ESLA Bond: Minority’s claims fraught with 'factual untruths' - Finance Ministry

The Ministry of Finance says the Minority’s position on the ESLA backed energy bond “is fraught with various factual untruths which appear to be deliberately spun to allow them to reach their own preferred conclusions”.

The Minority on Tuesday said the complex structure of the bond and unrealistic assumptions by the government caused "the spectacular failure of the bond".

However, the Ministry in a statement said the claims by the Minority are unsubstantiated.

Below is the full response

Response to the NDC’s press statement on the Esla-backed energy bond

The Ministry of Finance takes notice of the Statement by the NDC Minority in Parliament making various unsubstantiated claims about the recently issued Energy Sector Levy Act (ESLA)-backed energy bond. The Ministry as the ‘Sponsor’ of the GH¢10 billion Bond Programme, hereby responds to the Minority’s claims as follows:

1. Intellectual Dishonesty:

The Minority’s statement is fraught with various factual untruths which appear to be deliberately spun to allow them to reach their own preferred conclusions:

First, the claim that the 7-year bond closed at GH¢1.5 billion is not accurate. Published information by E.S.L.A. PLC indicates that the 7-year bond was oversubscribed at GH¢2.53 billion. E.S.L.A. PLC chose to accept GH¢2.4 billion at the cut-off interest rate of 19.0%;

Second, the claim that the 10-year bond was first closed at GHC760 million again is false. Bids received in the first week amounted to GH¢872 million and not GH¢760 million as claimed by the minority. This information is public and verifiable;

Third, the minority claims the 10-year bond after extension closed at GH¢2.2 billion. Again false. Total bids received for the 10-year bond was GH¢2.79 billion of which E.S.L.A. PLC accepted GH¢2.29 billons at an interest rate of 19.5%

In all E.S.L.A. PLC received Bids of GHC 5.32 billion (GH¢2.53 billion for the 7-year and GH¢2.8 billion for the 10-year), representing 89% of the targeted amount of GH¢6 billion for the first tranche under the Bond Programme. E.S.L.A. PLC chose to accept the total amount of GH¢ 4.70 billion out of a possible GH¢5.32 billion; representing 78% of the targeted amount as this was what it preferred within its target price range of 19%-19.5%. Making a decision based on a cost/yields consideration, is prudent and not a failure. To claim that the issuance was a failure, is to be intellectually dishonest, if not mischief.

2. Justifying Assumptions

The minority again claimed that the projected consumption of petroleum products, used as a basis for projecting ESLA inflows was unrealistic. This was based on their assumption that monthly fuel consumption is equal through-out the year.

Historical data on consumption patterns however prove that this is a flawed assumption. Fuel consumption in the second half of the year is often higher as a result of increased economic activity and seasonal weather patterns.

E.S.L.A. PLC’s projected consumption of petroleum products is accurate and conservative and remains in line with historical patterns.

3. Explaining Debt Service Coverage Ratio

The Minority claim that E.S.L.A. PLC could not meet the Debt Service Coverage Ratio (DSCR) of 1.25% but rather scored 1.1% DSCR. They arrive at the 1.1% by dividing the expected inflows from the Energy Debt Recovery Levy of GH¢1.281 billion by GH¢1.158 billion in total interest payments for both the 7-year and 10-year bonds (i.e. 1.281/1.158 = 1.1)

The Minority, however, did not recognise the addition of GH¢600 million GoG cash support (to be provided on demand) component, as stated in the prospectus, to the GH¢1.28 billion. They also did not add the starting cash of GH¢ 350 million in the Energy Debt Recovery Levy (EDRL) Account. It is instructive to note that the addition of the two missing components in the Minority’s assumptions, gives a total amount of approximately GH¢2.231 billion making the ratio now 1.926% (2.231/1.158). This is far greater than the required 1.25% DSCR.

The Minority either did not fully understand the assumptions underlying the structure and thus failed to do the math right or was just being plainly malicious.

4. The Subject of a Confusing Structure

The NDC claim that they found the structure of the transaction complex to understand. They further assume that because they found it complex to understand, others must also find it complex. The good thing is that the investors for whom the bond was meant understood it and that is why they patronised the bond with bids of up to GH¢5.32 billion of the targeted GH¢6 billion bid cover ratio.

Their claim that ESLA is government revenue and that an ESLA backed bond must be treated as sovereign debt is incorrect. ESLA proceeds do not commingle with the consolidated fund and thus, cannot be treated as government revenue affecting GoG fiscals.

An E.S.L.A backed bond can equally not be treated as government/sovereign debt. It is surprising that the former Finance Minister under the NDC, Hon. Seth Terkper shares this view and yet the Minority refuses to listen to him.

It is also unbelievable how the Minority would want this debt to be considered part of government debt, when in 2016, the same NDC government restructured about GH¢2 billion debt owed commercial banks under ‘the VRA Phase 1 Restructuring Program’ using ESLA proceeds as a payment source. If ‘VRA Phase 1’ and TOR debt restructuring were deemed prudent at the time by the NDC and treated as a non-sovereign transaction, why not the E.S.L.A. PLC’s Bonds? The inconsistency in the opinions of the Minority NDC is baffling.

5. Parliamentary and Constitutional Breach

The Minority in their Statement also claim that the transaction was unconstitutional as it did not have a parliamentary approval.

First, it is curious that the Minority fails to tell us which aspects of the constitution or parliamentary standing orders or procedures that have been breached here. The mere mouthing of unconstitutionality does not create an illegality.

Second, Parliament gave approval for this bond issuance program when it approved the 2017 Budget and Economic Policy which in paragraph 805 outlined this program. Again, in paragraph 74 of the 2017 Mid-year review the Finance Minister announced our readiness to execute this deal. Further, section 61 of the Public Financial Management ACT (which was incidentally passed during the tenure of the NDC) gives the Minister power to execute this transaction by auction. This transaction required no second layer of Parliamentary approval.

Third, this bond is not an International financial transaction as envisaged by the constitution. Both the 7-year and 10-year bonds were domestic bonds and do not require Article 181, clause 5 approval unlike the Eurobonds.

6. Causing Financial Loss

Can the Minority be bold and indicate how the financial loss arises? This is missing in their statement. The mere mouthing of the claim that government could have gotten the bond issued at 2% lower does not legitimize that claim. What is the empirical basis? The minority fails to state it. This transaction by E.S.L.A. PLC causes no loss to the State.

*Conclusion*

The Ministry re-iterates its congratulations to all who assisted with this groundbreaking transaction and shares in the view that this was a very successful and landmark transaction; the largest corporate bond issuance in Sub-Saharan Africa.

The Ministry of Finance under this Government, will continue to pursue measures to assist in resolving the challenges in the Energy Sector that it inherited, including the over GH¢10 billion worth of legacy debts and other obligations, dumsor, unreliable and intermittent power supply, high tariffs and non-performing loans within the banking sector that is threatening to cripple the banks (due to energy sector legacy debts).

We hope we can count on all Ghanaians and other stakeholders for their support and encouragement as we continue to tackle these challenges head-on.