Di's Open Letter To Parliament -
We have just received news today, Tuesday, July 6, 2010, that the Parliamentary Joint Committee of Finance and Works & Housing after meeting and considering the Supplier Credit Agreement between STX Engineering & Construction Ghana Limited (the lender) and the Government of Ghana (the borrower) for an amount of US$1,525,443,468.00 for the construction of 30,000 units of houses for security agencies in Ghana, has recommended to the House to adopt its report and approve by resolution the said $1.5 billion credit facility.
We find it most perplexing especially after the Ghana Real Estate Developers Association on Monday, July 7, presented to Parliament a detailed analysis which disclosed that the STX transaction on the 30,000 housing units, when all the elements are costed, could be done at an estimated $1.1 billion less. What this means is that Ghana stands to lose directly, up to an estimated $1.1 billion if Parliament gives its approval to the STX deal. GREDA is offering to undertake a similar project, with all amenities and onsite infrastructure at $540 million. We believe this calls for the pulling of the brakes on the STX deal for further consultation on cost analysis and negotiations to be done first before it can brought back to Parliament for any serious consideration.
The Danquah Institute is aware of the bizarre twist when GREDA met the Joint Committee. Whilst we are not in the position to speculate over what might have compelled GREDA to say to Parliament that they had no problems with the STX deal and that Parliament could go ahead and pass it, we believe the nation should still be grateful to GREDA for providing technical details and detailed cost estimates which STX has so far not done.
There are only two changes which we are aware have been made to the original agreement presented to Parliament on May 4, 2010 for approval under a certificate of urgency. One is the option for STX to covert the debt to be owed by Government into oil by 2015. The second is the usually high 1.5% Arrangement Fee and Management Fee which adds up to $22.5 million. We understand that has been reduced to $20 million.
GREDA's alternative proposal to Parliament laid out in great detail that a GREDA consortium, using 500 subcontractors across the country can put the 30,000 houses (as contained in the STX mix of one, two, three bedroom apartments, plus three and four bedroom bungalows) at a total cost of $540 million. GREDA proposes putting up 5,000 housing units per year at a cost of $90,553,797.1, which, they say, can be financed through a consortium of local banks and the issuance of Housing Bonds in Ghana. This works out at an average cost of $18,000 per unit. Yet, included in this average cost per unit are onsite infrastructure, such as roads, drains, water, electricity, biogas plant, and telephones, making up 35% of the construction cost at $19.5 million and; social amenities, including markets, schools, clinics, sporting fields, and ancillary buildings, making up 20% of the construction cost at $11.1 million. In addition, GREDA has done what STX failed to do before presenting the $1.5 billion supplier credit facility to Parliament - which is to give the cost per housing unit. GREDA estimates that the construction of the housing units will constitute 45% of the total construction cost - or $55.7 million of the $90 million for 5,000 units per year. None of such necessary details have been made available to Parliament from STX.
PREMATURE APPROVAL
The Supplier's Credit Facility of $1.5 billion for 30,000 housing units for the security agencies was presented to Parliament when the project was, technically, still at its PRE-DEVELOPMENT PHASE - the period during which the sponsors of the project (STX and Government of Ghana) were still evaluating its technical feasibility and, presumably, financial viability. Yet, this agreement before Parliament today suggests that there should be a FINANCIAL CLOSE - the date when all of the project contracts become unconditional and all conditions precedent to the project credit agreement are satisfied or waived. For Parliament to approve this STX agreement in its current form will set a dangerous and reckless precedent of rubber-stamping any credit facility even where it is clear that the sponsors of the project have chosen to jump straight from pre-development phase to a financial close when the necessary project development ingredients covering the critical technical components of the construction contract are yet to be prepared, known and evaluated.
The background is that the Government of Ghana has reached an agreement with STX of Korea for the construction of 200,000 houses. We have analyzed this project and have serious concerns about its integrity. From our analysis of estimates provided by the professionals, the Koreans (STX) stand to make between $300 million to $500 million unconscionable profit from the 30,000 housing construction project for the security agencies. Since the $1.5 billion deal is linked to the agreement with Government to off-take an additional 60,000 housing units from STX, we do not see Government having the capacity to satisfy the totality of that 90,000 agreement which would double Ghana's external debt. The risk associated with that anticipated failure is that the promise of STX to construct 200,000 units has been intrinsically linked by STX to the associated off-take agreement with Government. For Government to fail in fulfilling its total part of the agreement is to provide STX with the excuse of being disabled from finding the financial space to undertake the entire project. STX has so far shown no evidence of its commitment to invest in Ghana for the construction of the housing project.
We are therefore calling on Parliament not to give its approval to this agreement until and unless it has been satisfied on some three fundamental fronts: 1. STX providing enough information to justify the cost of the 30,000 units of housing project; 2. STX providing enough evidence to support its commitment to the entire 200,000-unit project; and 3. that an alternative package that is more beneficial to Ghana and less expensive to Government cannot be found.
What is curious about this total $4.5 billion off-take agreement of 90,000 housing unit is that, like the larger $10 billion deal, it states what the total cost is but it does not tell us the costing details such as unit cost per building. Thankfully, we have been told by both STX and KNUST that no architectural designs have been made on the housing project. So how then, Parliamentarians may ask, did STX conclude on the relative proportionate figures of $10 billion for 200,000 units, $4.5 billion for 90,000 units or $1.5 billion for 30,000, which put the average cost per unit at $50,000 by ordinary calculation? They cannot simply apply a cost item package for a housing construction in, say, Abu Dhabi or Korea, to that of Ghana. What is required for them to arrive at cost is the kind of consultancy work which they admit KNUST is yet to do for them.
Thus far, STX has not provided to Parliament the details of cost per housing unit. In the absence of which, at an average cost of $50,000 per unit, the STX project is a very, very expensive deal for such a mass construction project of this nature. By breaking the project down it becomes clear how over-priced this STX deal is for a country where you can pick up a 3-bedroom bungalow for $45,000. Half of the 30,000 units - 15,240 specifically - comprise of one bedroom apartments; 9,356 two-bedroom apartments; 5,217 three-bedroom apartments; plus 122 three-bedroom and 65 four-bedroom bungalows for senior officers. GREDA's designs, on the other hand, puts the direct cost per one-bedroom apartment at $12,926.32; two-bedroom apartment at $14,721.91; three-bedroom apartment at $29,443.81; three-bedroom bungalow at $32,120.52 and four-bedroom bungalow at $40,150.66. Indeed, the Minister of Water Resources, Works & Housing recently admitted on public radio that Government was still negotiating with STX on the cost per unit of the 30,000 housing units. So, on what basis is Parliament being asked to give its approval to this $1.5 billion deal?
It is curious how STX can present an agreement to Parliament at a total cost of $1.5 billion for the construction of 30,000 housing units when no designs have been done for the project. Per its own press release of June 16, STX, signed by its CEO, intended to show local content, actually ended up exposing STX as having no construction plan yet having a plan to take Ghana's billions. It reads: "STX Engineering & Construction Ghana Limited has signed contract with the College of Architecture and Planning (CAP) of the Kwame Nkrumah University of Science and Technology (KNUST) to be the main consultant of the project... The University's role as the main consultant to the project is in two-folds: the first phase involves the development of Project Implementation Framework (PIF)... The second phase of the KNUST engagement on the project shall be the provision of Planning, Architectural and Engineering Consultancy Services. The key areas of the services to be provided under this phase include: Architectural Designs (including concepts, sketch designs, working drawings and design management); Engineering Services (including Structural, Mechanical, Electrical, Geotechnical, Transportation, Water and Sanitation, etc.); Quantity Surveying Services (including pre-contract planning, tendering, etc..."
This has been confirmed by KNUST, which has an MOU with STX. Prof Samuel Afrane, Dean of the Faculty of Planning and Land Economy, KNUST, made this known when he said on Citi FM that: "We have worked on the kind of framework which defines what the project will allow and what it will not allow, and this project framework has been completed and sent to [STX]. The second assignment is for the provision of planning, architectural and engineering consultancy services. At that level, we are dealing with architectural designs, planning layouts and engineering services, as well as quantity surveying and construction supervision."
Parliament, by this agreement, is being pushed by the Executive to give its approval to a supplier credit when Government does not know what in fact is being supplied to it! All it knows is that the total cost of the 30,000 housing units will cost $1.5 billion. As to how STX came to that gross figure we are being told is immaterial. The thing with a supplier credit of this nature is that even though Government is paying for it, Government has no control over the money borrowed for the project; it goes straight to the provider of the turn key contract, as STX is in this case. So we should be sure of the details of what we are buying.
Also, this is supposed to be an EPC (Engineering, Procurement and Construction) Agreement yet the details of the EPC Agreement are yet to be negotiated. Our contention is that it would be premature for Parliament to grant approval to this facility without the accompanying EPC Agreement which would help to determine whether the deal serves the interest of Ghana.
GREDA, at least, based its estimates on some reasonable assumptions, such as the cost of virgin land on outskirts of major towns, and that it may require 150 acres to construct 5,000 units per year and that the total 30,000 units may cost Government $4 million in land acquisition and, assuming the sites are at some distance from town, Government may have to spend an additional $45 million on offsite infrastructure in all 10 regional capitals.
GREDA was also able to show to the Joint Committee that if it was offered the same incentives and exemptions that STX is being given the cost of such revenue loss to the Consolidated Fund would be $137 million, including an estimated 60% import content at $81.5 million, costs and expenses at $6 million, $45 million offsite infrastructure and $4 million land cost in all 10 regional capitals. This pushes the actual total cost of the GREDA model to $680.6 million ($543m estimated construction cost plus $137m exemptions). In short, GREDA's estimated cost per square metre is $421, a third cheaper than what the STX financial arrangement suggests.
According to the presentation made by GREDA to Parliament, "the STX housing deal is not value for money; GREDA has a less expensive option and; GREDA would deliver a better solution if given the same terms." GREDA's cost analysis of exemptions for STX are as follows: $4m land cost; $45m offsite infrastructure; $265m tax exemption on materials and equipment, assuming 60% import content; tax exemption on 50 expatriate employees at $2.4m and; additional costs and expenses at $10m. All in all, GREDA, Ghana's professionals in the estate development industry, estimates that the exemptions which Parliament is being asked to give to STX would cost the Consolidated Fund a whopping $326,480,000. Some half a billion Ghana cedis!
This pushes the $1.5 billion facility up to $1,851,923,468 - less than $150 million short of the $2 billion mark. It is, therefore, our contention that before Parliament looks at the so-called concessionary details of the STX agreement, it should also consider the estimated cost of the exemptions to the Ghanaian exchequer. Indeed, the GREDA option of approaching a consortium of local banks for a $100 million credit facility per year =, backed by a sovereign guarantee, may seem expensive since it may attract an annual interest rate of not less than 10% as compared to the 2% that STX says it can get. In crude mathematical terms, 10% more of $600 million adds up to $60 million, compounded. 2% more of $1.5 billion adds up to $30 million, compounded. In essence, the STX deal would be more expensive even at such an attractive interest rate; while, the GREDA option would mean more business and profits to our local banks.
Based on the figures available, GREDA's estimation of the breakdown of the STX deal is as follows: (i) estimated construction cost = $1,473,000.00 - onsite infrastructure (15% of construction cost); community amenities (3% of construction cost) and cost of housing units (82% of construction cost). This puts the estimated cost per square meter at $701.
GREDA managed to present to the Joint Committee designs of the 30,000 housing project; something which STX has so far failed to do. It is our contention that the STX agreement, as currently presented, remains in its pre-development phase. It would be highly dubious on the part of the people's representatives to pass this STX agreement in its current premature state.
We are therefore calling on Parliament not to give its approval to this agreement until and unless it has been satisfied on some three fundamental fronts: 1. STX providing enough information to justify the cost of the project; 2. STX providing enough evidence to support its commitment to the entire 200,000-unit project; and 3. That an alternative package that is more beneficial to Ghana cannot be found.
Signed
Gabby Asare Otchere-Darko The Executive Director of the Danquah Institute
