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General News Fri, 30 Jul 2010

DI: $265m STX Insurance Is A Rip-Off,

GOVT CAN SAVE $200M WITH MIGA

Thursday, July 29, 2010:- This week, the Ministry of Finance & Economic

Planning submitted, what it termed, “Revised Memorandum to Parliament” and

a revised supplier’s credit financing agreement between STX Engineering &

Construction Ghana Limited (as ‘Supplier’ – not ‘Lender’) and the

Government of Ghana in relation to the $1.5 billion financing of the

Security Services Housing Project.

In a press statement reacting to this new development after the agreement

was withdrawn from the floor of Parliament recently, the Danquah Institute

limited its comments to the fees and insurance premium, which it has

condemned as “a total rip-off”.

It has described the 17.34% insurance premium covering the credit facility

as “very fishy”, which should not have any place in any credible and

important financing agreement with a developing nation like Ghana.

It says Government can save the nation more than $200 million if it opts

for the kind of political risk insurance cover offered by MIGA, a member of

the World Bank Group, for developing states like Ghana.

The policy think tank says, “We are amazed by the insistence of STX and

the willy-nilly compliance of Government that STX must receive an upfront

payment from Government of 17.34% of the contract sum of some $1.5 billion

to arrange political risk insurance. This will mean an upfront payment of

$264.5 million (i.e. 17.34% of $1.52 billion) as part of the first

disbursement of the loan.”

The Danquah Institute does not understand why Government and STX have not

considered the MIGA option. The World Bank’s Multilateral Investment

Guarantee Agency is the pre-eminent agency in the world for the provision

of political risk insurance for projects in a broad range of sectors in

developing countries.

According to DI, the insurance premiums charged by MIGA range from 0.45%

to 1.75%, payable annually and not upfront.

On the basis of the MIGA insurance premiums, the rates charged by MIGA for

this project will range from US$1.01 million- US$2.62 million annually.

Over a 20 year period (i.e. as the terms of the STX loan stipulate), DI

estimates that the total sum payable will range between US$20.2 million and

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US$50.5 million.

This puts the difference between the STX insurance premium per the

agreement and what will be charged by MIGA between US$210- 240 million.

“This means that Ghana could save over $200 million in insurance costs

alone if STX rather obtained political risk insurance from MIGA,” the

Danquah Institute says.

The policy think tank is therefore asking Government to ask STX to obtain

political risk insurance from MIGA.

In his July 27 news conference, Alban Bagbin, the Minister for Water

Resources, Works and Housing, defended why Government was adding insurance

premium to the sovereign guarantee.

He said, “The sovereign guarantee is simply the collateral for the loan

facility. The insurance is the guarantee against political and commercial

risk.”

Mr Bagbin went on to explain, “This became even more relevant with regards

to Ghana when the NPP, on taking over the reins of Government in 2001,,

drove out Malyasian investors in Ghana (Ghana Telecom, etc).”

He added, “In the case of Korea, the preserved risk is high because it was

the NPP that decided to unilaterally halt the repayment for two Korean Exim

laons and interest before it conclude HIPC arrangement.”

The Minister’s disclosure in fact supports the MIGA option, says DI. This

is because under the NPP, a Malaysian company teamed up with SSNIT for the

proposed construction of 100,000 housing units, a project, which MIGA

readily offered insurance against the very risks mentioned.

The Executive Director of DI, Gabby Asare Otchere-Darko recalls, “There is

already a recent precedent in Ghana. A few years ago, MIGA issued

guarantees to Metro Ikram Sdn. Bhd. of Malaysia covering the first phase of

its anticipated investment of a 100,000 affordable medium range and premium

housing development project in Ghana.”

He adds, “The joint venture project was between Metro Ikram and the Social

Security National & Insurance Trust, beginning with a pilot of 1,000 homes

in Tema. The coverage for that was for five years, protecting against the

risks of transfer restriction, expropriation, war and civil disturbance,

and breach of contract.”

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“In spite of the high risk Government says comes with Korean loans it is

still committed to this soul-sourcing contract with STX. But, how high is

Ghana a risk to Korean firms to attract insurance premium which is more

than half of Ghana’s total capital investment budget,” says Mr

Otchere-Darko.

However, Mr Bagbin stated that the NDC has been able to restore the Korea

Eximbank’s relations with Ghana since Vice President John Mahama’s visit

there in March 2010.

“We find this even more curious,” says the DI Executive Director. “In the

same March, in Washington, MIGA and Korea Eximbank signed an MoU to

cooperate to promote private sector investment in developing countries.”

According to a press release at the time, “This partnership will enable

the two institutions to work closely on, among other things, mitigating

political (or non-commercial) risks in developing countries.”

The MoU was signed by MIGA Executive Vice President Izumi Kobayashi and by

Korea Eximbank Chairman and President Dongsoo Kim at MIGA’s headquarters in

Washington, DC.

The aim of the MoU is to strengthen cooperation between MIGA and the Korea

Eximbank in promoting foreign direct investment into developing countries

and support Korean outward investment, such as the STX housing deal.

The MoU will also facilitate general cooperation in specific projects

where both MIGA and the Eximbank are involved, Ghanaians were told, when

the Vice President returned from Korea that Korea Eximbank was involved in

this STX project.

DI further points out that MIGA can provide insurance coverage for up to

15 years (in some cases 20), which is within the terms of the STX supplier

credit facility.

Again, MIGA, in conjunction with the Public-Private Infrastructure

Advisory Facility—a multidonor technical assistance facility— has embarked

on a broad study of Ghana’s housing market with the objective of developing

a better understanding of its challenges and prospects.

“What can be more opportune than this STX housing deal in Ghana for MIGA

to provide insurance cover,” Mr Otchere-Darko says.

The revised STX agreement, which has been repeatedly criticised as too

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expensive, maintains the financing cost to Government for the 30,000

housing-unit barracks at US$1,525,443,468. Out of that, $1.3 billion is

stipulated as representing construction, cost (or the EPC contract amount)

with the rest, impliedly but not arithmetically, covering the insurance

premium and other specified fees, namely management and arrangement (which

is now termed as ‘facility fee’ in the revised agreement).

At paragraph 14.3 of the agreement, it is stated, “The Government shall

pay to the Supplier 17.34% of the Facility for the purpose of arranging

political risk insurance cover for the Facility. The Insurance Premium

shall form part of the first disbursement of the Facility.”

On top of that, it states in paragraph 14.2 that “The Facility Fee and the

Management Fee shall form part of the first disbursement of the Facility”.

The two fees translate into $11,440,826.01 and $7,627,217.34, respectively.

Thus, according to Oubor Kuntando, policy analyst at the Danquah

Institute, “Ghanaians are being asked to pay $265 million upfront to insure

the 30,000 units construction, which we are being told is being

pre-financed by STX, issue upfront a sovereign guarantee for STX to source

funding for the construction and pay them an additional upfront fee of $19

million to manage and facilitate the supplier’s credit. After all of the

above, the agreement also demands of Government to pay for any unspecified

expenses incurred by STX and connected with the financial arrangement of

this very $1.5 billion facility!”

There are a number of related concerns with the insurance arrangement,

which have been pointed out by DI.

Mr Kutando enumerates them: “One, if the insurer has not as yet been

identified, what is the basis for a quote of 17.34%? Whose quote is it?

“Two, our checks show that it is also very unusual for any insurer to ask

for an upfront payment for insurance covering the total number of years for

a contract (in this case 20 years).”

He continues, “Three, the upfront insurance premium of $265 million is

inordinately high and is not consistent with best practice, particularly

when we can save more than $200 million by taking the MIGA option.”

The press release from DI goes on to say, “It should further be noted that

many insurance brokers apply to MIGA for political risk insurance. For

eligible brokers, MIGA caps their insurance premiums at US$250,000 per

annum. This only goes to buttress the point that what is being proposed in

the STX agreement is way too high.”

Notes to Editors

MIGA was created in 1988 as a member of the World Bank Group to promote

foreign direct investment into emerging economies to support economic

growth, reduce poverty, and improve people’s lives.

MIGA fulfills this mandate by offering political risk insurance

(guarantees) to investors and lenders, covering risks including

expropriation, breach of contract, currency transfer restriction, war and

civil disturbance, and non-honoring of sovereign financial obligations.

MIGA works actively with investors and host countries, helping to resolve

disputes before they reach a claims situation. The agency also offers

technical assistance to its member countries and provides free online

investment information and knowledge services. Since its inception, MIGA

has supported 600 projects in 100 developing countries, totaling more than

$21 billion in coverage. MIGA’s gross exposure stands at $7.5 billion. For

more in-formation visit www.miga.org

The Korea Eximbank is an official export credit agency providing

comprehensive export credit and guarantee programs to support Korean firms

in conducting overseas business.

Since its establishment in 1976, the Bank has actively supported Korea’s

export-led economy and facilitated economic cooperation with foreign

countries. Korea Eximbank’s primary services include export loans, trade

finance, and guarantee programs structured to meet the needs of clients

engaged in overseas business.

The Bank also provides overseas investment credit, import credit, and

information services related to business opportunities abroad. For more

information, visit www.koreaexim.go.kr.

For more information on the STX deal please visit our website,

www.danquahinstitute.org or call +233 (0)302 78 28 78

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