PSIA). 73. In addition, the program has been further informed by the state of the PFM systems, processes and practices as highlighted the ERPFM (2009) and Draft PEFA (2009) reports at the national and sub-national levels. 31

41 Box 2: Summary Findings of Recent Studies under the NREG Program Public Revenue Analysis of the Forestry, Mining, and Environment Sectors. Key findings of this study include inter alia: There is a gap between economic rent capture from the NREG sectors and budget policy implementation. Wildlife revenue generating potential is constrained by the command and control approach to resource regulation and management, limited institutional capacity, and marketing of wildlife potential. How the Forestry Commission s finances work is not well understood in the public sector, and there is a lack of clarity in legislation about the purpose of Timber Rights Fees. Ghana s mining royalty system does not adequately address the extraction of economic rent as currently applied. The nature of the mining fiscal regime is straining the capacity of institutions to administer it. Placement of a reclamation bond has been made a requirement for all mining companies to comply with under EPA s mandate to enforce environmental compliance. This will be an excess charge on the mining industry under the policy of charging economic rent. EPA s mandate cuts across areas of responsibility of economic and social sectors. EPA is constrained financially and in terms of the human resources needed in attaining the ultimate objective of certifying environmental compliance of establishments. In the short to medium term, EPA should be dependent on government budget. EPA s long term policy should be one of self-financing through a taxation of the private sector for provision of environmental services. Review of Budgets, Expenditures, and the Financial Management System of the Natural Resources and Environment Sector. Key findings of this study include inter alia: The funding requirements of the sector necessary to perform its core functions far exceed the funding available from its revenue sources. The budget process fails to meet the resource expectations of the agencies; the annual budget is not currently guided by the rolling, three-year MTEF. Failure to adjust budget proposals for inflation leads to the need for additional funds. Consistent application of the expenditure classification codes is necessary for budget management. V THE PROPOSED NATURAL RESOURCES AND ENVIRONMENTAL GOVERNANCE DEVELOPMENT POLICY OPERATION A. OPERATION DESCRIPTION 74. DPO Series Objectives and Outcomes. The objective of the DPO series is to support the Government of Ghana to implement a set of policies and reforms intended to: (a) ensure predictable financing and sustainable management of the forest and wildlife resources and effective forest law enforcement; (b) improve mining sector revenue collection, management, and transparency; (c) address social issues in forest and mining communities; and (d) mainstream environment into economic growth through Strategic Environmental Assessment, Environmental Impact Assessment, and development of a climate change strategy. The proposed operation is likely to have a significant positive impact on the environment, forests and other natural resources. DPO-3 continues the focus on policies and reforms in the inter-related sectors of forestry and wildlife, mining, and environmental protection toward achieving the overall expected outcomes at completion of the proposed DPO series, which include (a) improved management of government revenues and finances in the forestry and mining sectors; (b) reduced illegal logging; (c) reduced social conflict in forestry and mining communities; and (d) 32

42 integration of environmental considerations into policy formulation and implementation across government, including risks associated with climate change. The Government s NREG Program covers a five-year period, but Bank assistance, through this DPO series, covers the first three years. The five and three-year expected NREG outcomes are outlined in Annex Overall progress toward outcomes. The joint GoG/DP mid-term review of five year NREG program to be undertaken in July 2010, and also the Bank s ICR of the DPO three year series, to be undertaken in the third quarter of 2010, will both carry out a detailed assessment of progress toward achievement of intended outcomes. However, based on the annual assessments of the PAF, as well as ongoing sector dialog, the general view of DPs and GoG is that progress is on track toward achieving most three year outcomes as defined for each of the three sectors in Annex 2. Given that this DPO series has been the first experience of Sector Budget Support for the sectoral agencies, and that a change of Government took place in early 2009 (including the creation of a new parent Ministry for EPA), the level and continuity of progress could be viewed as particularly significant. In addition to progress under each of the sectoral policy objectives included in the PAF, the initiation of improved multi-year strategic budget planning in the sectors, and the inclusion of NREG expenditures in the 2010 GoG budget, signal that the culture of SBS has been introduced, and has already begun to catalyze a more substantive dialog between the sectors and with MoFEP toward achieving NREG objectives in the longer term. 76. DPO-3 Prior Actions. NREG is a three year programmatic operation and IDA financing is provided annually based on completion of a set of policy reform actions (i.e. prior actions ) following annual joint review of progress by DPs and MDAs, and before approval of each operation in the series by the Bank s Executive Board. Under DPO-2 policy actions and indicators continued to focus and deepen the dialog on the forestry and mining sectors, and on environmental protection. The new Government that came to office in early 2009 reaffirmed Ghana's intention to support NREG, and progress continues to be generally on track, although the process of changing administration led to some delays in processing and submitting legislative reforms for Government endorsement. 77. Post DPO-3. DPO-3 is the last of the Bank s initial programmatic series of three DPO operations, but GoG will continue with the NREG program for an additional two years through end Key actions and targets for the Government program going forward are included in Annex 4. Some shifts in priority and new opportunities for engagement in the natural resource sectors in Ghana have developed in the last several years since the DPO series began. These are associated with the discovery of oil, development of the climate change agenda post- Copenhagen, and the emergence of new approaches and instruments, such as REDD and the Forestry Investment Program (FIP). As noted under lessons learned, this initial three year engagement under the NREG DPO series may not be sufficient to to achieve all outcomes envisioned. The joint DP/GoG Mid-Term Review (planned for July 2010), and the Bank's ICR (planned for 3 rd quarter of 2010) will inform selection of the best options and instruments available to the Bank to most effectively support Ghana to achieve its overall NREG and NRE objectives in the longer term 33

43 B. POLICY AREAS 78. Implementation and Prior Actions. Over the course of 2009, NREG MDAs focused on implementing the comprehensive set of policy and institutional actions. Progress achieved under DPO-2 is outlined below and detailed in Annex 3. Targets for DPO-3 are captured in the NREG program matrices (Annex 4). The prior actions for DPO-3 and their status are shown in Tables 4, 5 and 6. Component 1: Forestry and Wildlife Sector financing and Forest Law enforcement 79. Intended Outcomes of NREG under this component include: law enforcement in the forestry sector through an increased percentage of legally harvested wood supplied to the domestic market, and initiation of the use of FLEGT licensing; forest health though a significant reduction in the incidence of wildfires; predictable and diversified sources of funding for Forestry Commission though improved collection of fees and royalties; private sector investment framework in the forest and wildlife sector through increased volumes of tertiary processed wood exported and expansion of the area of plantation forest resulting from private investment; M & E system generating data on a monthly basis and made available to policy and decision makers; an increase in the proportion of local communities actively informed on the details of revenue collection and distribution, and active participation of local communities in decision making regarding forest resource management. Outcomes expected on conclusion of the NREG DPO series (i.e., after three years), and after five years are detailed and quantified in Annex Progress to date. Under DPO-1 and 2, the Government implemented policy reforms and actions outlined in the PAF. In accordance with the Voluntary Partnership Agreement (VPA) with the EC, which was established under DPO 1, piloting of wood tracking systems to verify the legal origin of timber was initiated in four large companies engaged in the harvesting, processing and export of timber. The VPA with the EC commits Ghana to ensure that all Ghanaian timber entering European markets is of legal origin. Legality includes harvest origin as well as wider legal compliance, such as ensuring that the timber derives from an area that has a current forest management plan that is being implemented, that permits have been acquired in conformity with regulations, and taxes and royalties have been paid. Furthermore, transport and processing was in accordance with the legal prescriptions, environmental regulations have been respected, and Social Responsibility Agreements are in place. Options to apply the VPA principles to the domestic market were developed in 2009 under DPO 2. This entailed reviewing existing benefit sharing arrangements in order to strengthen the forest sector s contribution to equitable and broad socio-economic development. Pilots of the wood-tracking system are currently under way, and FLEGT-licenses are expected to be issued from early 2011, following review of the experience of the pilot operations, and there will be an expansion of scope of the tracking system to include timber reaching the domestic market. The first VPA Joint Monitoring Review Mechanism was conducted in January In addition, the Forestry Commission disseminated bi-annual revenue disbursement reports within the targeted 30 days of publication. Further progress for the forest sector under DPO-2 included the development of management plans for 15 forest reserves; implementation of the wildfire strategy, including awareness raising and increased preparedness as well as the establishment of firebreaks around forest reserves; a strategy for tertiary wood processing was developed and approved by MLNR; and a REDD+ 34

44 Readiness Preparation Proposal was submitted to FCPF. (See Annex 3 for additional details on progress made to date). 81. Areas of Focus in DPO-3. MLNR led the development of the forestry sector matrix, which focuses on the following five areas for sector reform (See Annex 4 for details): Institutional Strengthening and Governance. This focal area relates to commitments that GoG has entered into as part of the sector reform agenda set out under the VPA process, i.e., strengthening the Forestry Commission s regulatory function by delegating authority to the private sector for certain aspects of resource management; agreement on an institutional structure to implement the wood tracking system and the related Timber Legality Assurance System (TLAS); and supplying more of the growing domestic market demand with timber from verified legal sources. DPO-3 will focus on the completion of pilots with companies for the wood tracking system, initiated under DPO-2, as well as preparation of a Forestry Development Master Plan and completion of a study on the domestic wood market to further inform policy directives by MLNR. Secure Natural Ecosystems for the Benefit of all Segments of Society. Illegal logging, bushfires, encroachment of reserves, and poaching have greatly contributed to the degradation of the forest and wildlife resources. Implementation of a national wildfire management policy, and development, implementation and monitoring of Integrated Management Plans for forest reserves and protected areas are therefore included as key targets under this policy focal area. Under DPO-3, twelve (12) additional management plans are being developed and reviewed and emphasis will be placed on ensuring effective implementation of plans revised under DPO-1 and 2. Effective implementation of these plans is also the focus of the proposed Forest Investment Program-climate activity. Additionally, two regional-level REDD pilot project proposals will be developed. The main outcome expected under this objective is an improvement in the integrity of the forest and wildlife resource base, as evidenced by reduction in wildfires and increase of keystone species in Protected Areas. Sustainably Finance and Promote Investment in the Forest and Wildlife Sector. With respect to the sustainable financing element, DPO-2 included targets relating to the submission to Parliament of a legislative bill on the Forestry Commission s financial framework, and also the assessment of potential for sector financing from various carbon markets. DPO-3 will focus on the implementation of the financial framework. With respect to attracting private sector investment, a strategy for tertiary wood processing was developed and approved by MNLR. However, a bill for improved revenue collection could not be approved in 2009 due to delays associated with the change of Government, but it will be resubmitted to cabinet in With plantations playing a key role in the future supply of Ghanaian timber, the sector has embarked on a process of preparing land-lease and benefit sharing agreements for private sector plantation development. The promotion, implementation and monitoring of these agreements are therefore an important target under this focal area, and land leases have so far been signed with 14 investors for commercial plantation development over 9,000 ha, and will continue under DPO-3. Development of timber plantations at the district level is a priority for the new Government and 1% of the District Assembly Common Fund has been allocated for plantation development. Additionally, a national REDD+ Readiness Preparation proposal has been prepared and 35

45 submitted to the Forest Carbon Partnership Facility. The main expected outcomes are to secure predictable and diversified sources of funding and to increase the level of (socially and environmentally responsible) private sector investment in the sector. Strengthen Monitoring and Evaluation Systems (with use of Information Communications Technology). The objective reflects the need to make better use of existing information management systems, including financial and administrative, as tools for more effective monitoring and evaluation that can be used to assess progress against targets set out in the sector Master Plan and three-year Corporate Plan, and the use of information systems for better planning. A draft M & E system for FC and MLNR has been developed and, under DPO- 3, will be refined in conjunction with development of the Minerals Commission s M&E system. In addition, DP0-3 will also focus on the development of an ICT policy and database management system. Promote Equitable Resource Access Rights and Benefits for all Segments of Society. Poverty impact is difficult to measure and it is not possible to attribute poverty outcomes to one sector alone. Hence, targets on revenue collection rates were proposed as an appropriate measure of progress under DPOs 1 and 2, since a percentage of these revenues is shared among local stakeholders. In recent years, the level of timber royalties redistributed to stakeholders has been affected by poor performance in revenue collection and unpredictable sector financing. The publication of bi-annual disbursement reports was therefore considered to be an appropriate means of verification for the poverty impact target since the reports would indicate revenue collection rates and their distribution. Disclosure of revenue disbursements at the local level was a prior action under DPO-2 and will continue under DPO-3. Also under DPO-3, to increase transparency and to better realize potential poverty impacts, local communities will be encouraged to monitor spending of revenues received by District Assemblies and traditional authorities 27. Regional and national fora will help provide platforms for multi-stakeholder engagement in policy dialogue and help to build trust among actors. 28 The two main outcomes expected under this focal area are transparency for communities on revenue distribution through full and active disclosure and more active participation of communities in natural resource management through instruments such as Forest Fora. 82. Status of DPO-3 Prior Actions. The first prior action relates to the program objective of institutional strengthening and governance, and required that the VPA be implemented through piloting the wood tracking system in three commercial companies engaged in the harvesting processing and export of timber. This prior action has been overachieved, with four companies now actively involved in the pilot. The pilots will be evaluated in September The second prior action, which relates to the objective of promoting equitable resource access rights and benefits for all segments of society, required that procedures be established to improve transparency of forestry revenue disbursements, through dissemination of bi-annual revenue disbursement reports within 30 days of publication by the Forestry Commission. Procedures 27 Guidelines for the use of timber royalties at local level have been prepared by MLFM/MLNR and are being discussed with the MLGRD. Once these have been approved, their implementation and monitoring may also become a target under this objective. 28 The success of the regional fora in 2007 prompted a discussion about whether they should widen the issues discussed to also cover mining sector issues or Natural Resources more broadly. 36

46 have been established, and dissemination did take place following the most recent disbursement in 2008, however, the 2009 disbursement has been delayed for reasons associated with internal budget management, but dissemination will take place within the required time frame following disbursement, which is expected to take place in the coming months (Table 4). Table 4: Status of Forestry and Wildlife Sector Prior Actions for DPO-3 Program/Policy Objective DPO-3 Prior Actions Change From DPO-2 Status Institutional Strengthening and Governance Pilot program of wood tracking systems commenced, to verify the origin of timber with at least three commercial companies that are involved in the harvesting, processing and export of timber, as a means of implementing the Voluntary Partnership Agreement No change. Achieved. A contracts have been awarded to implement the wood tracking system in four pilot areas and companies, including: Samartex (SAX) John Bittar and Co. (JCM) Bibiani Logging and Lumber ( BLLC) Kumi & Co. (KC) and field testing of equipment is ongoing. Promote equitable resource access rights and benefits for all segments of society Procedures established to improve transparency of forestry revenue disbursements This prior action has been changed from Dissemination of bi-annual revenue disbursement reports within 30 days of publication by Forestry Commission to focus the prior action on institutionalization of transparency mechanisms Achieved. Procedures established, as evidenced by the dissemination of all available revenue disbursement to the district councils. Component 2: Mining sector revenue collection, management and transparency, and social issues affecting mining communities 83. Intended Outcomes of NREG under this component include: reduction of the time required for processing mineral licenses; improvements in the supervision and control of production, social and environmental aspects of large scale mining; reduced perception of social conflicts in mining communities; increased registration of small scale miners; improved 37

47 monitoring and collection of revenues from large scale mining; up to date information on mining incomes, royalties, local revenues and their distribution published at the local level; and the Minerals Development Fund Bill and other regulations operationalizing the 2006 Minerals and Mining Act (Act 703) submitted for to Attorney General and Parliament for approval. Outcomes expected on conclusion of the NREG DPO series (i.e., after three years), and after five years are detailed and quantified in Annex Progress to date. The PAF for the minerals sector focuses primarily on sector governance issues including institutional strengthening for the sector; addressing social issues related to mining; improved support to the small-scale mining sector; improved revenue collection; management and transparency of revenues; enhanced policies and regulatory framework; and enhanced international cooperation. Specific achievements include significant advances to establish a modern mineral rights cadastre (licensing system), in line with the 2006 Minerals and Mining Act (Act 703), and ensuring consistency between the new licensing system and new draft regulations. This will enhance transparency and prevent the issuance of illegal licenses. With regard to the institutional strengthening policy objective, the Minerals Commission, including all of its departments and divisions, has started implementation of a Human Resource Development Plan, focusing on enhancing skills of management and technical staff. The HR Development Plan includes topics related to asset verification, environmental permitting, distribution of royalties, and compensation 29. In response to continued challenges in mining communities, the Mineral Commission has finalized the Guidelines for Use of Mineral Royalties by Districts 30 and Municipalities, and the draft of Guidelines on Corporate Social Responsibility. Both have gone through significant stakeholder consultation in mining regions and communities. Finally, in regard to the enhanced policy and regulatory framework and effective coordination policy objective, a major advancement is the development and submission to the Attorney General in December 2009 of the Mineral Development Fund Bill and other regulations to underpin the 2006 Mineral and Mining Act 31. (See Annex 3 for additional details on progress made to date). 85. Areas of Focus in DPO-3. Minerals Commission continues to fully own the mining sector policy matrix, which focuses on five policy/program objectives. These are outlined below (See Annex 4 for details): Institutional Strengthening in the Mining Sector. The ultimate outcome of this objective is to enhance the capacity of the staff of the mineral sector agencies (Minerals 29 Participation including the Ministry, Minerals Commission, Inspectorate Division of Mining, Geological Survey Department, revenue agencies, Customs and Excise Prevention Service, Environmental Protection Agency, the Academic and Research Institute, the Chamber of Mines, Traditional Authorities, civil society organizations, and others. 30 In the context of preparing guidelines for the use of mineral royalties, stakeholder meetings were held in Tarkwa in December 2009, and a validation workshop is planned for March/April The study districts were: Bibiani- Anwiaso-Bekwai, Tarkwa-Nsuaem and Prestea-Huni Valley (Western Region); Obuasi Municipality (Ashanti Region); Asutifi (Brong Ahafo); Dangme East and Weija Municipality (Greater Accra Region). The guidelines cover the following six areas: allocation of funds to project areas; allocation of funds to communities; budgeting; payments; supervision and monitoring of projects; and accounting for utilization of the fund. 31 Including regulation related to Compensation and Resettlement, Mineral Licensing System, Health and Safety Bill, Explosives, and other General Matters. 38

48 Commission, Geological Survey Department, and the Inspectorate Division of Mining) to deal with the difficult and complex challenges facing the mining sector. The five-year outcome indicator chosen to measure this is, 100% of licenses processed within the time limit provided in the 2006 Minerals and Mining Act (Act 703), which is an important indicator of the investment climate and ease of doing business for private investors in the minerals sector as well as Minerals Commission s capacity to facilitate this in a timely manner. This objective also focuses on a wider-range of training and human resources development activities under Minerals Commission s Human Resources Development Plan. This will help ensure that Minerals Commission staff has the requisite skills to respond to sector governance issues and address the varied challenges in the mining sector. The implementation of the HR plan was a target under DPO-2, and will continue, as the HR plan is further developed and implemented under DPO-3. Responding to increased focus on issues related to mining communities, the MC will strengthening the environment desk to include the Social Affairs Desk, to be responsible for responding to social issues, including those related to social conflict, human rights issues, artisanal and small-scale mining. Staffing this unit and making it operational will be a major priority under DPO-3. Reduce Social Conflict Issues in Mining Communities and Improve Support to Small Scale Mining (SSM). The purpose of this policy area is to contribute to an environment whereby conflicts and perceptions of conflict in mining communities are reduced. The objective focuses on two areas: (a) enhanced mining community benefits; and (b) an improved operating environment and organization of Small Scale Mining. With regard to enhanced mining community benefits, the Mineral Commission has elaborated guidelines to improve corporate social responsibility practices of mining companies. During 2010, the Minerals Commission will also develop a survey to track conflicts and perception of conflicts in mining communities. Additional clarity concerning compensation payments and procedures related to closure of mines has also been established in the development of regulations in these areas. Furthermore, Guidelines for District Assemblies on the use of funds from mineral royalties have been developed. Concerning improved conditions for Small Scale Mining activities, exploration activities for suitable areas for SSM continue in three areas Japa, Prestea and Kutukrom in the Western Region. Inception Reports were submitted to the Minerals Commission in November 2009 and work is likely to be completed in mid The exploration work involves study of the geology of the area using various methods, including satellite imagery, airborne geophysics and reconnaissance field visits. Environmental and social concerns related to these new SSM sites have been raised and beginning under DPO-3, MC will conduct SEA/EIA type assessments prior to commencement of mining activities to minimize the effect on environment. In addition, further collaboration with the Communities and Artisanal and Small-Scale Mining (CASM) Partnership will be pursued with a likely workshop planned for the first quarter of FY11. In regards to both (a) and (b), the MC has committed to quarterly consultations with civil society groups, particularly those involved in mining. The MC will also participate in the CHRAJ (Commission on Human Rights and Administrative Justice) enquiry formed by the Ministry of Environment, Science and Technology to follow up on findings of the report. Strengthening these consultation and participation mechanisms will be a priority under DPO-3. Improve Mining Sector Revenue Collection, Management, and Transparency. The purpose of this policy objective is to address the perception of a revenue gap, the difference in 39

49 amounts paid by companies and actual amounts due. An important first step has been the creation of a Mining Revenue Task Force composed of the Mineral Commission, Ministry of Finance, the Revenue Agencies Governing Board, Internal Revenue Service/Large Tax Payer Unit, Customs Excise and Prevention Service, Office of the Administrator of Stools and Lands, and EITI Secretariat. The Task Force is providing a platform for coordination between agencies involved in the formulation of the mining sector revenue policy, and agencies responsible for revenue collection and tax administration. Under DPO-2, training was provided to enable the Task Force and the MC to apply a mine specific fiscal model to assess the operating costs, production and the profitability of individual mines. The model was then applied to two additional mines (Newmont and Goldfields). In the context of the EITI, Ghana successfully submitted a validation report to the EITI Board at the end of February It has also finalized a work plan for Ghana EITI , with budget and financing still outstanding. In addition to formal requirements, GoG is including information on revenues paid at the local level (i.e. to District Assemblies, Traditional Authorities and Stools) in the EITI reports. Similar to the forest sector, the intention is to have this information actively disseminated at the community levels. Dissemination and implementation of the Guidelines for the Use of Royalties at the District and Municipal level, and if feasible, using EITI principles at the local level, will be priorities under DPO-3. Enhanced Policy and Regulatory Framework and Effective Coordination among Key Government Agencies to Improve the Performance of the Mining Sector. The ultimate outcome of this objective is to ensure that the policy and regulatory framework for the mining sector is in place and in line with international good practice, and compliance with environmental standards is improved. Key outcome indicators to measure success include the number of self-assessment reports (as required under the law and regulations) submitted by the mining companies and regular financing from the Minerals Development Fund for the Minerals Commission. Policy actions include Parliamentary adoption of the draft regulations that will operationalize the 2006 Minerals and Mining Act (Act 703); review and adoption by the Government of the draft Mining Policy prepared by the Minerals Commission (currently with MLNR); and adoption of a Minerals Development Fund Bill (currently with the Attorney General). Analysis indicates that the Policy needs to address environmental issues to a greater extent and that it would be appropriate for it to be subjected to an SEA process, prior to submission to Cabinet. Under DPO-3, coordination with the Environmental Protection Agency on new standards for the mining sector will be pursued, and lessons learned from the SEA and EIA work carried out with the EC funded Mining Sector Support Project will be incorporated. Enhance International and Regional Cooperation. The ultimate outcome of this objective is to ensure Ghana s compliance with its obligations through international agreements, in particular the Kimberley Process Certification Scheme. Because of the decrease in diamond mining due to the fall of global demand, it is proposed that this indicator be reformulated. The new indicator is likely to focus work under DPO-3 on regional harmonization (Africa and West Africa) and the implementation of the ECOWAS Directive on the Harmonization of Guiding Principles and Policies in the Mining Sector, as well as preparing an Action Plan for the African Union Commission s African Mining Vision

50 86. Status of DPO-3 Prior Actions. DPO-3 Prior Actions focused on: (a) addressing social issues in mining communities; and (b) improving mining sector revenue management and transparency. With respect to addressing social issues, Social Responsibility Guidelines for Mining Companies in Mining Communities have been developed and prepared in a very inclusive and participatory manner (consultation with communities, mining companies, municipal/district assemblies, NGOs and government institutions). Stakeholder consultation workshops were undertaken from November 2009 through January The Guidelines will be rolled out to companies and mining regions during Institutional arrangements, including mechanisms ensuring accountability and participation of communities and civil society organizations, need to be established to ensure effective and implementation. With respect to improving mining sector revenue management and transparency, three fiscal models (for Chirano, Newmont Ahafo, and Goldfields Tarkwa) have been applied. From November 2009 to January 2010, a consultant: (i) worked with the Mining Revenue Task Force on application of the fiscal models; (ii) provided training to MC, IRS, and Parliamentarians; and (iii) assisted with the Minerals Commission in creating new financial reporting forms for mining companies (which will facilitate the collection of information to continuously update the fiscal models). Regarding the Macro Model, the MC is to update the portion that pertains to its fee regime (Table 5). Table 5: Status of Mining Sector Prior Actions for DPO-3 Program/Policy Objective DPO-3 Prior Actions Change from DPO-2 To reduce social conflict issues in mining communities and improve support to small scale miners (SSM) Improve mining sector revenue collection, management, and transparency Satisfactory Guidelines on social responsibility for mining activities prepared Implementation of the Mining Revenue Task Force action plan commenced, to improve mining sector revenue collection, management and transparency, including completion of a collaborative pilot audit (by Minerals Commission, IRS, and others) of at least one mine, and application of a fiscal model to three mines. This prior action has been changed from Guidelines on social responsibility for mining activities prepared to provide IDA and development partners the opportunity to review and comment on guidelines before they are finalized. Status Achieved. Social Responsibility Guidelines for Mining Companies in Mining Communities have been prepared, and reviewed as satisfactory. Stakeholder consultation workshops were undertaken from November 2009 to January A validation workshop is planned for April No change. Achieved. From November January 2010, a consultant: (i) worked with the Mining Revenue Task Force on application of the fiscal model; (ii) provided training to MC, IRS, and Parliamentarians; and (iii) drafted new reporting forms for mining company fiscal information. As a result, the fiscal model has now been applied to three (3) mines (Chirano, Newmont Ahafo, and Goldfields Tarkwa). A collaborative pilot audit was also carried out by the Multi Agency Revenue Task Force on the Newmont Mines. 41

51 Component 3: Mainstreaming Environment into Growth 87. Intended Outcomes of NREG under this component include: Improved cross sectoral coordination for environmental management through SEA review of new policies, and establishment and operation of a new inter-ministerial forum on environment (the Environment and Natural Resources Advisory Council ENRAC); organized and functional national environmental institutions; ; improved national environmental monitoring and reporting through an environmental M&E system in place and operational; strengthened EPA regional and district offices to undertake SEAs and EIAs; investment in climate change adaptation and mitigation integrated in national budget and planning processes; and a strengthened national system for environmental impact assessment, with an updated legislative instrument on SEA, and improved processing of EIA applications. Outcomes expected on conclusion of the NREG DPO series (i.e., after three years), and after five years are detailed and quantified in Annex Progress to date was an important year for Ghana s environmental and climate change institutions, with significant progress made in all areas of policy reform under DPO-2. Of particular importance was the re-establishment of the Ministry of Environment, Science and Technology following an eight-year hiatus of the presence of this ministry in the administration. This has provided additional opportunity for enhanced reforms, and the need for clarification of the roles and responsibilities of the institutions responsible for environmental management. While progress has been satisfactory, some aspects of the program are particularly challenging, such as the emerging petroleum industry and the new frontier of climate change, which are subject to political and international influence. The Environment and Natural Resources Advisory Council (ENRAC), planned for inauguration in 2010, will become a very important entity to ensure that critical environmental issues affecting economic growth can be raised at the highest level. Significantly, MEST and EPA are now both recognized in the national budget, with 2010 operating budgets. On climate change, Ghana s capacity was overloaded by the volume of tasks in preparation for UNFCCC COP15 and the design of new programs on disaster risk management and adaptation. Nevertheless, the Government is moving toward a comprehensive approach to climate change that will include adaptation and low-carbon growth, and enabling measures, in line with international practice. In addition, following COP 15, Development Partners have strengthened their own coordination with Ghana on climate change, which is expected to enhance the quality and timeliness of results in (See Annex 3 for additional details on progress made to date). 89. Areas of Focus in the DPO-3. The environment matrix includes six focus areas for DPO- 3, described below (see Annex 4 for details): Cross-sectoral natural resource and environmental management and partnerships: DPO-3 will support GoG actions to improve cross sectoral coordination, policy coherence and integration of environment into policies, programs and budgets. Finalization of the Sustainable Development Action Plan initiated under DPO-2 will help inform the plans of sector agencies, as 42

52 well as long term development planning by NDPC. DPO-3 will also support the formalization of the Inter-ministerial forum, now named the Environment and Natural Resources Advisory Council (ENRAC), which is expected to include climate change and use of strategic environmental assessments (in particular for the petroleum industry) in sector planning. Strategic Planning for Environmental Institutions: Following the establishment of the Ministry of Environment, Science and Technology in early 2009, the government is in the process of refining the organization to become an effective ministry. MEST now has a draft organizational chart, with key entities listed including the Ghana Environmental Conventions Coordinating Authority (GECCA), the Council for Scientific and Industrial Research (CSIR), EPA, Town & Country Planning Department, Policy & Strategy Unit, Science and Technology Unit, Research Unit, and Administrative Unit. Under DPO-3, it is expected that institutional functions (for policies, regulations, implementation, and M&E) of MEST will be approved by Head of Civil Service (Management Services Division). National Environmental Monitoring and Reporting: The Ghana Environment Sector Study (GESS) identifies a number of ongoing environmental monitoring, data collection, and information management activities. However, data are not yet systematically collected, stored, analyzed, or shared across agencies and among districts. A consolidated reporting system is needed to provide information that can be made accessible to relevant national, sectoral and district agencies, as well as civil society. This will be particularly important at decentralized levels to assist in early warning of climate change related events and other natural hazards and potential disasters (including chemical and toxic waste hazards that the Environmental Protection Agency has successfully averted in the past). Reinforcing environmental monitoring and information management will enable more regular reporting on the state of the environment and the costs of environmental degradation. Agreeing on mechanisms for public access to environmental information will also enhance both public awareness and engagement on policy development and implementation. DPO-3 will conclude work on the development of indicators for the Sustainable Development Action Plan as well as a progressive integration of cost of environmental degradation information into the database on the state of the environment to track the impact of environmental degradation. Decentralized Environmental Management: The Environmental Protection Agency's key service delivery process is the EIA, which results in the issuance of permits and certificates as well as monitoring of compliance with Environmental Management Plans. The demand for permits and certificates has been growing steadily. Applications for permits and certificates increased from 515 in 2002 to 1,555 in 2005, with about 50 percent coming from within the Greater Accra region, highlighting the importance of the Agency s decentralized strategy for EIA permitting. Under DPO-3, piloting of an on-line EIA registration system will be undertaken. Also under DPO-3, the capacity to apply Strategic Environmental Assessment, including full disclosure and consultation, will be developed in an additional 20% of Districts and mainstreamed in District Medium Term Development Plans, which will be supported by the decentralized EPA capacity achieved under DPO-2. Climate Change: The importance and urgency of addressing climate change has been recognized by policymakers in Ghana, but a more systematic response across GoG remains to be 43

53 finalized, following new concepts emerging during 2009 and following COP 15. A considerable increase in awareness on climate change was accomplished in 2009, across the media, key MDAs, civil society and the general public. A draft adaptation strategy was produced by EPA staff and national consultants and was being made ready for submission to Cabinet with supporting policy briefs prior to the National Climate Change Forum in December This will be updated to reflect sector plans and objectives, the findings from new analysis, such as the study on the Economics of Adaptation to Climate Change, and a new UNDP program on adaptation. The President announced Ghana s intent to develop a low carbon growth plan at the Copenhagen UNFCCC Summit. Positioning Ghana to avail of international support will require incorporation of the outcomes of UNFCCC negotiations and related processes, and new opportunities for addressing adaptation, and low-carbon growth, including energy efficiency, and REDD+. Increasingly, emphasis is being placed on achieving development objectives that are affected by, or affect, climate variability and change. With the advent of new climate financing mechanisms and systematic work by other developing countries, progress is required on several supporting elements simultaneously to enable Ghana to draw on new resources and to prepare and implement effective climate responses. Key amongst these are mechanisms for measuring, reporting and verification, managing fiduciary risk and budgetary allocation of scaled-up resources, building core institutional capacity and compiling evidence and tools to underpin practice. The Minister of Finance and Economic Planning has also announced in April 2010 the establishment of dedicated capacity to enable the Ministry to engage with carbon finance and to make informed decisions on integrating climate change into national planning and budgetary processes. The Government s comprehensive approach to climate change will include adaptation and low-carbon growth in line with best practice 32. It is expected that a consolidated National Framework for climate change will be submitted to Cabinet during 2010, under DPO-3. National Environmental Assessment System: In 2003, in connection with the formulation of GPRS I, the Environmental Protection Agency and National Development Planning Commission led a number of SEAs. Subsequently, GoG decided to build the capacity to develop SEA at the district level, focusing on pilots in selected districts, and to introduce SEA to selected key sectors such as energy, water, and agriculture, as well as to build capacity across a broad range of stakeholders to ensure they play an effective role in these processes. Following the series of successful events in 2009 in the Oil SEA area, it is expected that the findings will be mainstreamed into sector implementation (including resource requirements) for environmentally responsible management in the oil sectors. This will be a priority area for the environment sector under DPO Status of DPO-3 Prior Actions. The two prior actions for DPO-3 focused on climate change and a strategic environmental assessment on oil. Regarding climate change, this prior action has been dropped, as it is has been superseded (and therefore no longer relevant) under the new government s policy framework for climate change. A draft national climate change 32 Proposed objectives agreed in principle by the Minister for Environment, Science and Technology are: 1. Adaptation/resilience/disaster risk reduction; 2. low carbon development, including REDD+; 3. financing mechanisms; 4. knowledge and research; 5. MRV and communications; 6. cooperation and voice widening constituencies (international and national, including Parliament and civil society, regional bodies, negotiations); 7. social dimensions and poverty, including gender; and 8. institutions and capacity building. 44

54 adaptation strategy was produced by EPA in 2009, and a concept for low-carbon growth was produced ahead of the COP15. However, under the new government, and to reflect a more comprehensive approach to climate change, and confirmed by the President s Office, these strategies will be merged into a new National Framework for Climate Change and updated to incorporate sector plans as well as reflect the findings of new analyses, such as economics of adaptation to climate change, outcomes of UNFCCC COP 15, new opportunities for addressing adaptation, new approaches for low-carbon growth, including energy efficiency, and REDD+. The National Framework for Climate Change is expected to be submitted to Cabinet by end of Regarding the SEA on oil, several factors led to some delayed progress, particularly due to the transition of the EPA to a new ministry following the change of Government and crossinstitutional delays on development of oil and gas policy and supporting measures. Despite these challenges, the Ministry of Energy and MEST are fully engaged in the SEA process and have made significant progress under DPO-2. In September 2009, there were two opportunities for Ghana to learn from experiences of other countries on environment and oil, first through a Ministerial-level study tour to Norway and The Netherlands, and then in the context of a Bank and Norway sponsored seminar, hosted by Ghana, on Environmental Governance and the Oil Sector, with participants from 12 countries. In addition, public hearings were held in six districts in November 2009, and a needs assessment workshop on Oil and Environment was held in December 2009, with a resulting draft SEA on Oil completed in March This draft SEA is being reviewed with stakeholders prior to its finalization, expected by end of The Energy and Environment Ministries will incorporate the SEA findings into their emerging policy frameworks, and EA guidelines for oil and an updated oil spill contingency plan have also been prepared (Table 6). Table 6: Status of Environment Sector Prior Actions for DPO-3 Program/Policy Objective DPO-3 Prior Actions Change From DPO-2 Status Climate change Adaptation climate change strategy submitted to Cabinet. This Prior Action has been dropped, as it is no longer relevant, to reflect GoGs new comprehensive and good practice approach for a stronger climate change policy framework that addresses adaptation, mitigation, and low-carbon growth, with enabling measures, under a single approach. A National Framework for climate change will be submitted to Cabinet by end of An Adaptation to climate change strategy has been prepared and was being made ready for submission to Cabinet, but will now be incorporated into the National Framework, with updates on new climate change findings, outcomes of UNFCCC COP 15, and new opportunities for addressing adaptation and low-carbon growth, e.g., energy efficiency and REDD+. Dropped. 45

55 Program/Policy Objective DPO-3 Prior Actions Change From DPO-2 Status National environmental assessment system Satisfactory SEA on oil sector is submitted, and guidelines for environmentally responsible management of oil sector issued. This prior action has been changed from SEA on oil sector is produced, which includes guidelines for environmentally responsible management of oil sector to provide IDA and development partners the opportunity to review and comment on the SEA before it is finalized. Achieved. Draft SEA on Oil, reviewed as satisfactory, completed in March 2010, and reviewed with stakeholders in late March Environmental Assessment guidelines and an updated oil spill contingency plan have also been prepared. VI OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACT 91. Poverty and Social Impact Assessment (PSIA). A Poverty and Social Impact Assessment (PSIA) exercise was undertaken in 2008 to inform NREG DPO-2 and provide policy makers and other stakeholders with information on the range of actors engaged in the natural resource management debate in Ghana. Government, civil society, private sector and DPs were consulted as part of this initiative. The PSIA provided new inputs on stakeholders perceptions of, and engagement with, the NREG program. It also identified some of the key risks confronting NREG implementation and identified core strategies for mitigating these risks. The outcomes of the PSIA are provided in Box However, Government and DPs generally recognize that considerably more information is needed to enhance and deepen understanding of the poverty and social impacts of NREG. To these ends, a second phase Social Impact Assessment is proposed, so the findings can inform the implementation of DPO-3 and remaining years of the GoG program. This new Assessment will focus specifically on social accountability issues in the mining and forestry sectors and will offer practical recommendations that could be instituted to build demand-side governance capacity in communities and stakeholder groups who are likely to impacted most by mining and forestry activities. It will also try to determine whether risks identified in the original PSIA have been mitigated, and whether any further issues need to be considered. 46

56 Box 3: Outcomes of Stakeholder and Risk Analysis Stakeholders. Three sectors are covered by the NREG Program and have a wide range of stakeholders. In addition to government (e.g., Forestry Commission, Minerals Commission, EPA, etc.), primary stakeholders include communities, Traditional Authorities, Stools, large corporate entities, small and micro-enterprises, artisanal miners, and chainsaw operators. Many local-level actors, while impacted by policies, are distant from the policy process and not sufficiently involved or adequately consulted in decision-making. The result has in large part been disinterest or opposition, which in the medium-term could generate conflict. Important stakeholders, such as CSOs and the media, have not always been sufficiently consulted and engaged in policy decisions in the three sectors. The NREG program has offered a significant opportunity for, and has engendered, an elaborate stakeholder engagement process among GoG, DPs, CSOs, and primary stakeholders at all levels. Risks. Five principal risks have been identified: (a) institutional risks (caused by weak institutions, limited capacity, and lack of resources); (b) increased social conflict; (c) increased poverty and vulnerability; (d) reduced investment and growth; and (e) climate change impacts. Social conflict is at the heart of the risk scenario. The underpinning causes of social conflict include: (i) discretionary power due to weak, confusing, or in some areas non-existent rights, (ii) weak policy, legislative, and regulatory frameworks; (iii) inadequate access rights, incentives and compensations, (iv) unconventional enforcement practices, (v) human rights abuses. For instance, the poor collection rates of taxes and revenues, and the rural elite capture of revenues can lead to conflicts between the private sector, communities and the state and its agencies. Unclear guidelines, for example on compensation for displacement or damage to prime community-based resources (e.g., water) have led to mistrust, which in turn leads to frustration, and occasionally proceeds to violence. The consequences of social conflicts can be devastating in terms of international reputation, reduced investments, and Ghana s progress toward the MDGs. Risk Mitigation Measures. Strategies identified for mitigating risks include: - Meaningful, timely and effective consultation with communities, - Community based monitoring systems built into the enhanced policy and regulatory frameworks for mining and forestry sectors. - Social protection arrangements to support compensation and displacement packages for poor people during transition periods to ensure they have adequate livelihoods.. - A realistic and comprehensive, macro-level alternative livelihood strategy, incorporating responsibilities and approaches across several MDAs. - A systematic review of all current skills development and social protection packages to see how these can be broadened and transferred to rural communities that are negatively impacted (in terms of livelihoods) by tighter, more rigorously enforced, regulatory environments in forestry and mining - Actively involve forest-dependent communities by clarifying and securing their tenure, property, and carbon rights and removing barriers to transparent, inclusive and accountable forest governance. - Increasing the share of benefits accruing to local communities from both the mining and forest sectors - Increased transparency and accountability concerning the sharing of revenues 47

57 B. ENVIRONMENTAL ASPECTS 93. Environmental Impacts. An overarching objective of the NREG program is to achieve positive environmental impacts. However, there is a possibility that some outcomes could lead to unintended negative effects if insufficient due diligence to environmental impact is pursued during implementation. For example: (a) new investment in the forest and wildlife and mining sectors; or (b) diversification of the mineral production base leading to increased mineral exploitation. However, NREG reduces risks by heightening attention to environmental impacts. Also review of environmental implications of targets and triggers that could entail risk of environmental damage is undertaken during annual progress reviews and during ongoing sector dialog. Additionally, Ghana s experience of SEA has also been reviewed to consolidate good practice and inform inter-sectoral planning and implementation. 94. Strategic Environmental Assessments (SEA). Ghana s experience of SEA practice and institutionalization of this approach is under independent review and will inform the consolidation of country systems to address such concerns. The evolution of the NREG sector budget support has attracted considerable favorable attention from the OECD-DAC Taskforce on SEA and Environment in 2008, as well as in the World Bank-convened workshop on Country Environmental Analysis. 33 C. IMPLEMENTATION AND MONITORING AND EVALUATION 95. NREG Steering Committee. GoG has established a high-level NREG Steering Committee, which meets at the Ministerial level (MoFEP, Ministry of Lands and Natural Resources, and Ministry of Environment, Science and Technology) for the purpose of taking policy and strategic decisions needed to implement the NREG program. 96. NREG Technical Coordination Committee. This committee supported by a Technical Secretariat, and provides guidance and facilitates overall policy dialogue, coordinates crosscutting issues, and organizes annual reviews of the NREG-PAF. The Technical Coordination Committee is led by MoFEP (with MoFEP also responsible for the Technical Secretariat) and includes representatives of the relevant MDAs and the National Development Planning Commission (NDPC). 97. The ENR Sector Group. This group consists of all DPs intervening in the ENR sectors. The group is chaired by the Government. The purpose of the ENR sector group is to ensure a full donor harmonized approach to the environment and natural resources sector. 98. Annual Sector Reviews. The ENR Sector Group is used as a forum to address issues related to the NREG program, and the annual sector review of the ENR Sector Group contributes 33 The EPA hosted in May 2009 the conference of the International Association for Impact Assessment (IAIA), and featured many Ghana and NREG-related presentations and discussions, including strategic environmental assessment for oil and Social Impact Assessment. 48

58 to the NREG (and related MDBS) performance assessment process, in line with the annual budget cycle. As with the MDBS, the NREG Technical Coordination Committee and DPs have agreed to hold at least two joint meetings per year: one in the first semester to discuss the results of the annual review of the NREG PAF, and one in the second semester to update the PAF for the following years; discuss the execution of the annual work plans and budgets of the MDAs involved in the NREG program during the first half of the year; review the audit reports as regards the previous year; and discuss special policy, strategy, and reform issues. All NREG consultations and assessments will be open to all DPs who are a member of the ENR Sector Group, whether or not they provide sectoral budget support. 99. Modalities for DP Disbursement. Actual disbursements by DPs for the NREG program could be less than the amounts programmed if the joint assessment exercise reveals that prior actions and targets in the PAF have not been achieved. The overall set up of the disbursement modalities is spelled out in the Framework Memorandum (Annex 5). Detailed disbursement arrangements for each DP are reflected in individual financing agreements. All NREG disbursements are contingent upon satisfactory progress in the implementation of the GPRS II and satisfactory IMF assessment of the macroeconomic framework, as expressed in the MDBS/PRSC dialogue. DP disbursements are aligned with the budget cycle and, in line with the Framework Memorandum, commitment amounts for the coming year are estimated and conveyed to GoG ahead of budget preparation for the coming year. The main modalities of DP disbursement are as follows: EKN and DFID: both agencies disburse single annual tranches, on the basis of a satisfactory holistic assessment of the three matrices. Satisfactory progress with VPA implementation is particularly important for DFID. AFD: AFD disburses, after a holistic review of the PAF, a single annual performance tranche based on the assessment of the triggers of the forestry matrix, although the funds will not be earmarked specifically for the sub-sector related to these triggers (e.g., forestry). EC: the EC will disburse single tranches for the financial years 2009 and 2010, based on one trigger per sub-sector, selected among the triggers agreed in the PAF. IDA: the Bank will disburse a single annual tranche based on satisfactory implementation of the overall Government program in the three sectors, with a special emphasis on prior actions highlighted in the PAF National M&E Framework. The National Development Planning Commission (NDPC) has monitored the implementation of the GPRS II ( ) and has taken charge of formulation of the Medium-Term National Development Policy Framework ( ) as well as the monitoring and evaluation. The NDPC has issued guidelines for sectoral as well as district M&E systems in Ghana and is currently reviewing these guidelines through a consultative and participatory process. Accordingly, MDAs and DPs work closely with NDPC to ensure that the NREG M&E arrangements are aligned with core national indicators and the sectors reporting requirements. Under the MDBS PAF for 2009, the production of annual progress reports for six ministries has become a trigger which strengthens the national M & E system. Under the leadership of MoFEP, M&E systems for natural resources and environmental governance will be 49

59 aligned and harmonized with the national M&E framework and will build on the guidelines produced by NDPC. A consolidated approach to development of M&E within the NREG MDAs has been taken, and sectoral M&E systems for the two parent ministries under NREG are currently under development. It will include not only the three participating institutions in the NREG program but also all the other commissions and agencies under the Ministry of Lands and Natural Resources and the Ministry of Environment, Science and Technology NREG M&E Framework. The first step in the development of the sectoral M&E systems is the M&E plan which outlines the policy objectives, baselines, targets and indicators, as well as data acquisition and reporting methods, and the responsible institutions. It will outline critical assumptions and key risks, and how information will be used, e.g., for strategic decision making, better planning and budgeting, improved implementation and reporting, accountability and transparency, or combinations thereof. The M&E plan will incorporate participatory methods for data collection and analysis, systems for data processing and storage and presentation of data. It will also define institutional arrangements, job descriptions, incentives, training needs, as well as a communication strategy to ensure that information on the status and impacts of GoG s program to improve natural resource management and environmental governance reaches key stakeholders and the general public. The plan is expected to be completed in 2010 and then implemented by all participating MDAs in a coordinated manner. Additional tools, such as enhancing GoG s capacity to track the cost of environmental degradation, will also be key to tracking progress on overarching NREG program objectives. Measurement, Reporting and Verification (MRV) is a particular requirement for access to international support on climate change, including REDD Annual NREG Assessment. More specific to the year-on-year tracking of progress under the NREG program, M&E is undertaken through the annual environment and natural resources sector review, which is led by GoG, as well as via the joint GoG-DP annual assessment of prior actions and triggers in the PAF. A set of three year and five year outcomes has been developed by each sector agency to track progress on policy objectives and outcomes (Annex 2). Following DPO-3, the Bank s Implementation Completion and Results Report for the first NREG DPO series will draw on the mid-term review of GoG s five-year program, being supported by the Netherlands and DFID in mid If steady progress under the first DPO series is observed and GoG remains committed to the long-term reform agenda that NREG is addressing, it is likely that the Bank will remain a committed partner in the sector. The ICR will include an assessment of appropriate instruments for continued Bank engagement in the NREG sectors, as well as identify potential risks to achievement of intended outcomes of the government s five year program, and sustaining the policy reforms established under the series. Conclusions will help the Bank determine its best approach to continued engagement in both the NREG program as well as in the related sectors Mid Term Review EKN, AFD and the EU will continue their support for NREG through DfID will design a multi-country instrument during 2010 that will enable continued support. It has already committed 1.4 million for technical assistance on climate change and environmental governance through 2012 that will leverage other resources on climate change and REDD+. In July 2010 a joint DP Mid Term Review will assess progress in the NRE sector in meeting objectives and targets of the NREG Statement of Policies on Natural resources and the 50

60 Environment and associated annual NREG-PAFs, and will identify constraints and opportunities for improving performance. The findings of the review will be used to inform Government and DPs on the strategic direction and implementation of NREG by Government. D. FIDUCIARY ASPECTS 103. Public Financial Management: Ghana s fiduciary environment is considered adequate for development policy lending. As reported in the ERPFM 2009 and the Draft PEFA 2009 reports, Ghana is gearing itself to building a strong foundation towards achieving aggregate fiscal discipline, based on positive developments in the following areas: (a) prevalent low levels of unreported extra-budgetary expenditure; (b) good and timely public access to key fiscal information; (c) adherence to a fixed and coherent budget calendar; (d) high average debt collection ratios for tax arrears and regular and timely revenue transfers to the Consolidated Fund; (e) comprehensive recording, reconciliation and reporting of debt service and on the debt portfolio; (f) predictable budget support disbursements; (f) timely in-year budget implementation reports and annual financial reports; and (g) improved effectiveness and timely external audit scrutiny. Building on the PEFA 2006 and the ERPFM 2006 reports, the latest reports further confirm that Ghana has built a solid legal and regulatory framework and foundation for public financial management that performs at an average level and occasionally above-average standards However, the overall fiduciary control environment, according to the latest assessments, continue to suffer from failures to (a) apply the guiding principles of a well structured consolidated cash management system, in a Treasury Single Account mode, for all public expenditures supported under the budget, (b) fully implement commitment accounting and controls and hence document, report on, and minimize the potentials for, expenditure arrears arrears that add to the distortion of macro-fiscal stability, (c) provide a consolidated fiscal picture in respect of revenues and expenditures against the five separate and distinct funds of the government; and (d) adopt and implement a Government Finance Statistics (GFSM2001) chart of classification for budgeting, accounting and fiscal reporting, that is uniform across all government formations As the trend towards a more widespread use of country systems looks increasingly promising, upgrading, stabilizing, and rolling-out of a fully integrated financial management information system for government budget management is critical to sustaining success in both the maintenance of fiscal discipline and the effective and timely monitoring of overall government finances. To this end, the GoG has initiated and approved a new PFM improvement Charter called the GIFMIS Charter that outlines the framework that the government has adopted, and seeks to implement on priority basis, aimed at reversing the key inherent weaknesses in its fiduciary control environment. The Charter, which has the full government ownership and unflinching commitment at the highest level, will address the key challenges involved in the budgeting, accounting, and reporting systems, processes, and practices across government. In addition, to support improved cash management, the CAGD has implemented a form of treasury realignment that provides for integrating the treasuries as part of the administrative control of MDAs and MMDAs, while retaining the recruitment and positing powers of the accounting staff. 51

61 106. A summary assessment of the country s budget credibility and the quality of financial reporting is found, based on the outcomes of the ERPFM (2009) and Draft PEFA (2009), in Box 4. 52

62 Box 4: Ghana s Public Financial Management System: Key Findings Credibility of the Budget. Actual primary expenditure compared with budgeted expenditure shows significant deviations at both the aggregate level and at the level of individual Ministries, Departments and Agencies (MDAs). Aggregate deviation for 2008 was a high of 34.2%. Expenditure compositional variance has favorably shown a reducing trend during the last 3 years (see Table below). The largely ineffective establishment control and commitment controls, complicated further by unpredictable budget releases, undermine efforts to maintain expenditure within budget ceilings. High expenditure arrears, discovered at mid-term budget review, have contributed to further weakening the credibility of the budget. The improved realism in revenue budgeting was however reported to have cushioned the impact of reduced overall budget credibility. Comprehensiveness and Transparency of the Budget. While the budget documentation is fairly complete, comprehensible and comprehensive, and is made publicly available, the budget classification system is not yet fully GFS compliant and is incapable of directly supporting a functional outcome budgeting process. This is notwithstanding the fact that the categorization of the administrative classification elements allows some linkage to the National Development Strategic Framework. Transparency of inter-governmental fiscal relations also requires improvement. Policy-based Budget. While budgets have become more policy-based in recent years in as much as the approaches instituted remain severely constrained Ghana s performance is held back by limited ability to cost strategies, the lack of effective wage bill planning, and the absence of a transparent link between planned and executed budget activities. The underlying institutional arrangements to support a policy based budget process are absent despite the adoption of a single stage coordinated budget process for recurrent and development budgets. Despite underlying weaknesses in its implementation experience, the GoG has adopted a three-year Medium Term Expenditure Framework for its budgetary processes. Predictability and Control in Budget Execution. While Ghana s central government scores well overall with respect to some aspects of revenue administration, debt management, payroll management and procurement, but overall predictability and control in budget execution remains an area of concern. The areas of concern include the discretionary elements of the legal and regulatory framework for revenue management, the controls in the taxpayer registration system, the predictability in the availability of funds for the commitment of expenditures, the extent of consolidation of the government s bank cash balances, the effectiveness of the establishment control, and the effectiveness of the commitment control. Cash management remains a particular challenge to the PFM systems as well as the apparent lack of effective procurement planning as part of the budget process. Although the legal and regulatory framework is clear on the controls for each of the main steps of the procurement and expenditure cycle, these are not applied uniformly across all MDAs. The internal audit units are well structured although their focus continues to include pre-audit functions as well a factor that undermines their independence. Accounting, Recording and Reporting. Within 4 6 weeks after each month end, the CAGD-managed bank accounts are reconciled, following clear guidelines and procedures contained in the Accounting Manual. For the other government accounts, the retained IGF bank accounts and those related to development partner funded projects, these remain outside this arrangement. The retained IGF accounts are reconciled quarterly in some ministries but at least annually for all in the preparation of the final accounts. Suspense accounts are also reconciled and cleared, but annually, as part of the year end closing of accounts. Data integrity however remains a source of concern, especially in the absence of full consolidation of all government fund types. The monthly financial statements produced, within 4 6 weeks after month-end, do not report on expenditure at the time of commitment but the actual expenditures alone. The presentation permits only a partial (nonconsolidated) comparison of revenues and expenditures to the original budget appropriations. Timeless in preparing the Public Accounts (Consolidated Fund) is achieved as they are submitted within 3 months of end of fiscal year, and the accounts are largely consistent with the International Public Sector Accounting Standards (IPSAS) cash basis of financial reporting. Accounting, recording, and reporting are predominantly paper-based. External Scrutiny and Audit. Submission of audit reports to the legislature is now timely - within 3 months and 6 to 9 months after receipt of draft accounts for the consolidated fund and the MDAs respectively - and in the scope and nature of audits performed is satisfactory, although much of risk-based focus is required despite audits being largely compliant with international standards. Effective follow up on audit reports is only just beginning. With procedures for review of budget documentation by the legislature being firmly established and respected in terms of available review time, the scope of the scrutiny as well as the failure in respecting the rules for in-year budget adjustments hamper performance against this PFM dimension. Examination and completion of reviews of audit reports by the Public Accounts Committee remain untimely. 53

63 Table 7: National Budget Primary Expenditure Deviation and Compositional Variance ( ) Budget Year Total Expenditure Deviation Total Compositional Variance % 10.3% % 6.2% % 4.6% Source: Draft PEFA (2009) Report 107. At the sectoral level: Taking a cue from the performance of the national budget execution systems, the Credibility of the Budget at MDA levels was, overall, poor due to a variety of reasons. One, the predictability of budget releases to MDAs was undermined, historically, by the very long delays in releases of budget allocations against items 3 & 4 of the budget. Two, the weak linkage between sectoral plans and their costings impacted the timely implementation of budgets and realization of the expected objectives in a variety of cases Regarding NREG agencies, while the overall timing of flows of funds was particularly encouraging, the slower than expected implementation of strategies gave rise to excess carriedforward budget balances. This has been facilitated by the less than stronger relationship between the budget as approved in the responsible Ministry s overall budget and the budget approved by the various Boards of the NREG agencies. The fact that the NREG s IGF estimates are not properly aligned with those in the GoG s overall budget is one of the key reasons why the budgets of the NREG agencies do not fully reconcile with those approved in the GoG budget. The Table below demonstrates that the budget execution in the NREG agencies is fragmented and that the budget compilation process needs reengineering to avoid big differences between budgets (as prepared by agencies and redone by the Ministry) and outturns, during any fiscal year. Budget execution rates of the three NREG agencies are provided in table 8. Because of the low credibility of the budgets, as they are mentioned in the GoG budget, budget execution rates vary a lot. The credibility of the budgets made by the agencies themselves is much higher. EKN has provided biannual support for MDAs to help take stock and provide guidance for improving Public Finance Management within the NREG MDAs and MoFEP. Further support will focus on forward planning in the context of comprehensive strategies and multiannual plans and budgets. Table 8: NREG Agencies Budget Execution Status Forestry Commission Mineral Commission Environmental P.A Agency/Fiscal year Overall Expenditure 135% 209% 56% 68% 158% 134% Personnel Emoluments 145% 496% 117% 1501% 324% 128% Administration Costs 161% 50% 50% 22% 185% 104% Services 122% 299% 62% 44% 37% 93% Investments 131% 116% 44% 0% 0% 0% 54

64 109. Apart from the poor estimation of the expenditure budgets of agencies in the GoG budget, the low budget credibility arose out of additional factors, including (a) intermittent cash flow problems at the Treasury level; (b) lack of adequate implementation capacity at the MDAlevel; (c) failure to integrate procurement planning in the budget process; and (d) changes in priorities at the government level regarding how to allocate available resources. Strengthening budget preparation of the MDAs through the multi-annual budgetary frameworks, including all available resources, and better comprehensive reporting is needed, as well as better budget execution An agreement on the NREG program includes a commitment by GoG to provide a comprehensive overview of all expenditures of the MDAs concerned on a yearly basis within three months after the closure of the financial year. Therefore, timely, comprehensive, and reliable reporting on actual annual expenditures is a crucial element of monitoring NREG program implementation Treasury Realignment. To address issues emanating from cash management, the Controller and Accountant General Department (CAGD) has integrated treasuries into the Finance/Accounts Division of MDAs and Metropolitan Municipal and District Assemblies (MMDAs). Highlights of realignment include (a) Treasury staff to be part of MDA; (b) day-today administration of Treasury functions to be within the purview of MDA management; and (c) CAGD will continue to be responsible for the recruitment and posting of accounting staff to the MDAs and MMDAs Actions Taken by GoG. As part of the Public Sector Reform Program, GoG has aimed to strengthen central government structures and organizations by introducing programs to make them more efficient, effective, and private sector-friendly. PFM laws, namely, the Financial Administration Act of 2003, the Internal Audit Agency Act of 2003, and the Public Procurement Act of 2003, have been enacted to regulate the use of public funds. New approaches in the scope, timing, and quality of reporting on budget management have also been introduced and the Accounting Manual and Departmental Accounting Instructions updated NREG Policy Matrix and PFM. One of the objectives of the NREG program is to improve PFM as it relates to the three sectors (including accounting systems, audits, and revenue collection). Annual dialog on the budget and indicative resource allocation to strategic priorities is an accepted part of sector budget support practice. This will ultimately have the end-program outcome of greater transparency of financial flows relevant to natural resources and environment sectors, more efficient and effective use of available funds, and an increased level of budget allocation and revenue collection. Targets related to this objective can draw upon ERPFM diagnostic work, which identifies short- and medium-term priority actions, as well as technical assistance provided on a regular basis by EKN as regards strengthening financial management of the MDAs involved in NREG. The Draft PEFA also highlights weaknesses in the PFM that the GoG is committed to manage, using various intervention platforms, including GIFMIS, as a key thrust of the reform implementation. Monitoring of budget execution will be done in parallel with MDBS/PRSC supervision missions, with the MDBS/PRSC focusing on aggregate fiscal spending and the NREG program focusing on the implementation of the individual budget programs of the relevant MDAs. 55

65 114. Independent Auditing. The 2009 PEFA report concludes that the audit reports of the Auditor General, as related to the Consolidated Fund, are of reasonable quality, and that the performance in regards to the timeliness of the audits of the Consolidated Fund and MDAs has also improved markedly over the last two fiscal years 2007 and The audit reports for both of these fiscal years were submitted to the Parliament within 3 months of the receipt of the draft Accounts from the CAGD i.e., 6 months after the close of the fiscal year. In respect of MMDAs however, the average submission timeline achieved was 9 months after the end of the fiscal year. There is therefore scope for further improvement in the coverage of audit as well as the timeliness for completion of the MMDA audits Internal Auditing. Following the passage of the Internal Audit Agency Act in 2003, progress has been encouraging, with the establishment of Internal Audit Units in MDAs and MMDAs and the submission of quality reports. Under the Act, audit reports and implementation committees have been created in spending ministries and departments with responsibility of following up internal and external audit findings. The current business process for BPEMS requires the Internal Auditors to approve transactions in the system before a payment is made; this weakens their independence. There is a need therefore to shift the focus of Internal Auditing from pre-payment audit to adoption of risk-based audit concentrating on systemic issues with the objectives of ensuring (a) conformity to GoG s strategy; (b) effectiveness and efficiency of operations; (c) reliability of financial reporting; and (d) compliance with applicable laws and regulations. To meet this objective the major challenge facing the Internal Audit Agency is attraction and retention of suitably qualified auditors. The Agency has made proposals to the Head of Civil Service and MoFEP for a special scheme of service for Internal Auditors so that the required skills and competencies to perform specialized audits can be attracted Foreign exchange Control Environment. Under the Fund's safeguards assessment policy, the Bank of Ghana (BoG) has been subject to an update assessment with respect to a new PRGF arrangement approved July ; the assessment, completed on December 2, 2009, followed an initial safeguards assessment from October The update assessment found that while the safeguards framework of the BoG has been strengthened in several areas since then, new risks in governance oversight emerged with the removal of the former Board in January 2009, and a delay, due to a legal challenge, in the start of the successor Board. Pending the resumption of Board activities some interim measures have been introduced to provide an independent oversight mechanism. These include the introduction of an Advisory Panel comprised of three outside members responsible for the external and internal audit and controls systems. In March 2010, the authorities have advised staff that a new Board has been appointed. They have also either committed to or implemented all measures proposed by staff Procurement. A new Public Procurement Act came into force in 2004 providing the legal framework for a public procurement system based on transparent and fair competition, and clear and comprehensive procurement procedures and regulations. A Public Procurement Board (PPB) assigned to monitor the application of the new law and to regulate public procurement became operational in October The 2009 ERPFM includes an assessment of Ghana s procurement practices. The review concluded that the legal and institutional foundations for sound public procurement are now in place in Ghana, but that continued efforts still need to be made to build 56

66 capacity and institutionalize the processes now laid down in all the ministries, departments and agencies of the Government. While part of the challenge is on the supply side creating a cadre of experienced procurement professionals the PPB assessments also point towards a demand side problem that ultimately has to be addressed, namely the low status senior management assigns to the procurement function. Although entities are more aware that there is a well defined set of rules for public procurement, watched over by the PPB and statutorily enforced, many are still not giving the procurement function the importance it deserves. This in turn is part of a larger issue discussed regarding the priority given to all aspects of PFM, and the recognition that PFM is not just about rules compliance, but a vital underpinning of public entity performance Monitoring public procurement practices. The draft 2009 ERPFM strongly supports the continued use of the PPB s procurement assessment tool, the PPME. Of particular interest is the proportion of public procurement subject to open, competitive bidding on a transaction basis, which in the 2007 report declined to only about one-quarter, down from around one-half in the 2006 report. 34 These two estimates however are not entirely comparable. The 2006 sample was skewed toward larger public sector entities, more likely to follow competitive processes, while the sample of entities reviewed in the 2007 assessment appears to be more representative, containing a large number of entities procuring smaller amounts and therefore relying disproportionally on price quotation as a procurement method. 35 This information will continue therefore to draw increasing attention. There are two main reasons why. First, the share of procurement following competitive procedures is a critical measure of the effectiveness of the system as a whole. Second, given donor interest in the greater use of country systems, it will be important to measure and track the ratio of open and competitive bidding to total procurement on a total value basis. The review recommends therefore that the proportion of public procurement that is open to competitive bidding be monitored by value. The most important improvement to procurement practice needs however to go beyond actions by the PPB and include clear incentives and sanctions by MoFEP. The first step is to have final public procurement plans for the MDAs submitted to the Public Procurement Board (PPB) soon after the approval of the appropriation law by Parliament. These procurement plans would then provide the basis for budget releases by CAGD to these MDAs Overall Fiduciary Environment: The GoG s commitment to widening and deepening the pace and scope of reforms is exemplified by a range of actions already taken as well as by the strategies mapped in the GIFMIS Charter, which are all geared to further consolidating on the 34 In either case, Ghana still ranks below the threshold for an A score under the PEFA methodology, which requires that more than 75 percent of the procurement contracts be awarded on an open competitive basis. An A, B, or C score requires that either more than 50 percent, or less than 50 percent of the procurement contracts, respectively, be awarded on an open competitive basis. This means that while in 2006 Ghana was on the borderline between a B and C score, in 2007 Ghana scored a clear C on the PEFA indicator for competition, value for money and controls in procurement (PI-19 indicator). The PEFA ranking for this same indicator for other countries in Africa is the following: Rwanda, A; Mauritius, B+; Kenya, B; Cote d Ivoire, C. Rwanda ranks particularly high under this indicator with 82 percent of contract in 2006 awarded on the basis of open competition, accounting for 73 percent of the total value of contracts above the threshold awarded during that year. 35 For instance, half of the entities in the sample in the 2007 assessment (258 out of 515 entities) were located outside the regional capitals, while none of the entities were located outside the regional capitals in the 2006 assessment. 57

67 achievements made in the area of PFM improvement across government as a whole. As a partner in the work leading to the results highlighted in the analytical work already done in Ghana (for example the ERPFM and draft PEFA of 2009), the GoG is determined to pursue reforms geared to reversing the PFM weaknesses identified in those reports, in concert with development partners. The key focus at this stage is to fast-track the design and implementation of a GIFMIS project being the thrust of the country s PFM reform platform - that will provide the necessary systems and controls supportive of entrenching stronger expenditure management principles and practices across government. Reform successes in the area of public procurement are also quite encouraging as revealed by the PPA s use of the Public Procurement Model of Excellence (PPME) as a self-assessment tool. As against a target of 80% set by PRSC7 and MDBS 8 for assessment of performance of high spending entities in public procurement in 2007, actual performance realized were 97.55%, 95.20%, and 81.63% respectively for (a) use of appropriate procurement methods, (b) publication of tender notices, and (c) publication of award of contracts In conclusion, and based also on the mitigated risks associated with the manner the Bank of Ghana manages the country s foreign exchange reserves as highlighted by the latest published IMF Safeguards Assessment, the overall fiduciary risk of the operation is rated modest. E. DISBURSEMENT AND AUDITING 121. Recipient and Financing Agreement. This proposed Credit, amounting to SDR 6.6 million (about US$10 million), would be made to the Republic of Ghana, represented by the Ministry of Finance and Economic Development, in a single tranche Funds flow arrangements: The Government of Ghana shall identify a Foreign Exchange Account with the Bank of Ghana and which forms part of the country s official foreign exchange reserves, into which the proceeds of each of the Credit will be disbursed upon meeting the agreed prior actions and upon Credit effectiveness. The Cedis equivalent of the funds in the Account will, within two working days, be transferred into the Consolidated Fund of the Government of Ghana held with the bank of Ghana which is used to finance budget expenditures Disbursements from the Consolidated Fund by the Government of Ghana shall not be tied to any specific purchases and no special procurement requirement shall be needed. The proceeds of the Credit shall, however, not be applied to finance expenditures in the negative list as defined in the Schedule of the Development Credit Agreement. If any portion of the Credit is used to finance ineligible expenditures as so defined in the Schedule of the Credit Financing Agreement, IDA shall require the Government to promptly, upon notice from IDA, refund an amount equal to the amount of the said payment to IDA. Amounts refunded to IDA upon such request shall be cancelled from the Credit Assurance Requirements: Based on the modest fiduciary risk associated with the operation, there will be no special fiduciary arrangements established for the Credit. However, within 7 working days of disbursement of the Credit by IDA, the Recipient, through the Chief Director of the Ministry of Finance and Economic Planning, shall provide written confirmation to IDA that the Cedis equivalent of the Credit has been received into the Consolidated Fund 58

68 Account of the Government of Ghana, and the amount duly accounted for in the Recipient s financial management system, together with information on the number of the bank account, the date of the receipt, and the exchange rate applied to translate the Credit currency into Cedis. The Bank will retain the option to seek an audit of the receipt and accounting of the disbursement, if considered necessary. F. RISKS AND RISK MITIGATION 125. Risks and risk mitigation measures are similar to those discussed in the program document for DPO-1 and DPO-2, and are outlined below: 126. Risks of Weak PFM. There is a need to strengthen MDAs capacity to prepare credible and comprehensive multi-year work plans that are accurately costed. Plans may not be translated to realistic and credible budget estimates, under the MTEF as the costing framework has inherent weakness due to weak capacities at MDAs. Technical assistance under the NREG program is however helping to mitigate this risk by assisting MDAs to develop capacity and standardized approaches to planning and budgeting Political. Natural resources in Ghana are highly political and contested, with a complex institutional and contextual history. The NREG program is sensitive to this reality, and continues to work to promote dialogue and positive interaction between relevant stakeholders to improve natural resources and environmental governance through enhanced transparency and accountability mechanisms. In addition, Ghana is one of eight case studies on the political economy of natural resources being carried out by the Bank to try to better understand political economy drivers behind the natural resource sector (the case study in Ghana is focusing on the mining sector, with lessons to be learned for other natural resource sectors, including oil). With the change of administration following closely contested elections in late 2008/early 2009, GoG s commitment to the NREG program has not been questioned. The new administration is committed to improving natural resources management in Ghana and views the NREG program as a key component of this agenda. The proposed ministerial level Environment and Natural Resources Advisory Council will further enable policy coherence and political ownership of this agenda Macroeconomic Risks. Compared with a year the situation prevailing in late 2008, risks of macroeconomic instability have declined sharply, as Government efforts and external support has translated into higher foreign currency reserves, lower fiscal and current account deficits, a stabilized exchange rate and a decelerating inflation rate. Risks nevertheless remain, given the political feasibility of pursuing further fiscal adjustment through structural reforms, which could possibly lead to insufficient GoG funds being made available to the NREG sectors. The combination of the continued exceptional budget support from the World Bank and the IMF program would mitigate these risks by providing support to the budget and balance of payments and sending a strong signal to markets and Development Partners of Ghana s continued commitment to bringing its fiscal stance to a sound and sustainable track Financial. Delays in the release of funds to the MDAs (either by MoFEP or by the line ministries once funds are transferred to them by MoFEP) is a potential risk that DPs closely 59

69 monitor in the context of implementing the NREG PFM action plan, which is aimed at improving MDA planning and budgeting. Conversely, implementation capacity of the NREG agencies may delay effective utilization of funds when GoG budgetary allocations are increased. While timely releases of funds may reduce the chances of this occurrence, the NREG agencies may also require technical assistance to facilitate the effective implementation of the NREG programs Environmental. An overarching objective of the NREG program is to achieve positive environmental impacts. However, there is a possibility that some outcomes could lead to unintended negative effects if insufficient due diligence to environmental impact is pursued during implementation. For example: (a) new investment in the forest and wildlife and mining sectors; or (b) diversification of the mineral production base leading to increased mineral exploitation. However, NREG reduces risks by heightening attention to environmental impacts. Also environmental implications of targets and triggers that could entail risk of environmental damage is undertaken during annual progress reviews and during ongoing sector dialog. Additionally, Ghana s experience of SEA has been reviewed to consolidate good practice and inform inter-sectoral planning and implementation Social. An overarching objective of NREG is to address social issues in forest and mining communities. Forestry, mining, and environmental resources are highly contested in Ghana. There is a risk that benefits will be captured by elites, or reforms blocked by entrenched interest groups. There is also a risk that, without adequate technical support, communities and key stakeholder groups, whose livelihoods stand to be most affected by changes, will fail to effectively use their voice to make their concerns and demands known, and fail to have any role in informing policy development. Social accountability and transparency require jointdecision making, and without this stakeholder participation will be constrained and the enabling environment for inclusive natural resources governance remains weak. The potential for social conflict may be reduced if sound and clear efforts are made to increase the share of benefits accruing to local communities. This increase in benefit shares by the communities will need to be matched by demand-side governance capacity building in communities and affected stakeholder groups. It is very important that forest-dependent communities are engaged in planning processes, clarifying and securing tenure, property, and carbon rights, and that barriers to transparent, inclusive and accountable forest governance are removed. Without sufficient efforts in these areas, there is real risk that social conflict may increase as distributional asymmetries become more evident. The proposed Social Assessment will help shed light on the role and influence of various stakeholders and will identify practical ways of building communities demand side governance capacities. NREG implementation has, both through the PSIA and other approaches, actively consulted with stakeholders in an endeavor to mitigate such risks, and ensure the program results in social benefits. The intent is to further enhance these efforts building on the recommendations of the proposed Social Assessment Misperception. While non-state actors have been - and will continue to be - engaged in NREG program, there is a possibility that some groups will feel inadequately consulted and informed and may misunderstand the intent of NREG. There is a need to expand on communications and awareness raising activities, and further develop mechanisms for involving non state actors in implementation and monitoring of NREG. The success of NREG will be 60

70 reliant on key stakeholders being continuously informed and updated on the objectives and intended positive outcomes of the program, as well as their opportunities to contribute toward its success Risk that five year outcomes may not be achieved following the end of the DPO series. The Bank will continue to support the ENR sectors. While other DPs are committed to continuing support to the Government's five year NREG program, the Bank is obliged to assess progress and achievements under the DPO series after three years in its ICR. Lessons learned through implementing the series will inform decisions about a possible follow on operation, and the choice of instruments. The CAS mid-term review includes provision for an operation that will be defined following completion of the ICR. In addition, Ghana has been selected as Forestry Investment Program (FIP) pilot country that will provide for continuity of support for improved governance and sustainable management of the forestry sector, and a TA operation that would support capacity building within EPA to manage the environmental impacts of oil and gas development is under discussion. 61

71 VII ANNEXES ANNEX 1. LETTER OF DEVELOPMENT POLICY 62

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80 ANNEX 2. EXPECTED NREG OUTCOMES AND OUTCOME INDICATORS 36 Program/Policy Objective 1. Strengthen institutions and Governance Baseline Baseline study on percentage of legal timber in the domestic market completed in September Forestry and Wildlife Outcomes 3 years (2010) 5 years (2012) Law enforcement in the Forestry Sector: -10% increase in Legal Wood supply to the domestic market FLEGT License issued Law enforcement in the Forestry Sector: - 20% increase in Legal Wood supply to the Domestic Market - 75% of all timber exports verified as legal 2. Secure Natural Ecosystems for the benefit of all segments of society 3. Sustainably Finance and promote Investment in Forestry Sector Baseline study on wildfires was completed in June 2009 and keystone species July 2010 Baseline revenue study completed in June 2009 Forest health: - Incidence of wildfires reduced by 40% - Presence of keystone species in Protected Areas increased by 3% Predictable and diversified sources of funding for Forestry Commission: - Actual Timber Revenues against potential Timber Revenues increased by 15 % due to better collection of fees and royalties Forest health: -Incidence of wildfires reduced by 70% - Presence of keystone species in Protected Areas increased by 5% Predictable and diversified sources of funding for Forestry Commission: - Actual Timber Revenues against potential Timber Revenues increased by 25 % due to better collection of fees and royalties - Eco-Tourism revenues increased by 10% - Process of payment for environmental services (PES) initiated Private Sector investment framework in Forest and Wildlife Sector: -Eco-Tourism revenues increased by 10% - Payment for environmental services (PES) revenues increased by 10% Private Sector investment framework in Forest and Wildlife Sector: -Carbon financing proposal prepared -Export of Tertiary Processing Wood increased by 5%. - Plantation Forest Area increased by 15%, through increased Private investment -Carbon financing proposal implemented - Export of Tertiary Processing Wood increased by 15% - Plantation Forest Area increased by 30%, through increased Private investment. 4. Strengthen Monitoring & Evaluation system (with use of ICT) Assessment of current M&E system to be completed before May 2010 M&E system: -Data from M&E system being generated on a monthly basis, disclosed and submitted to policy and decision-makers M & E system: -Evidence-based management decisionmaking system in place 36 Outcomes are shown for Government's NREG program, which is 5 years, while three year outcomes are associated with this three year DPO series 71

81 5. Promote equitable resource access rights and benefits for all segments of society Assessment of current percentage of local communities knowing the revenue sharing data completed September 2009 Assessment of Forest Fora completed March 2009 Data on revenue collection and distribution: - 40% of local communities actively informed on revenue collection and distribution. Active participation of communities in decision-making regarding resource management - 25 number of Forest Fora functional in forest districts Data on revenue collection and distribution: -70% of local communities actively informed on revenue collection and distribution Active participation of communities in decision-making regarding resource management - 50 number of Forest Fora functional in forest districts 72

82 2. Mining Program/Policy Objective 1. Institutional strengthening in the mining sector 2. Reduce social conflict issues in mining communities and improve support to small scale miners (SSM) 3. Improve mining sector revenue collection, management, and transparency 4. Enhance policy and regulatory framework and effective coordination among key government agencies to improve the performance of the mining sector Baseline Large scale: 48 applications received, 13 granted Small scale: 220 applications received, 95 granted (information still lacking on time to grant licenses) 32 planned visits to operating mines, 18 visits carried out 58 planned visits to exploration companies, 25 visits carried out No tool or tracking of perception of social conflicts in mining communities 2 cooperatives in existences (2006 baseline) Zero mine fiscal models in use (2006 baseline) Data on mining incomes, royalties, and local revenues and their distribution not published at the local level No tool or tracking of perception of use of mineral revenues at district and municipal level No guidelines of use of revenue at local level Baseline data under development (quarterly reports for exploration companies and monthly reports of operating mines available) MDF Bill in draft (2006 baseline) No baseline available, but draft reports on Prioritized action plans on outcome of EIA/SEA project and Outcomes 3 years (2010) 5 years (2012) Mineral licensing: Mineral licensing: - Processing time for 40% of the mineral licenses in compliance with the requirements of the minerals and Mining Act (Act 703). Monitoring of compliance: - 45% of planned compliance missions undertaken for operational mines, 30% of planned compliance missions undertaken to exploration sites Monitoring social conflicts and establishment of small scale miners cooperatives: - Survey tool to track perception of social conflicts in mining communities designed and at least one (first) survey undertaken One (1) additional SSM cooperative established in addition to the existing (2) established cooperatives in mining areas with improved performance Generation and use of mining revenues: - Fiscal model applied to three (3) mines, resulting in improved overview of revenues due to GoG and a reduction of the "revenue gap" (difference between paid amounts and amounts actually due) - Up to date data on mining incomes, royalties, and their distribution published at the district level - Survey tool to track perception of use of mineral revenues at district and municipal level designed, and at least one (first) survey undertaken Reporting by mining companies, financing of Minerals Commission and EIA compliance: - 60% of the mining companies submitted their quarterly reports on time - MDF Bill submitted to Parliament by GoG (NB. Passage of bill beyond scope of Minerals Commission) - Documented incidences of compliance with EIA 73 - Processing time for 100% of the mineral licenses in compliance with the requirements of the minerals and Mining Act (Act 703). Monitoring of compliance: - 80% of planned compliance missions undertaken for operational mines, 50% of planned compliance missions undertaken to exploration sites Occurrence of social conflicts and establishment of small scale miners cooperatives: - Reduced perception of occurrence of social conflicts in mining communities SSM established through six (6) cooperatives in mining areas with improved performance Generation and use of mining revenues: - Fiscal model applied to six (6) mines, resulting in improved overview of revenues due to GoG and a reduction of the revenue gap (difference between paid amounts and amounts actually due) - Up to date data on mining incomes, royalties, and their distribution published at the district level - Improved perception of use of mineral revenues at district and municipal level in accordance with guidelines Reporting by mining companies: % of mining companies submitted their quarterly reports on time - Appropriate allocations from MDF to Minerals Commission) - Documented incidents of compliance with EIA

83 5. Enhance international and regional cooperation Incorporation of MSSP EIA/SEA into the SEA document of Ghana are prepared System of internal controls lax and inadequate (2005 KPCS review) No Action Plan for African Union Mining Vision 2050 International and regional cooperation: - Compliance with KPCS -Action plan prepared for African Union Mining Vision 2050 International and regional cooperation: - Compliance with KPCS -Action plan under implementation for African Union Mining Vision

84 3. Environment Program/Policy Objective 1. Improve crosssectoral coordinationa and alignment 2. Strengthen national environmental institutions 3. Improve national environmental monitoring and reporting Baseline The Sustainable Development committee is ad hoc and on technical level only No clear task division between ministry and EPA (see GESS study for details) No uniform M&E system in place in relation to SDAP. Outcomes 3 year (2010) 5 year (2012) Review of national polices from a sustainable development perspective: - Formalized SEA review of all new policies in place Organization and function of national environment institutions: - New functional relationships and resource mechanisms established by EPA and Ministry of Environment, Science & Technology National environment monitoring and reporting: - Environmental M&E system in place and operational. Sustainable development priorities and goals in national policies based on consensus: - Inter-Ministerial Forum in place and functional Organisation and function of national environmental institutions: -Functions and functional relationships clearly defined and resource allocation mechanism in place National environment monitoring and reporting: - Key environment indicators integrated in macro-economic plans and national accounts 4. Strengthen decentralized environmental management 5. Promote investment in climate change adaptation and mitigation Baseline study on EPA regional and district offices capacity to undertake decentralised environmental management No investments for adaptation to climate change in the 2008 budget EPA regional and district offices strengthened to undertake SEA and EIAs Investment in climate change adaptation and mitigation integrated into national budget and planning processes: - Long-term investment plan prepared EPA regional and district offices strengthened to undertake SEA and EIAs Investment in climate change adaptation and mitigation integrated into national budget and planning processes. - Specific investments for adaptation and mitigation interventions foreseen in national budget. 6. Strengthen national environmental impact assessment system Strategic Environmental Assessment in need of update vis-a vis legislation and development of sector guidelines needed 30% of EIA applications processed within the prescribed time frame and with the requested consultation and disclosure procedures National environmental impact assessment system: - Updated legislative instrument on Strategic Environmental Assessment, including sector guidelines for oil, mining, forestry, energy, transport sectors and consultation and disclosure procedures for environmental assessment. - 60% of EIA applications processed within the prescribed time frame and with the requested consultation and disclosure procedures. National environmental assessment system (EIA and SEA) institutionalized and consolidated % of EIA applications processed within the prescribed time frame and with the requested consultation and disclosure procedures. 75

85 ANNEX 3. PROGRESS AGAINST 2009 TARGETS 1. FORESTRY SECTOR MATRIX 37 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) F1. Institutional Strengthening and Governance Baseline survey conducted on percentage of legal timber in domestic market Policy options and implementation plan for domestic wood supply approved by MLNR Pilot program of wood tracking systems commenced, to verify the origin of timber with at least three commercial companies that are involved in the harvesting, processing and export of timber, as a means of implementing the Voluntary Partnership Agreement Market surveys Ministerial directives; License registers Verification reports Achieved. Market survey completed and discussed at stakeholder workshop. Clarity on the future of the resource base needs to be determined in advance of decisions on policy options. Achieved. Strategy for implementation of Mobile Recovery Team program (which would utilize stumps and marginal timber remaining after felling on reserves), submitted to MLNR by FC. Legal issues regarding ownership of material to be solved before program can be implemented. Additional options identified in the domestic market survey are under consideration by MLNR. Achieved. A contracts have been awarded to implement the wood tracking system in four pilot areas and companies, including: Samartex (SAX) John Bittar and Co. (JCM) Bibiani Logging and Lumber ( BLLC) Kumi & Co. (KC) and field testing of equipment is on-going Improved law enforcement in the Forestry Sector: - 20% increase in Legal Wood supply to the Domestic Market; - 75% of all timber exports verified as legal 37 In the 3 sector matrices, prior actions and triggers are in bold, benchmarks are in regular and performance indicators are in italic. 76

86 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) F2. Secure Natural Ecosystems for the benefit of all segments of society F3. Sustainably Finance and Promote Investment in Forestry Sector Wildfire strategy fully implemented Develop (10) Review (5) and implement (5) Management plans for forest reserves and Protected Areas (PAs) Legislation related to financial framework approved Potentials for accessing carbon credit schemes assessed Strategy for tertiary wood processing developed and approved Wildfire Annual Reports; Field visits Budgets; Annual reports; Field visits; Management Plans Minutes of Parliamentary deliberations; Reports on revenues; Budget forestry sector; Annual reports forestry sector Achieved. Report for 2008/2009 is available. Key strategies for wildfire management include: (i) Wildfire awareness education and preparedness and (ii) Establishment of firebreaks around forest reserves in the transition zones and fuel treatment facilities Achieved. 15 management plans for forest reserves have been developed or reviewed, and the quality of management plans and implementation under scrutiny. Use of management effectiveness scorecards as part of wider management processes proposed. Not fully achieved. Two bills approved by Parliament (review of timber export levy from 3% to 2%; and revision of wildlife fees). Ministry seeking legal advice on Timber Utilization Contracts (TUCs) and Timber Rights Fees (TRFs). Achieved. Ghana s REDD Readiness Preparatory Proposal submitted to the FCPF. Expression of interest for Forest Investment Program submitted. REDD Steering Committee, chaired by Deputy Minister MLNR, established. Options for linking REDD+ to wider issues on forest governance, FLEGT/VPA and sustainable forest management being explored. Achieved. Strategy for tertiary wood processing has been approved by MLNR. Practicalities of linking with the VPA need to be further defined as the strategy has implications for the industry, given that Improved forest health: - Incidence of wildfires reduced by 70% - Presence of keystone species in Protected Areas increased by 5% Predictable and diversified sources of funding for Forestry Commission secured: - Timber Revenues increased by 20% (Base year is 2008) - Eco-Tourism revenues increased by 10% (base year is 2008) - Payment for environmental services (PES) revenues increased by 10% (base year is 2010) Increased Private Sector investment framework in Forest and Wildlife Sector: - Carbon financing implemented. - Export of Tertiary Processing Wood increased by 15%. - Plantation Forest Area increased by 30%, through increased Private investment. 77

87 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) F4. Strengthen Monitoring & Evaluation / Information Communication Technology Systems Land lease and Benefit Sharing Agreements with 10 investors signed and monitored M&E System for Forestry Commission and MLFM approved. Comprehensive Database Management System designed Archive of Benefit Sharing Agreements Joint annual review tracking system would need to be extended to tertiary products. Achieved. Land leases have been signed with 14 investors for commercial plantation development over 9,000 ha. Outstanding discussion on land rights and benefit sharing delays processing of additional investments and modified taungya schemes. Achieved. Draft M&E system of FC and MLNR developed. The draft is being pursued at the time of assessment. This draft needs to be considered in conjunction with the minerals M&E system. Achieved. ICT policy which guides the development of a database management system developed. Evidence-based management decision making system put in place: Data from M&E system being generated on a monthly basis, disclosed and submitted to policy and decision-makers F5. Promote equitable resource access rights and benefits for all segments of society Conduct a survey ( work to be contracted to an entity with the requisite technical expertise and be undertaken with NGO engagement) to assess current level of awareness at community level on resource access rights and benefits Procedures established to improve transparency of forestry revenue disbursements Survey report Disbursement reports; Independent verification by CSOs Achieved. Study has been undertaken, with incisive commentary on the degree to which communities are aware of and perceive resource rights and benefit sharing. Achieved. Procedures established, as evidenced by the dissemination of all available revenue disbursements reports to the district councils. Data on revenue collection and distribution fully and actively disclosed to local communities (transparency): Percentage of beneficiary communities actively informed on revenue collection and distribution. Active participation of communities in decision-making regarding resource management: 10 Regional and 1 National Forest Forum adequately resourced and functional District Assembly reports; Field surveys Achieved. Adequate funds released for the operation of all Forest Fora. Modalities have been developed for Forest Number of Forest Forums functional 78

88 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) Fora at the district level. Role/value of regional fora to be considered in

89 2. MINING SECTOR MATRIX Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) M1. Institutional strengthening in the mining sector Continue training for mining sector agencies based on short term HRD plan. Human Resource Development Plan implementation records. Achieved. A short term HRD plan is being implemented for the Minerals Commission, Inspectorate Division, Geological Survey Department and Ministry of Lands and Natural Resources. Focus has been on upper middle to senior management, with relevant training courses followed in Ghana and abroad. Need to maintain focus also on mid-level technical personnel and seek optimum proportion of in-country training. Processing time for mineral licenses in compliance with the requirements of the Minerals and Mining Act (Act 703) 80% of planned compliance missions undertaken to operational mines, 50% of planned compliance missions undertaken to exploration sites M2. Reduced social conflict issues in mining communities and improve support to small scale miners (SSM) Satisfactory Guidelines on social responsibility for mining activities prepared Guidelines Achieved. Social Responsibility Guidelines for Mining Companies in Mining Communities have been prepared, and reviewed as satisfactory. Stakeholder consultation workshops were undertaken from November 2009 to January A validation workshop is planned for April Reduced perception of occurrence of social conflicts in mining communities Continue to carry further exploration activities to find two (2) new areas for SSM. Report on exploration work Achieved. Exploration underway in three (3) new areas at Prestea, Kutukrom and Japa in the Western Region. An Inception Report is ready, and Monthly Progress Reports have also been prepared. SSM established in six (6) cooperatives in mining areas with improved performance (working conditions, use of techniques, legal compliance, environmental reclamation) - dependent on outcome of exploration activity M3. Improve mining sector revenue collection, Implementation of the Mining Revenue Task Force action plan commenced, to improve mining Audit Report and Fiscal Model Report Achieved. From November 2009-January 2010, a consultant: (i) worked with the Mining Revenue Task Force on application Fiscal model applied to six (6) mines, resulting in improved overview of revenues due to GoG 80

90 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) management, and transparency sector revenue collection, management and transparency, including completion of a collaborative pilot audit (by Minerals Commission, IRS, and others) of at least one mine, and application of a fiscal model to three mines. Fourth (covering 2006) & Fifth (covering 2007) EITI reports published by EITI Secretariat (MoFEP), in liaison with Minerals Commission. EITI Reports published of the fiscal model; (ii) provided training to MC, IRS, and Parliamentarians; and (iii) drafted new reporting forms for mining company fiscal information. As a result, the fiscal model has now been applied to three (3) mines (Chirano, Newmont Ahafo, and Goldfields Tarkwa). A collaborative pilot audit was also carried out by the Multi Agency Revenue Task Force on the Newmont Mines. Achieved. EITI validation report submitted to EITI Secretariat in February, 2010, and work-plan prepared for No local/decentralized EITI offices have been established. and a reduction of the "revenue gap" (difference between paid amounts and amounts actually due) Up to date data on mining incomes, royalties, and local revenues (and their distribution) published Guidelines on use of mineral royalties by District and Municipal Assemblies finalized Guidelines Achieved. Stakeholder meetings held in Tarkwa. Final Guidelines prepared and submitted end of February, Improved perception of use of mineral revenues at district and municipal level in accordance with guidelines. M4. Enhanced policy and regulatory framework and effective coordination among key government agencies to improve the performance of the mining sector Draft Mining Regulations, MDF Bill, finalized for presentation to Parliament. Mining Policy ready for presentation to Cabinet Review of final MSSP EIA reports to establish baseline on compliance Finalized Regulations Baseline report Achieved. Mining Regulations are with the Attorney General. After revisions, the regulations will be submitted to Parliament. If no comments are received within 21 days, the Regulations will come into effect (i.e. Cabinet approval is not required). Mining Policy is currently with MLNR, with adoption by Cabinet expected by end of year (no need for Parliamentary approval). Partially Achieved. Consultants have prepared draft reports on Prioritized action plans on outcome of EIA/SEA Improved compliance with regulations resulting in increased number of reports submitted by companies and accepted by Commission Secure financing for Minerals Commission (through appropriate allocations from MDF) Improved compliance of EIA procedures, demonstrated through reduced number of documented 81

91 Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) M5. Enhance international and regional cooperation Register of small scale diamond miners. 10% more than in 2008 KPCS report project and Incorporation of MSSP EIA/SEA into the SEA document of Ghana. Discussions based on these documents on-going with consultants and EPA to establish appropriate baseline. No longer appropriate. Due to a significant drop in global diamond prices and very high global gold prices, most, if not all, small scale diamond miners have moved out of the sector and into gold mining. An in-country DP report on the Kimberley Process in Ghana reported positively in November 2009, and this will be complemented by a more thorough report in Approximately 6,000 small scale miners have been registered to date, but most are no longer active. incidents of non-compliance Compliance with KPCS 82

92 3. ENVIRONMENTAL PROTECTION MATRIX Program / Policy Objectives Target 2009 Means of Verification (MOV) Progress Against Achievement of 2009 Triggers and Targets EXPECTED OUTCOMES 2012 (End of 5 years) E1. Cross-sector natural resource and environmental management and partnerships in environmental management Draft SDAP and Action plan formulated and reflected in Ghana s long-term development plan Copy of Draft SDAP Achieved. Working groups established, functional and in the process of preparing the SDAP. Draft Sector and Issues notes prepared by the working groups for mining, economic instruments, transport, chemicals, tourism, agriculture, and energy. Overall framework and outline for SDAP still to be proposed and to be finalized through dialogue on content in Progress verified by review of Sector Issue notes. Workshop to consolidate approach held in March 2010,subsequent to assessment. Institutionalized functioning of Inter-Ministerial Forum. Inter-ministerial forum established Minutes of first meeting of interministerial forum Achieved. This institutional change is an important step towards addressing environmental issues related to governance, climate change, and environmental protection. Draft TOR for the creation of the Environment and Natural Resources Advisory Council (ENRAC) has been prepared and submitted by MEST to the Vice President. Inauguration is planned to take place in April 2010, depending on calendar of Vice President. Final terms of reference and composition of Council to be prepared, and first meeting still to take place. Progress verified by review of the Memo from MEST to the Vice President, and the draft TOR. 83

93 E2. Strategic Planning for Environmental Institutions Ministry s and EPA s functions and financing mechanisms on environment reviewed; National budget Draft document on Institutional functions of Ministry and EPA Achieved. Budgets National Budget includes allocations for MEST and EPA. Review of EPA s financing framework is in progress, and the formulation of an associated action plan with revised targets is expected to provide added support in approval of EPA s financing mechanisms. Functions 2009 was an important year of reform for MEST, recreated after a 8 year hiatus. MEST now has a draft organizational chart, with key entities listed (GECCA, CSIR, EPA, Town & Country Agency, Policy & Strategy Unit, Science & Technology Unit, Research Unit, and Administrative Unit) and has engaged a consultant to finalize TOR for key positions. Recruitment process planned for when TORs are completed. Positions are expected to be filled in The Minister undertook a study tour to the Netherlands and Norway in August 2009 to learn from experiences to guide reorganization. Action plan on Ministry structure and function available. Progress verified by review of draft organizational chart and discussions with EPA. Institutional structure on environment operational, at Ministry and Agency level. 84

94 Strategic plan improved to reflect functions of EPA and the ministry. Strategic Plan Achieved. EPA has provided input to the MEST medium term sector development plan and this is drawn from the elements of former (2003) draft EPA strategic plan. Functions of MEST and EPA, as well as action plan are yet to be incorporated into a comprehensive Strategic Plan for EPA as regulator. However, the task is on a good track and it is expected that an EPA strategic plan will be available during Progress verified by review of Memo documenting EPA input provided to MEST. E3. National environmental monitoring and reporting Study on the costs of environmental degradation done. SDAP Document on Study of the costs of environmental degradation Partially achieved. Study is planned to be concluded in 2010 and Ghana Statistical Service will be associated with the work. The study was delayed due to government s procurement process, but tendering process now on track with letters of invitation sent to short-listed consultants. Progress verified by review of Invitation to tender. Environmental M&E system in place and operational SDAP indicators developed. SDAP Indicators Partially achieved. While no specific candidate indicators available, the SDAP SDAP sector working groups are expected to produce such indicators, which then will be compiled and become an integral part of the SDAP. 85

95 E4. Decentralized environmental management 30% of districts have capacity built in SEA tools and mainstreamed into District Medium Term Development Plans (DMTPs) District medium term development plans Achieved. Consultation and training at district level has been carried out by EPA and National Development Planning Commission (NDPC). SEA included district planning guidelines provided to the districts. District plans submitted to NDPC in mid- March Progress verified by review of District Planning guidelines and selection of DMTPs presented. Environmental management decentralized. EIA procedures decentralised to the ten (10) regional and three (3)district EPA offices Minutes of TRC meetings Achieved. EIA procedures have been decentralized to all of the country s 10 Regional EPA offices. 24 of the country s 170 districts have received training in SEA tools, and its expected that an additional 55 districts will mainstream environment into District Medium Term Development Plans (DMTDPs). Pilot of Online EIA registrations in four(4) Regions Number of Online EA registrations Achieved. The software has been designed and the Ministry Tender Board has issued approval for procurement of equipment. Training to be carried out in 2010, and system to be implemented in priority regions (Greater Accra, Ashanti, Western, Northern) and priority sectors (petroleum stations, clinics, hotels, LPG stations, telecom, workshops, waste management). Progress verified by review of Approval from Tender Board. E5. Climate change Adaptation climate change strategy submitted to Cabinet Cabinet memos National budget Dropped. Climate change integrated into national budget and planning processes. 86

96 E6. National environmental assessment system Satisfactory SEA on oil sector is submitted, and guidelines for environmentally responsible management of oil sector issued. SEA report SEA guidelines Annual environmental audit Achieved. Draft SEA on Oil, reviewed as satisfactory, completed in March 2010, and reviewed with stakeholders in late March Environmental Assessment guidelines and an updated oil spill contingency plan have been prepared. National environmental assessment system (EIA and SEA) institutionalized and consolidated. 50 % of EIA applications processed within the prescribed time frame including required consultation and disclosure procedures. EIA register Partially achieved. A sample of EIA processing times across major sectors of applications indicated 50% completion rate within the timeframe in mining only. Substantial delays experienced for other sectors. EPA has identified the need for systematic attention to these weaknesses and much will be addressed with the roll out of the on-line EA system in Enhanced EIA service delivery, including application of 8 sector guidelines and enhanced consultation and disclosure procedures 87

97 ANNEX 4. NREG PROGRAM MATRICES Performance Assessment Framework (PAF) NREG PAF Forestry (Bolded Targets are Prior Actions) SECTOR MATRICES INDICATING TARGETS Forestry Matrix Program / Policy Objectives F1. Institutional Strengthening and Governance Targets 2010 Review of Forest and Wildlife Policy and Forestry Development Master Plan Draft Wildlife Bill submitted to Cabinet Means of Verification (MoV) Final Draft of Policy and Final Draft of Mater Plan ready for submission to Cabinet Cabinet memo on Draft Wildlife Bill Targets 2011 Launch and implementation of policy Launch and implementation of Master Plan Implement Wildlife Bill EXPECTED OUTCOMES 2012 (End of 5 years) Improved law enforcement in the Forestry Sector: - 20% increase in Legal Wood supply to the Domestic Market; - 75% of all timber exports verified as legal Submit study report on the domestic wood market to MLNR for policy directives and adoption Letter of submission of report MNLR Policy Directive 5% increase of legal timber on domestic market Establish baseline on percentage of legal timber on the domestic market Pilot of Wood Tracking System completed with four companies Baseline Report Report on Review of Pilot Exercise FLEGT Licenses issued 40% of all timber exports verified as legal F2. Secure Natural Ecosystems for the Extend implementation of Wildfire Strategy beyond transitional zone to Baseline Survey report Implement Strategy Improved forest health: - Incidence of wildfires reduced 88

98 Program / Policy Objectives benefit of all segments of society Targets 2010 three (3) northern regions Development of 12 new Management Plans (MPs) for forest reserves, PAs and Parks; review 5 old Management Plans and implement 25 approved MPs for forest reserves, and 30 GSBAs Means of Verification (MoV) Action Plan for Wildfire Strategy for the north Field visits FC Annual Reports Field Visits Management Plans Targets 2011 Continue the development, review and implement Management Plans for forest reserves EXPECTED OUTCOMES 2012 (End of 5 years) by 70% - Presence of keystone species in Protected Areas increased by 5% Implement MPs for 5 CREMAs in the north METT Scorecards F3. Sustainably Finance and Promote Investment in Forestry Sector Develop and initiate implementation of 2 regional level REDD+ pilot project proposals Implement FC Financial Framework Seek approval of REDD Readiness Preparation Proposal and implement Implement two priority areas for tertiary wood processing for small, medium and large scale industries Establish baseline on percentage level of export of tertiary processed wood products Land lease and Benefit Sharing Agreements signed and monitored with an additional 10 investors and 10,000 ha. of plantations established and maintained REDD+ Pilot project proposal REDD+ Pilot implementation plan New Park Fees Improved revenue collection procedures Reviewed procedures for conversion of extant concessions to TUC Approved RPP Implementation progress reports Forestry sector annual reports Benefit Sharing Agreements 10,000 ha. of established plantations (success rate of 85%) Expansion of REDD+ pilot projects to 2 new regions Evaluate FC financial framework Develop National REDD Strategy for implementation Export of tertiary processed wood products increased by 10% Land lease and Benefit Sharing Agreements signed and monitored with additional 10 investors Predictable and diversified sources of funding for Forestry Commission secured: - Timber Revenues increased by 20% (Base year is 2008) - Eco-Tourism revenues increased by 10% (base year is 2008) - Payment for environmental services (PES) revenues increased by 10% (base year is 2010) Increased Private Sector investment framework in Forest and Wildlife Sector: - Carbon financing implemented. - Export of Tertiary Processing Wood increased by 15%. - Plantation Forest Area increased by 30%, through increased Private investment. 89

99 Program / Policy Objectives F4. Strengthen Monitoring & Evaluation / Information Communication Technology Systems Targets 2010 M&E System for Forestry Commission and MLNR developed Develop ICT Policy and data communication linkage for FC districts and Parks implemented Means of Verification (MoV) Targets 2011 EXPECTED OUTCOMES 2012 (End of 5 years) M&E 2010 Reports Quality of M&E data reviewed Evidence-based management decision making system put in place: ICT Annual Report Implement ICT Policy Data from M&E system being generated on a monthly basis, Physical Verification disclosed and submitted to policy and decision-makers ICT Policy F5. Promote equitable resource access rights and benefits for all segments of society Develop framework and initiate community involvement in resource access rights and benefits Framework developed Framework Implementation Report Implement framework Data on revenue collection and distribution fully and actively disclosed to local communities (transparency): Dissemination of Revenue Disbursement Reports within 30 days after payment by FC achieved Develop modalities for integration of Forest Fora into District Assembly Structures and monitor efficiency and effectiveness Dissemination Reports Guidelines and framework for integrating district for a Monitoring Reports Evaluate impact of dissemination of disbursement reports on communities Forest Fora integrated into District Assembly structures Percentage of beneficiary communities actively informed on revenue collection and distribution. Active participation of communities in decision-making regarding resource management: -Number of Forest Forums functional 90

100 Program / Policy Objectives M1. Institutional strengthening in the mining sector Targets 2010 Finalization of medium to long term Human Resource Development Plan Continued implementation of short term Human Resource Development Plan Means of Verification (MoV) Plan and report on implementation Mining Matrix Targets 2011 Continue Training and 10% increase over 2010 of Human Resource Development Plan implemented EXPECTED OUTCOMES 2012 (End of 5 years) Processing time for mineral licenses in compliance with the requirements of the Minerals and Mining Act (Act 703) M2. Reduced social conflict issues in mining communities and improve support to small scale miners (SSM) Environment desk strengthened to carry out social issues Initiate implementation of guidelines and the development of annual tracking mechanisms to include social conflicts Carry out exploration activity in two new areas Carry out SEA on prospective areas Implement programs (training, logistics, finance) to improve performance of SSM in existing cooperatives of SSM and establish two (2) new cooperatives in viable areas Recruitment of Social Expert Implementation Progress Report Annual Tracking mechanism developed Exploration Reports SEA Reports Implementation progress reports Establishment of Social Unit (if feasible) Implementation of guidelines with annual tracking mechanisms to include social conflicts Implement Programs to improve performance of SSM in existing co-operatives of SSM and establish two (2) new co-operatives in viable areas (on the basis that suitable areas are found in 2010 for the coops) - again dependent on outcome of exploration activity 80% of planned compliance missions undertaken to operational mines, 50% of planned compliance missions undertaken to exploration sites Reduced perception of occurrence of social conflicts in mining communities SSM established in six (6) co-operatives in mining areas with improved performance (working conditions, use of techniques, legal compliance, environmental reclamation) - dependent on outcome of exploration activity Carry out alternative livelihood projects in selected mining communities Report on Projects Continue to carry out alternative livelihood projects in selected mining communities M3. Improve mining sector revenue collection, management, and transparency Mining Revenue Task Force action plan under implementation, including collaborative audit (by Minerals Commission, IRS, and others) of one more mine. Fiscal model applied to one (1) additional mine. Audit Report and Fiscal Model Report Mining Revenue Task Force action plan under implementation, including collaborative audit (by Minerals Commission, IRS, and others) of one more mine. Fiscal model applied to two (2) additional mines. Fiscal model applied to six (6) mines, resulting in improved overview of revenues due to GoG and a reduction of the "revenue gap" (difference between paid amounts and amounts actually due) 91

101 Program / Policy Objectives M4. Enhanced policy and regulatory framework and effective coordination among key government agencies to improve the performance of the mining sector Targets 2010 Sixth EITI report (covering 2008, and also including information on royalty payments at local level) published by EITI Secretariat (MoFEP) in liaison with Minerals Commission Publish information on royalty payments at local level and monitor the use of minerals royalties by District and Municipal Assemblies Draft Mining Regulations, MDF Bill, finalized and enacted. Mining Policy ready and submitted to Cabinet Development of improved EIA procedures based on outcome of MSSP EIA/SEA study (subject to further discussion with EPA regarding outcome of the MSSP EIA/SEA) Means of Verification (MoV) EITI report published Published information and report Parliamentary Hansard. A memo to Cabinet Baseline report on New EIA procedures to be confirmed Targets 2011 Seventh EITI report (covering 2009, and also including information on royalty payments at local level) published by EITI Secretariat (MoFEP) in liaison with Minerals Commission) published by EITI Secretariat (MoFEP) in liaison with Minerals Commission. Implementation, monitoring and evaluation of use of mineral royalties by District and Municipal Assemblies (using annual tracking mechanisms, linked to annual tracking mechanism under M2) Implementation and monitoring of Mining Policy, Mining Regulations and MDF Bill Monitor compliance with new EIA procedures - Minerals Commission in conjunction with EPA EXPECTED OUTCOMES 2012 (End of 5 years) Up to date data on mining incomes, royalties, and local revenues (and their distribution) published Improved perception of use of mineral revenues at district and municipal level in accordance with guidelines. Improved compliance with regulations resulting in increased number of reports submitted by companies and accepted by Commission Secure financing for Minerals Commission (through appropriate allocations from MDF) Improved compliance of EIA procedures, demonstrated through reduced number of documented incidents of non-compliance M5. Enhance international and regional cooperation Prepare Action Plan for African Union Commission s African Mining Vision 2050 Action Plan Implement key elements of Action Plan Compliance with KPCS 92

102 Environment Matrix Program / Policy Objectives E1. Cross-sector natural resource and environmental management and partnerships in environmental management Targets 2010 SDAP finalized and submitted to Cabinet Inter-ministerial forum (ENRAC) meetings held on SDAP, climate change and environmental management of the oil industry. Means of Verification (MoV) Memo to Cabinet with final SDAP attached Minutes of ENRAC meetings Targets 2011 Implementation and reporting on SDAP to Inter-Ministerial Forum. EXPECTED OUTCOMES 2012 (End of 5 years) Institutionalized functioning of Inter- Ministerial Forum. E2. Strategic Planning for Environmental Institutions E3. National environmental monitoring and reporting Institutional functions (policy, regulator, implementer, M&E) of MEST approved by Head of Civil Service (Management Services Division) EPA Strategic Plan endorsed by the EPA Board and Minister. Cost of environmental degradation calculated for the forestry sector Agreement on the SDAP/environmental indicators and monitoring system Memo from Head of Civil Service confirming final organizational responsibilities within MEST Memo explaining that findings of cost of environmental degradation of forestry sector is incorporated in to forestry implementation and compliance monitoring plans Environment function in Ministry institutionalized and implemented, as reflected in 2011Budget. And strategic plan Sustainable financing mechanism for EPA in place. Database on environment indicators created and a monitoring system established. Institutional structure on environment operational, at Ministry and Agency level. Environmental M&E system in place and operational E4. Decentralized environmental management Additional 20% of districts (above base year) have capacity built in SEA tools and mainstreamed into DMTPs Pilot of Online EA registrations in four (4) additional regions and one (1) district office Report from districts and regional EPA offices Number of Online EA registrations Additional 20% of districts (above base year) capacity built in SEA tools and mainstreamed into DMTPs Online EA registrations in all regional and district offices Environmental management decentralized. 93

103 E5. Climate change Consolidated National Framework for Climate Change submitted to Cabinet Memo of submission of National Framework for Climate Change by MEST to Cabinet Ghana s Long-Term Development Plan includes mainstreaming of climate change issues as per National Framework for climate change Climate change integrated into national budget and planning processes. E6. National environmental assessment system Findings of Oil SEA mainstreamed into sector implementation (including resource requirements) for environmentally responsible management in the oil sector Institutional Framework Sector SEAs (sanitation, transport, tourism, oil, mining, agriculture) are made operational through the corresponding ministries annual work plans and budgets National environmental assessment system (EIA and SEA) institutionalized and consolidated. 60% of EIA applications processed within the prescribed time frame including required consultation and disclosure procedures. EIA register 75% of EIA applications processed within the prescribed time frame including required consultation and disclosure procedures. Enhanced EIA service delivery, including application of 8 sector guidelines and enhanced consultation and disclosure procedures; 94

104 ANNEX 5: FRAMEWORK MEMORANDUM OF UNDERSTANDING 95

105 1. Preamble 1.1. This Framework Memorandum (FM) contains the understandings of the Government of Ghana (GoG) and the Development Partners which have signed this FM (hereafter called the signatory DPs), as regards providing sector budget support (SBS) for the design, implementation, monitoring and evaluation of the Natural Resources and Environmental Governance (NREG) program in Ghana. This FM has been endorsed and approved by the GoG and the signatory DPs and came into force on the date of signature. DPs not yet signatory of this FM, can join this FM by agreement of all signatories and an official exchange of letters between the new signatory and the existing signatories This FM will operate subject to the provisions of the bilateral financing agreements/arrangements between the GoG and the individual DPs, which form the legal basis for the provision of budget support by each of these DPs. This FM is not a binding legal agreement and, in the event of any conflict between the provisions of this FM and the bilateral agreements/arrangements, the provisions of the bilateral agreements/arrangements will prevail. Ultimate approval of the provision of budget support, and the circumstances/conditions under which it is provided, rests with the individual DP. However, DPs will, with due regard to the separate accountability of each DP, endeavour to sign bilateral agreements and maintain financing arrangements that are compatible with the spirit and provisions of this FM. In case of deviations, the signatory DP concerned will inform the GoG and the other signatory DPs of such deviations in writing Signing this FM is a commitment to participate actively in the activities foreseen in this FM, to respect the spirit and provisions of this FM and to provide financial resources for the NREG Program as agreed in the bilateral agreements Initially the NREG Program covers the forestry, mining and environmental protection sectors. The scope of the NREG Program could be expanded at a later date, after mutual agreement between the signatories, with other sectors and sub sectors dealing with natural resources and environmental governance issues When implementing this FM, the signatories endeavour to apply international guidelines as regards budget support, notably to focus the objectives and targets on results. 2. Principles and objectives 2.1. The overall objective of SBS for the NREG Program is providing support to the GoG for achieving the GoG s goals as regards the sectors and sub sectors covered by the NREG Program. The SBS will therefore be based on and embedded in well defined and resultoriented policies and strategies for the (sub) sectors concerned, translated into medium term action plans, medium term expenditure frameworks and annual work plans and budgets. It is acknowledged that not all these prerequisites are in place at the start of the 96

106 NREG Program, but will have to be further developed and strengthened during the first years of implementation of the NREG Program The SBS-NREG consists of (i) transfers of financial resources to the Consolidated Fund of the Treasury of the GoG and (ii) a joint policy dialogue conducted by the GoG and the signatory DPs as regards a number of policy and strategy issues and the targets to be achieved in the (sub) sectors covered by the NREG Program. A progress assessment framework (PAF) will be used for measuring progress towards achieving the sector development goals and the annual targets SBS for the NREG Program is based on the concept of a Sector Wide Approach (SWAp), which implies comprehensive planning, programming, budgeting, reporting, monitoring and evaluation as regards the (sub) sectors involved in the NREG Program, encompassing all sources of funding (treasury funding, Internally Generated Funds, project and program aid, etc.). This comprehensive planning, programming, budgeting and reporting is the responsibility of the MDAs involved in the NREG Program, and will be one of the subjects of the policy dialogue between the GoG and the signatory DPs The SBS funds to be transferred to the Consolidated Fund of the national Treasury will be taken fully into account by the GoG in the planning, budget and accounting process. They will become part of the national resources of the Treasury and will be managed and spent according to national procedures as regards public finance management. The transfer of funds from signatory DPs is subject to certain disbursement conditions as regards policy measures to be taken and/or performance targets to meet, as mentioned in the PAF (see chapters 3 and 5) In principle the use of the SBS funds will be un-earmarked, which means that SBS funds are not meant to be used specifically for certain budget chapters, budget lines or expenditure items. Instead the GoG will ensure adequate levels of funding made timely available to the (sub) sectors covered by the NREG Program in order that the agreed NREG objectives and targets will be achieved. Funding levels required for the (sub) sectors of NREG will be one of the subjects of the policy dialogue. In specific circumstances a DP could decide to earmark its SBS in accordance with its own policy and procedures The signatory DPs confirm that they will, as far as possible, harmonise and align their policies and procedures as regards providing support to the NREG Program, while at the same time strengthening the ownership of the GoG as regards the design and implementation of the NREG Program. Harmonisation and alignment require: - a joint Progress Assessment Framework (PAF) with clearly defined objectives and targets; - a joint policy dialogue between the GoG and the DPs, and; - a joint regular review mechanism of the PAF - a joint review of the financial audits (see chapter 6) The signatory DPs confirm also that they aim for improving the predictability of donor flows to the Treasury of the GoG through the arrangements agreed in this FM This FM for the SBS-NREG is compatible with the FM for the Multi Donor Budget Support (MDBS) in terms of (i) approaches and procedures, and (ii) division of tasks. In 97

107 principle the PAF of the MDBS deals with macro and cross sector issues. Those issues will thus not be included in the PAF of the NREG Program. On the other hand, sector related issues covered by the PAF of the NREG Program will not be included in the PAF of the MDBS. Exceptions could be made for some key reform issues, particularly those exceeding the strict boundaries and competences of the NREG (sub) sectors Reliable, transparent and effective Public Finance Management (PFM) is a requirement for each budget support program. The MDBS policy dialogue reviews regularly the progress with the implementation of the overall action plan for strengthening PFM in Ghana. The NREG policy dialogue will address some PFM issues at the level of the MDAs involved in the NREG Program, including the implementation of overall PFM reforms at the level of those MDAs One of the objectives of the NREG Program is to support the establishment and proper functioning of an inter-ministerial and inter-sectoral coordination mechanism for environmental and natural resource governance. The implementation of the NREG Program will become part of such a coordination mechanism once it has been established. 3. The Progress Assessment Framework and the review process 3.1. The Progress Assessment Framework (PAF) of the NREG Program contains the program and policy objectives and the annual targets as agreed by the GoG and the signatory DPs. The PAF will be used to assess progress with implementation of the NREG Program. The PAF is a forward rolling three-year planning instrument, containing fixed objectives and targets for the first year, projected objectives and targets for the second year and indicative objectives and targets for the third year The GoG and the DPs agree that the PAF will be limited in size and will be focused on the most crucial objectives and targets of the (sub) sectors concerned. The policy documents, medium term action plans, MTEFs and annual work plans of the MDAs involved will be broader in scope and more detailed. The PAF is not meant to replace those policy and planning documents of the MDAs concerned. The PAF will be resultoriented and comprise a balanced mix of policy actions/input indicators and result/outcome indicators The signatories of this FM will carry out a joint annual review of the progress achieved as regards the objectives and targets of the PAF. The purpose of that annual review is to assess progress as regards the implementation of the NREG Program, to formulate recommendations for strengthening the implementation of the NREG Program, to inform the decision making process as regards the disbursements of SBS (see chapter 5), and to prepare updating the objectives and targets of the PAF for the following years (see also article 4.3) The annual review will be based on annual reports to be produced by the MDAs involved in the NREG Program. The review will be coordinated by the Chairpersons of the NREG Coordination Committee and the DP-NREG group (see chapter 4) and will be carried out by representatives of the participating MDAs, the NDPC and the signatory DPs. The 98

108 NREG Coordination Committee and the signatory DPs may wish, at certain occasions, to organise an external review of the NREG Program carried out by independent experts every three years. The results of such an external review will feed into the annual review process The annual review as regards the results of a particular year will be carried out before the end of April of the subsequent year, and preferably before the annual review of the MDBS Ideally the targets of the PAF for a particular year should be fixed before the end of September of the previous year in order to be in line with the budget preparation cycle. However, for the first year (2008) of this NREG Program a special arrangement is necessary to phase-in that sequencing. The first NREG-PAF, to be finalised before the end of January 2008, refers to the years and includes fixed targets for 2007 and 2008 and indicative targets for Attainment of the targets of 2007 will be evaluated before the end of January All future NREG-PAFs will follow the MDSB/PRSC timeline for preparation and assessment Notwithstanding differences in disbursement procedures (see chapter 5), the signatory DPs try to reach joint conclusions as regards the holistic assessment of the progress achieved in the (su)sectors on the basis of the PAF targets, as well as regards each target of the PAF individually. 4. Coordination, dialogue and reporting 4.1 The GoG will set up (i) a High Level NREG Steering Committee for the purpose of taking policy and strategic decisions as regards the NREG Program and (ii) a Technical Coordination Committee supported by a Technical Secretariat for the purpose of organising and coordinating the policy dialogue and the annual reviews of the NREG- PAF and for coordinating cross sector and common issues of the MDAs involved in the NREG Program. The High Level NREG Steering Committee will be composed of the Ministers responsible for Finance, Forestry, Mining and Environmental Protection. The Technical Coordinating Committee will be co-chaired by the Chief Directors of the three Ministries involved in the NREG Program. All MDAs involved in the NREG Program, including the Ministry of Finance and Economic Planning (MoFEP), will have a high level representative in the Technical Coordination Committee (chief executive level). The MoFEP will be in charge of the Technical Secretariat. The terms of reference of the Technical Coordination Committee are attached to this FM. 4.2 The DP signatories of this FM will nominate a focal point (one of the DPs having signed this FM), which will be in charge of maintaining contact with the chair of the High level NREG Steering Committee and the chair of the NREG Technical Coordination Committee about all implementation issues concerning the NREG Program. 4.3 The NREG Technical Coordination Committee and the DPs will have at least two joint meetings per year: one in the first semester to discuss the results of the annual review of the NREG-PAF and to update the PAF for the following years, and one in the second semester in order (i) to discuss the execution of the annual work plans and budgets of the MDAs involved in the NREG Program during the first half of the year, (ii) to review the 99

109 audit reports as regards the previous year (see chapter 6), (iii) to discuss special policy, strategy and reform issues, and (iv) to discuss the budget of the following year. These joint meetings will be co-chaired by the chairperson of the NREG Technical Coordination Committee and the focal point of the signatory DPs. The sector dialogue will take place in the context of the Environment and Natural Resources Sector Group (see also paragraph 4.6). 4.4 The annual review of the NREG-PAF will be coordinated by the Chairperson of the NREG Coordinating Committee and the focal point of the signatory DPs. Representatives from Parliament and non-state actors may be invited to participate in the review as observers. Results of the joint assessment of the NREG-PAF will be disseminated to a broader group of stakeholders. 4.5 The annual review of the NREG-PAF will be informed by the budgets, medium term action plans, annual workplans and Annual Progress Reports (APR) of the MDAs involved in the NREG Program and the means of verification (of the targets and triggers) as defined in the PAF. In order to ensure a fully informed dialogue, the GoG will submit that documentation to the signatory DPs at least 3 weeks prior to the annual review. 4.6 Besides coordinating the NREG Program itself, the NREG Technical Coordination Committee will also take care of coordinating the NREG Program with other programs and projects being implemented within the NREG sectors. However, broader issues of environmental governance and coordination with other projects and programs in the environment and natural resources sectors (outside the NREG sectors) will be dealt with by the existing Environment and Natural Resources Sector Group and the future intersectoral coordination mechanism for environmental and natural resources governance (see also article 2.10). 4.7 It is acknowledged that the MDBS policy dialogue and coordination structure will be the pivotal point in a network of sector dialogues, guided by the GoG, where cross cutting issues, major policy reform issues and issues with significant budgetary implications can be raised. The MDBS policy dialogue will add value to and will be informed by policy dialogues at sector level. However, the MDBS policy dialogue will not repeat discussions that have been handled adequately at sector level nor will the NREG policy dialogue repeat discussions about macro and cross-sector issues already dealt with by the MDBS policy dialogue. 5. Disbursement mechanisms 5.1. The annual SBS of each DP consists of either one disbursement or two disbursements (a base tranche and a performance tranche). The decision as regards the disbursement conditions is left to the discretion of each individual DP and will be stipulated in the respective bilateral agreements as regards providing SBS for the NREG Program. However, the signatory DPs aim for harmonising their disbursement conditions as far as possible within the framework of guidelines presented in the following paragraphs Both general and sector budget support is only be provided to countries with adequate macro-economic and fiscal policies and an adequate public finance management (PFM) 100

110 system or a program aimed at strengthening the PFM system. These preconditions will therefore be part of the disbursement conditions of SBS for the NREG Program, but assessing whether these conditions have been met will be done in the context of the annual MDBS reviews In case of a single annual SBS-NREG disbursement the decision to disburse will be subject to the preconditions mentioned in paragraph 5.2 and a satisfactory assessment of attainment of the NREG-PAF targets. As regards those targets some signatory DPs will focus on a holistic assessment, others will focus on specific targets (then called triggers), or on both a holistic assessment and specific targets (triggers) In case of two disbursements per year, the base tranche will be subject to the preconditions mentioned in paragraph 5.2 and a holistic assessment of attainment of the NREG-PAF targets, while the performance tranche will be based on certain specific targets (triggers) of the NREG-PAF The signatories of this FM agree that triggers (specific disbursement conditions) will be limited in number and will be chosen out of the list of targets mentioned in the PAF In order to improve the predictability of aid flows and to facilitate GoG s budget preparation process, the disbursement of the tranches in year N will depend on assessments made in year N-1 as regards the achievement of the targets of year N-2. The signatory DPs will inform the GoG as soon as possible after the annual review and at the latest before the end of August in year N-1 about the disbursements of the volume and timing of the tranches in year N. Disbursements should preferably take place during the first four months of year N. However special arrangements are needed for the first year (2008) of the NREG in order to phase-in this system (see next article) At the start of the program the disbursements of 2008 will be based on the NREG-PAF review carried out in January 2008 (which has evaluated the targets of 2007). The following reviews and related disbursements will follow the time schedule of the MDBS. As stipulated in article 5.6 the GoG will be informed about the disbursements to be effectuated in 2009 before the end of august Disbursements will be deposited in a foreign exchange account with Accounts Name: Nat. Res. And Environmental Gov. Budget Support, Accounts No , in the name of the GoG held at the Bank of Ghana (BoG). The BoG will immediately inform in writing the signatory DP concerned and the Ministry of Finance and Economic Planning (MoFEP) as regards the receipt of the foreign exchange funds. Within 48 hours after receipt of the SBS disbursement the BoG will credit the Cedi equivalent to the Central Treasury Account (using the Central Bank buying exchange rate on the date of purchase). The MoFEP will immediately inform in writing the signatory DP and the Chairs of the NREG Coordinating Committee as regards the receipt of the Cedi equivalent. These acknowledgements should be accompanied by documentary evidence of the amount and date of, respectively, the foreign exchange payment received and the amount and date of the deposit of the GH Cedi equivalent in the Central Treasury Account. 101

111 6. Audit 6.1. The annual accounts of the MDAs involved in the NREG Program will be audited according to the official regulations of the Government of Ghana as regards auditing MDAs The audits of the Agencies involved in the NREG Program will cover all their sources of income and all their expenditures, including treasury funding, Internally Generated Funds and donor funded projects of which financial management is under the control of the Agencies concerned The audit reports mentioned in articles 6.1 and 6.2 will be presented to the signatory DPs within 9 month after the closure of the year and will be reviewed by the NREG Coordinating Committee and the DP-NREG group during their second semester meeting. As far as the audit reports of the ministries are concerned, special attention will be paid to the Departments involved in the NREG Program and the flow of funds towards the Agencies involved in the NREG Program. 7. Responsibilities of the Government of Ghana 7.1. The GoG will maintain an appropriate macro-economic and fiscal framework and will endeavour to further improve the quality of Public Finance Management The GoG will provide sufficient financial resources to the MDAs involved in the NREG Program in order to allow them to implement the agreed NREG Program and to achieve its policy objectives and notably the targets mentioned in the PAF The GoG will further develop (i) the formulation of coherent and result-oriented policies for the (sub) sectors involved in the NREG Program and for environmental governance in general and (ii) the translation of those policies in medium term action plans, result matrices and annual work plans. This will be done during the first years of implementation of the NREG Program The GoG will set up a multi-sectoral coordination mechanism for environmental governance The GoG will develop an effective monitoring, evaluation and reporting systems for assessing progress as regards implementation of the NREG Program in general and the medium term action plans and annual work plans of the MDAs involved in the NREG Program in particular The GoG will assure the set up and effective monitoring of the NREG Steering Committee and the NREG Technical Coordination Committee The GoG will ensure that all the NREG MDAs receive the required support from other relevant governmental bodies in the fulfillment of their objectives and achievement of the PAF targets The GoG will ensure transparency, accountability and probity in the use of public resources. 102

112 7.9. The MDAs involved in the NREG Program will perform all procurement in accordance with the official rules guidelines and procedures as regards public procurement The MDAs involved in the NREG Program will be fully accountable and responsible for the implementation of the NREG Program and for the management of all financial contributions provided for funding the program. The GoG will keep financial records of all financial resources provided in accordance with the accounting standards of the PFM system in Ghana. The DP signatories will not bear any responsibility and/or liability to any third party with regard to the implementation of the NREG Program 8. Anti-corruption clauses 8.1. All parties involved in the NREG Program will ensure that their staff and consultants refrain from offering, seeking, accepting or being promised from or by third parties, for themselves or for any other party, any gift, remuneration, compensation or benefit of any kind whatsoever, which could be interpreted as an illegal or corrupt practice Each partie involved in the NREG program will promptly inform the other parties of any instances of corruption as referred to in the previous paragraph. In case of signs of corruption a formal investigation will be carried out and the outcomes shared with the parties concerned. 9. Responsibilities of the Development Partners 9.1. The signatory DPs will work in partnership with the GoG and will provide support for the implementation of the NREG Program as laid down in this FM and the bilateral agreements as regards the NREG Program The signatory DPs will, as far as possible, base their bilateral agreements as regards SBS for the NREG Program, on the principles and procedures enshrined in this FM The signatory DPs will harmonise their policies and procedures as regards providing support to the NREG Program and will align their policies and procedures with those of the GoG as far as possible. This will imply a joint policy dialogue, a joint Progress Assessment Framework (PAF), a joint annual review mechanism and, as far as possible, joint conclusions as regards the evaluation of PAF targets The signatory DPs will promote, facilitate and respect the GoGs responsibility as regards the design and implementation of the NREG Program as well as the GoGs accountability to domestic stakeholders The signatory DPs will inform the GoG before the end of August in a given year as to the level of their planned budget support for the following year, accompanied by indicative figures for the following years The signatory DPs will endeavour to disburse the annual tranches of the approved sector budget support before the end of April of a given year. 10. Consultation, modification and termination 103

113 10.1. Any difference or controversy that arises in relation to the SBS for the NREG Program should be settled by means of dialogue and consultation between the signatory DPs and the GoG Modifications to this FM can be made by way of an exchange of letters in terms accepted by all signatories of this FM The GoG and each DP will promptly inform and consult the other signatories whenever a DP proposes to suspend or terminate, in whole or in part, support to the NREG and/or its membership of this FM Membership of this FM could be terminated by informing the other signatories in writing This FM can be denounced in its entirety by the GoG or by a joint decision of the signatory DPs. 104

114 ANNEX 6. FUND RELATIONS NOTE Ghana Assessment Letter for the World Bank and Other Development Partners March 31, 2010 Introduction This note provides the IMF staff assessment of recent economic developments and prospects in Ghana. It reflects discussions with the authorities during staff missions to Accra in October 2009 and March 2010 relating to the 2010 budget and other macroeconomic policies covered by the first and second reviews under the IMF s Extended Credit Facility (ECF) arrangement. It is intended that these discussions, if concluded in the coming weeks, will permit an IMF Executive Board meeting to conclude the ECF reviews and consider the next tranche of IMF financing around late May Recent Macroeconomic Developments and Program Performance Growth in Ghana slowed from 7.3 percent in 2008 to about 3-4 percent in 2009 as lower private remittances and reduced access to trade credits were accompanied by tighter fiscal and monetary policies. The impact of the global recession was ameliorated by the strength in the prices of the country s two main exports cocoa and gold. The latest data suggest that the economy started to regain strength towards the end of On the fiscal front, the budget deficit was reduced from 14.5 percent of GDP in 2008 to 9.7 percent of GDP in 2009, close to the program target of 9.4 percent of GDP. This deficit figure excludes, however, new domestic arrears incurred in 2009, totaling more than 4 percent of GDP. These arrears were accumulated when cash flows were squeezed by a shortfall in indirect tax collections on account of the weaker economy, and as overruns were experienced in the public wage bill, investment spending, and borrowing costs. Monetary conditions were progressively tightened through 2008 and early 2009 under the central bank s inflation targeting regime. By the second half of 2009, the growth rates of liquidity and credit aggregates had slowed markedly. Private credit saw no growth, in real terms, during 2009, after rising about one quarter in This compression would have been sharper still, in the absence of the fiscal consolidation in 2009, which helped reduce the crowding out associated with bank financing for the government deficit. With tighter fiscal and monetary policies, the balance of payments improved markedly through 2009, contributing to a stronger currency from July 2009 onwards. Reflecting these developments, twelve-month inflation fell to 14.2 percent in February 2010, from close to 20 percent during the first half of With evidence of declining inflation, monetary conditions were eased from end-2009, with the policy interest rate reduced in both November 2009 and February 2010, by a cumulative 250 basis points. The quantitative targets under the ECF arrangement were met in the second half of 2009, except for the September 2009 ceiling on the fiscal deficit, which was narrowly missed, and 105

115 the continuous limit on external nonconcessional borrowing which was breached in November when a state enterprise liability was taken over by the budget. The deficit targets would have been missed by much larger margins, however, if large domestic arrears had not been accumulated. The net international reserve target was met by a large margin. Good progress was achieved in implementing most of the program s structural measures, with some met ahead of time. Key achievements have been the establishment at end-2009 of an integrated Ghana Revenue Authority and the launch of an important program of public finance management reforms. At the same time, progress has been slow in computerizing public agency payrolls and a review of tax exemptions has fallen behind schedule. The 2010 Economic Program The government s 2010 economic program seeks a further reduction in the fiscal deficit to reduce pressures on inflation and reverse the deterioration in public debt indicators. The program is underpinned by measures to strengthen the management of public finances. The program assumes a pick-up in economic growth to the 4-5 percent range in 2010, with new private sector spending linked to the emerging oil sector more than offsetting the impact of continued fiscal tightening. Tighter fiscal policy and cautious monetary management are projected to reduce inflation to single-digit rates by end The 2010 budget The 2010 budget approved at end-2009 targeted a fiscal deficit of 7½ percent of GDP. Measures adopted in the 2010 budget to achieve this goal include a reimposition of import tariffs on cereals and edible oils that had been eliminated during the global food price boom; a reduction in import tariff exemptions; a significant rise in public fees and charges; an increase in mineral royalties from 3 percent to 5 percent (still pending); a re-introduction of ad valorem excise duties for tobacco and alcohol; and measures to strengthen revenue collections from the communications service tax. The budget also relies on sizeable dividend transfers from the Cocoa Board and Bank of Ghana. Subsidies for the electricity sector will be avoided by an adjustment of tariffs toward cost recovery levels. Recurrent spending is projected to rise in relation to GDP in 2010, partly as statutory fund and other spending recovers from a sharp compression in Investment spending is projected to decline slightly in relation to GDP. With outturn fiscal data for 2009 showing weaker tax receipts than anticipated at the time of the 2010 budget, the authorities now see the approved budget deficit target as unattainable, and have developed an updated fiscal framework targeting a deficit of 8 percent of GDP. To achieve this goal, the authorities intend to reduce spending on both investment and recurrent goods and services below appropriated levels. In addition, catch-up payments to statutory funds in respect of under-funding in 2009 are scheduled to be deferred until Notwithstanding this, the government intends to remain current on revenue transfers to statutory funds accruing in 2010, generating a marked upturn in incomes in 2010 with which to finance new infrastructure projects. Aside from the 106

116 statutory funds, a number of domestic expenditure arrears were settled in early 2010 to ease the liquidity problems of contractors and their lending banks. The financing plan for the 2010 budget relies less on bank financing than in , so a larger share of credit will be available to support private sector investment. Nonbank financing, including corporate and other private purchases of treasury bills, is projected to increase. A residual fiscal financing gap of $275 million for 2010 is projected to be met through the second tranche of the World Bank budget support loan approved in June 2009 ($150 million), plus new concessional support from the World Bank or other budget support partners. The outlook for public debt is somewhat more favorable than in earlier projections, in large part reflecting the recent strengthening of the exchange rate, which implies smaller revaluation effects for external debt. Notwithstanding this, total public debt is projected at 64 percent of GDP in 2010, up from 60 percent of GDP in 2009, and a low of 42 percent of GDP in 2006 following debt relief. A marked decline in public debt ratios is projected only for , with the projected reduction of the fiscal deficit to the 3 4 percent of GDP range. In the context of the anticipated combined first and second ECF reviews, the authorities intend to request leeway under the ECF arrangement to contract nonconcessional external debt for two new projects in a combined amount of $150 million, as well as scope to contract or guarantee up to $100 million in additional nonconcessional external debt for other high-return projects during the remainder of Preliminary updates to the joint Bank-Fund debt sustainability analysis (DSA) have been developed, using the latest debt data and updated financing projections consistent with the higher baseline for nonconcessional borrowing proposed for This DSA update suggests a substantial increase in debt vulnerability, though Ghana would remain among the group of countries classified as facing moderate risk of debt distress, in line with DSAs prepared in 2008 and In the baseline projections, external debt indicators remain below the threshold levels for debt distress. These results depend on the planned sustained reduction of the fiscal deficit to low levels; debt dynamics based instead on the continuation of fiscal deficits at the average levels of recent years would relatively quickly exceed the DSA threshold levels. Stress tests also indicate that the DSA outlook is sensitive to the economic growth and borrowing costs assumptions. The debt-to-gdp indicator is expected to be revised downwards over the course of 2010 as a result of the national accounts rebasing exercise which is projected to result in an upward revision to nominal GDP. Importantly, however, this would not affect the debt service to export and revenue ratios, which are projected to rise sharply (while still consistent with moderate risk of debt distress) over the coming decade. Structural policies The government has initiated reforms aimed at strengthening public financial management, revenue administration, and public administration. 107

117 At end-2009, the integrated Ghana Revenue Authority was established, marking a key step in the program to strengthen revenue administration. On tax policy, a comprehensive review is underway of zero-rate VAT items and of the nature and scope of tax exemptions and discretionary waivers. The government completed a review of the current financial management information system, and established a project implementation committee to manage implementation of the upgraded system. On civil service reforms, the government assigned responsibility to the Ministry for the Public Sector to complete a review of subvented agencies in order to determine the future status of these agencies. While only limited progress was made in migrating the payroll of all subvented agencies to an integrated database, the government completed an audit of all staff of the Ghana Education Service and has contained growth in the size of the civil service by limiting new hiring principally to the education and health services. To avoid risks to the budget, the administrative ceilings for petroleum product prices continue to be subject to bi-weekly review to ensure that prices reflect trends in prevailing costs. On the monetary side, the Bank of Ghana has launched a newly-designed website that highlights the goal and outcomes of the inflation-targeting regime, and provides more user-friendly access to key data and publication. Risks and Vulnerabilities Possible slippages in fiscal performance represent the key downside risk to the program. On the expenditure side, the public sector wage bill remains high in relation to both the tax base and the size of the economy. In 2009, the wage bill exceeded budgeted levels, and, unless carefully managed, the new single spine public pay structure to be phased in from late 2010 could prove more expensive than anticipated. If planned measures to reduce the wage burden on the budget do not achieve their intended results, Ghana s high public administration costs could crowd out the fiscal space created by future oil revenues. The ceiling on domestically-financed investments has been cut to a very low level in the 2010 budget, which increases the risk of over-runs. Contracting will need to be monitored very closely to avoid breaches of budget targets. As noted below, an increase in electricity tariffs to cost recovery level will be critical to avoiding further large subsidies to the electricity sector. In the event that this increase is not quickly implemented, offsetting fiscal measures would need to be adopted. On the revenue side, Fund staff has reviewed the 2010 projections closely with the authorities with the view to establishing a solid baseline. There are upside risks, if the economy recovers more strongly than projected. But there are also downside risks arising from the recently adopted and proposed taxes and fees, if these do not yield their anticipated returns. Overall, the authorities need to monitor budget developments closely and be ready to take corrective fiscal measures, should conditions warrant. The smaller-than-originallyprogrammed reduction of the fiscal deficit in 2010 as well as the issue of new public debt 108

118 equivalent to 1.7 percent of GDP in March 2010 to repay state-owned enterprise debts to the Ghana Commercial Bank and strengthen its liquidity has required increased government resort to bank financing. Slippage relative to this revised fiscal path could complicate liquidity management, with adverse implications for the effectiveness of the inflation targeting regime. Looking ahead to 2011, it will be important to contain expectations for public sector spending during the transition to oil producer status. Although oil will generate important new revenues, the available fiscal space for new projects will depend critically on the soundness of the non-oil budget. In this connection, Ghana s fiscal deficit going into the oil era remains large and, in the absence of other revenue or expenditure measures in 2011, the scope for new projects will likely be relatively modest, at least in the early years of oil production, and spending plans will need to be developed accordingly. In the broader public sector, a number of state-owned enterprises pose risks to public finances. Steps are underway, supported by the World Bank, to return the electricity sector to financial viability. An early adjustment of the electricity tariff to cost recovery levels will be critical to achieve this. At the same time, steps are needed to tackle the financial liabilities of the oil refinery, which will likely require public funding. A common origin of these financial problems has been under-pricing of energy products. Going forward, it will be important to maintain the existing market-based pricing formula for petroleum products, and implement regular reviews of the new electricity tariff structure to maintain cost recovery. In the monetary and financial sectors, it will be important to maintain sufficiently tight monetary conditions to consolidate the decline in inflation. Clear communication of the disinflation strategy will be important to rebuild credibility in the goals of the inflation target framework. In the banking sector, the rise in nonperforming loans appears manageable, as capital ratios remains strong. However, oversight arrangements should be strengthened for institutions with key risk factors, such as rapid credit growth and high funding costs. * * * * * * 109

119 Table 1. Ghana: Selected Economic and Financial Indicators, ECF ECF Proj. Proj. 7/09 1 Est. 7/09 1 Proj. (Annual percentage change; unless otherwise specified) National accounts and prices Real GDP Real GDP (nonoil) Real GDP per capita GDP deflator Consumer price index (annual average) Consumer price index (end of period) External sector Exports, f.o.b. (percentage change, in US$) Excluding oil exports Imports, f.o.b. (percentage change, in US$) Export volume (excluding oil) Import volume Terms of trade Nominal effective exchange rate (end of period) Real effective exchange rate (end of period), (depreciation Cedis (new) per U.S. dollar (end of period) Money and credit Net domestic assets Credit to the private sector Real private sector credit (% annual changes) Broad money (excluding foreign currency deposits) Velocity (GDP/average broad money) Prime rate (Bank of Ghana; percent; end of period) (Percent of GDP) Investment and saving Gross investment Private Central government Gross national saving Private Central government New fiscal measures (net S/I impact) Foreign savings (Percent of nonoil GDP) Government operations Total revenue Grants Total expenditure Arrears clearance and VAT refunds New fiscal measures Overall balance (including grants) Net domestic financing Gross government debt Domestic debt External debt (Percent of GDP; unless otherwise specified) External sector Current account balance (including official transfers) Current account balance (excluding official transfers) NPV of external debt outstanding percent of exports of goods and services Gross international reserves (millions of US$) 2,837 2,036 2,403 3,165 2,803 3,576 4,526 5,902 months of imports of goods and services Total donor support (millions of US$) 1,171 1,478 1,722 1,703 1,474 1,515 1,443 1,064 percent of GDP Memorandum items: Nominal GDP (millions of GHc) 14,046 17,618 21,577 22,007 25,146 25,934 33,952 39,027 Sources: Data provided by Ghanaian authorities; and IMF staff estimates and projections. 1 After including SDR allocation in Percent of broad money (including foreign currency deposits) at the beginning of the period. 3 Including public enterprises and errors and omissions. 4 Before new fiscal measures. 5 Includes potential new exceptional financing starting in

120 ANNEX 7. COUNTRY AT GLANCE 111

121 112

122 ANNEX 8. MAP OF GHANA 113