General News Mon, 12 Jul 2010

Civil Society Group Damns Finance Committee Report On STX


Sunday, July 11:- The Danquah Institute (DI), an Accra-based policy think tank, has criticized the Parliamentary Select Committee on Finance for recommending the controversial $1.5 billion STX supplier credit facility for the construction of 30,000 housing units to the House for parliamentary resolution.

DI described as “very disturbing” the fact that the committee saw nothing wrong with the agreement when pertinent questions its members sought answers to, such as the source of funding and cost per housing unit, could not be adequately answered by the sponsors of the deal.

The agreement which is up for debate before the whole House on the unusual date of Monday, July 12, received the all-clear by the James Klutse Avedzi-chaired committee on July 5.

The centre-right think tank accused the Finance Committee on reneging on its ultimate responsibility to satisfy itself that the details of the deal are in Ghana’s interest.

Di is worried that the issue of how this multi-billion dollar housing deal fits into Ghana's development paradigm has not been addressed. "For instance, should this not be driven by the State Housing Company in strategic partnership with others, instead? What is the entire cost of this 90,000 off-take agreement to the country; HFC's capacity to provide a multi-billion dollar mortgage fiacility for the bulk of the 200,000 units and what are the financial guarantees that STX will and can undertake the project?" are some of the questions which DI said should have been answered.

“The report is shockingly silent on whether or not the agreement constitutes value for money. Yet, the House would ordinarily expect this kind of tooth-comb scrutiny to have been done by our Committee before presenting its report to the House for a resolution. This is just not good enough,” says Dr. Mathew Prempeh, a member of the governing board of the Danquah Institute and a Member of Parliament for Manhyia.


Di expresses serious doubts over the terms and conditions of the agreement, which, although laid out in certainty, it argued, cannot be trusted in the absence of clearly identified sources of funding.

“According to the Finance Committee report, sources of funding are far from certain. So, who is providing the $1.5 billion supplier's credit facility? In spite of the agreement describing STX Ghana as lender, STX Ghana is, in fact, merely an on-lender to the borrower - the Government of Ghana. The provider of the funding should be part of the agreement with the Government of Ghana and should undertake to do so,” DI said.

The Finance Committee report showed that the Ministry of Finance could not say for certain who was providing the $1.5 billion for which Government is required to issue a sovereign guarantee.

“Woori Bank of Korea could only issue a non-committal letter of intent to enter into negotiations with STX. The Korean Government could not say how much money with which it was willing to support the agreement. In fact it has not even said for certain that it will fund this project either in part or whole. So who is funding it?”

In fact, DI said, in spite of recent claims from STX Ghana that the Korean government will fund the project, a letter from the Korean Government presented to Parliament did not help. It only sought to argue that the STX Group, backed with Ghana's sovereign guarantee, can raise the money from the capital market: "Messrs STX Business Group, which is the Korean partner of the STX Engineering & Construction Ghana Limited, is a good standing conglomerate group in Korea. Since its current financial standing is over US$25 billion turnover per annum, it is eligible to obtain any credit facility without Korean Government support in Korea and any part of the world. It is particularly so when the repayment is well guaranteed by the Government of Ghana, which is prerequisite for acquiring credit facility for the project."

DI warned, “It is difficult to accept the claim that due diligence have been conducted on this facility without any clarity on the ultimate source of funds for this project? For Parliament to approve this deal is as good as offering a blank cheque of a Sovereign Guarantee to STX with which it can go shopping for funds. And, it is very dubious to guesswork on terms and conditions before going shopping.”

According to Ouborr Kutando, a Harvard-trained DI analyst, “In the absence of clarity on itemised sources of funding, little weight can be placed on the terms of conditions provided by STX even if they do meet concessionary requirements. For a loan to be concessionary does not mean it is value for money. Contract sums can be inflated and yet terms of the contract can still be made to appear concessionary.”


South Korea's central bank Friday unexpectedly raised the key interest rate from a record low in a bid to restrain inflation. Contrary to widespread predictions, Bank of Korea governor Kim Choong-Soo and other policymakers increased the benchmark seven-day repo rate for July from 2 percent to 2.25 percent -- the first rise since August 2008.

Mr Kutando said this is likely to affect the terms of the STX agreement which, offering an interest rate of 2% per annum, was relying on Korea’s equivalent of Ghana’s prime rate remaining at 2%. With interest rates far lower in Europe (0.5% in the UK and 1% within the Eurozone), DI believed Ghana can get a competitive deal for the housing project is it were to throw its net for funds wider.

“Parliament should be assured that this unexpected raise by the Korean central bank would not affect the terms and conditions of the STX deal. As to how that assurance can be honestly given we have our doubts. But, this should persuade Government to pull the brakes on STX and shop around. Let us be transparent and get the funds ourselves and get our own SHC, GREDA and other local operators to build this better Ghana housing project,” Mr Kutando suggested.

Though, the Arrangement Fee for the STX deal remained at 0.75%, the Management Fee has been reduced from 0.75% to 0.50%. This reduces the total amount of fees specified to $20 million - a figure which DI insisted was still very high, especially considering the financial obligations of the agreement which are all placed on the shoulders of the Government of Ghana.

DI posed the question that if the source of funding is the Korean Government and that the funds borrowed are not coming directly to GoG, then what accounts for this unusually high percentage rate of Arrangement Fee (0.75% of the total sum of the facility), especially, when the agreement at Paragraph 14.1 stipulates that "the Government of Ghana shall within 10 business days of demand pay all expenses incurred [by the Lender] (including legal, valuation and accounting fees, travel expenses and other out-of-pocket expenses), and any VAT on those expenses"?

DI has expressed concerns about the implication of the entire off-take agreement of 90,000 housing units to Ghana’s debt sustainability ratio.

The Finance Committee report indicates that when some members of the Finance Committee raised issues over the financial burden involved in Government paying for the $4.5 billion cost of 90,000 housing units as its commitment to the off-take agreement with STX to build 200,000 housing units in Ghana in five years, no satisfactory response was given. Indeed, “Government's response was rather curious,” said DI.


To the argument that the 45% would amount to US$4.5 billion, which would amount to about 30% of Ghana's GDP and immediately double our external debt, the report said Mr Seth Terkper, Deputy Minister of Finance & Economic Planning "explained that with prudent loan management, this facility will not substantially impact the debt sustainability ratio of the country in the medium term."

It is instructive to note, according to DI, that since the credit facility comes with a five-year moratorium, it obviously has no serious medium term impact on our ability to service the loan!

But, argued DI, “since the 30,000 units are to serve as barracks and the project is not therefore a self-amortizing kind (which would yield income), the Deputy Minister's assurances appear rather hollow if put under scrutiny.”

It argued further, “Again, the lack of capacity of HFC, (which has an associated off-take agreement to 'buy' the majority of the 200,000 housing units under the Housing Project) to buy the houses and sell them on to the public through mortgage financing, could seriously place Government's debt servicing capacity at risk, especially when the financing arrangement is supported by a sovereign guarantee.”

DI said, Ghana’s total public debt stock stood at US$9,202.94 million (61.7 percent of GDP) at the end of December 2009 up from US$7,918.1 million (54.6 percent of GDP) at the end of December 2008 and breaching the prudent ceiling for the total debt stock of 60.0 percent of GDP set in the 2007 budget.

“An Additional debt of $4.5 billion for the Government off-take of 90,000 houses will increase the debt stock to a whopping 91.8% of GDP, edging Ghana towards pre-HIPC levels with an additional burden of servicing the debt.

“The annual debt service on this STX ($4.5 billion) loan (interest and principal) after 5 years will be over $400 million per annum. This means that in nominal terms Ghana’s debt service on this single transaction will be close to Ghana’s total debt service ($560 million) at the time it became HIPC.”

DI stated, “The total package will make Ghana’s debt burden unsustainable to the extreme. This does not make sense considering that this investment does not enhance the capacity of Government to service the debt. Furthermore it does not leave Government any room to undertake more productive investment in other sectors like roads, water, railways, ICT and energy which will be necessary to drive growth.”

DI also touched on the new position of the Ghana Real Estate Developers Association. GREDA had presented a petition to the Joint Committee of Finance and Works & Housing. At their meeting with the joint committee on Monday, July 5, GREDA presented a case, backed with drawings, comparative analysis and cost estimates, including cost per unit, that it could build 30,000 housing units for Government at a total cost of $540 million.

This is nearly a third cheaper than the financing package offered by STX. The Finance Committee would only say, "Whilst the Committee took the petition into consideration in coming up with this report, the Joint Committee's report on the said petition has been prepared separately for submission to the House."

DI concluded, “It is instructive to note that in recommending to the House to adopt its report and approve by resolution the $1.5 billion supplier credit facility, the Finance Committee was absolutely silent on the all-important question of whether the agreement constitutes value for money.”

The Committee could only conclude that it "finds that the project would be of immense socio-economic benefits to the various security agencies as well as provide employment to the teeming youth."

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