Combing through the PDS saga and the way forward

Government of Ghana in August 2014 executed the second Millennium Challenge Compact with the U.S government with the objective of providing assistance of up to Four Hundred Ninety-Eight Million Two Hundred Thousand United States Dollars (US$498,200,000) to the Government for a program to reduce poverty through economic growth in Ghana (increasing private sector investment and the productivity and profitability of micro, small, medium and large scale businesses.)

To effectively execute and implement the project, an act of parliament established MiDA (Millennium Development Authority, Act 702, 709, & 897 as amended).

The objectives of the Authority are: To oversee, manage and implement the programmes under the Millennium Challenge Account for poverty reduction, through economic growth as set out in each agreement between the Government of Ghana and the Challenge Corporation acting for and on behalf of the Government of the United States of America and for any other national development programme of similar nature funded by the Government of Ghana, a development partner or both and provide for related matters.

Government designated MiDA (Millennium Development Authority), as its primary agent to exercise and perform the right and responsibility of overseeing, managing and implementing the Program, including without limitation allocating resources and managing procurement.

Among the six projects within the Second Compact is the ECG Financial & Operational Turnaround Project (EFOT) which seeks to introduce a private sector participant in the management & operation of ECG. Consequently, governments under the auspices of MiDA embarked upon competitive procurement process which resulted in the selection of an acceptable partner to manage, operate and invest in ECG’s operations for 20-years.

Manila Electric Co. (Meralco) led consortium was declared the winning bidder in April, 2018. Meralco has partnered AEnergia SA, an Angolan Company, and three Ghanaian Companies. The shareholding: Miralco = 30%; AEnergia = 19%; Three Ghanaian Companies (TG Energy Solutions Ghana Ltd, Santa Power Limited & GTS Power Limited) = 51%.

Power Distribution Services Ghana Ltd (PDS) takes-over the Electricity Company of Ghana (ECG) in March 2019 based on a July 3rd 2018 Lease and Assignment Agreement (LAA) and Bulk Supply Agreement (BSA) between the two entities as part of the Private Sector Participation (PSP) in ECG under the Ghana Power Compact of the Millennium Challenge Account (MCA)

PDS was primarily expected to sell & distribute power/electricity to customers in the Southern Zone while ECG will serve as a Bulk Purchaser of electricity from V.R.A and other power producers.

There were notable variations in the new agreement relative to the one signed in August 2014, i.e.

a) Change in the structure of the shareholding from the initial 80%:20% to 49%:51%;

b) Waiving away of some ‘Conditions Precedent’ before the takeover to ‘Condition Subsequent”

c) Changing of the bank demand guarantee to demand insurance guarantee.

On July 30, 2019, the Government of Ghana through the Ministry of Finance and the Electricity Company of Ghana (ECG) Ltd suspended the concession agreement with Power Distribution Services (PDS) Ghana Limited due to fundamental and material breaches of PDS’s obligation in the provision of Payment Securities (Demand Guarantee) for the transaction which have been discovered upon further due diligence.

“We have through deep intelligence detected that they have issues with those guarantees that were provided… they were not valid and as a step, we have taken measure to secure the assets of the state by suspending the concession agreement,” Information Minister, Kojo Oppong Nkrumah told Evans Mensah on Joy News’ PM Express.

It must be stated clearly that PDS from inception failed to satisfy all ‘Condition Precedent’ among other things, a documented Lease Payment Security (LSP) and BSA Payment Security in the form of Letters of Credit (LC) issued by a qualified bank as spelt out in the LAA and the BSA as proof of capitalization.

PDS which was expected to inject about $580million into ECG in the first five years of its operation failed to demonstrate capitalization for even the first year of their operation. PDS had instead proposed to MiDA/ECG (against the terms of the LAA and the BSA) to use Insurance Companies with re-insured guarantees serving as ‘qualified banks’ to help them raise the LC, which they were unable to meet.

It has been noted that whereas Meralco was required to prove their financial and technical capability beyond all reasonable doubt which they did, the 51 percent Ghanaian ownership (TG Energy Solutions Ghana Ltd, Santa Power Ltd, GTS Power Ltd,) as part of the consortium were not financially and technically sound enough to partake in the deal leading to challenge in providing a bank statement of actual receipt of equity contributions accompanied by certifications from PDS Ghana on its outstanding shares and paid-up capital by shareholders.

A letter, dated 18th October 2019, under the signature of the Finance Minister, Ken Ofori-Atta titled “Termination of Power Distribution Services (PDS) Concession” indicated the termination of the PDS deal “the current concession had to be terminated in view of the facts uncovered regarding the failure by PDS to satisfy conditions precedent under the relevant transaction documents AND, however, that every effort would be employed to ensure a suitable replacement within the relevant timelines in order to complete the compact. The Government decision to terminate the PDS concession and find a replacement in a timely manner to successfully conclude the compact…”

It has become evidently clear that the Millennium Development Authority (MiDA), the supervising agency of the Millennium Challenge Compact (MCC), which embarked upon a competitive procurement process resulting in the selection of Manila Electric Co. (Meralco), and the group of Ghanaian investors to manage, operate and invest in ECG’s operations for 20years, was negligent in the award of the concession agreement as it failed to do adequate due diligence, resulting in the botched deal.

It has also been proven that apart from Meralco, the other parties in the consortium were not known to have both technical and financial capacity to assume the business with the cash flow of close to US$4billion; failing to inject private capital into the operations of the ECG as required. And to the extent that local shareholders of PDS used proceeds of ECG to fund US$11.5million of the US$12.5million payments it made to procure the demand guarantees.

All information gathered about the purported Demand Guarantees provided by PDS as security for the transfer. The Government of Ghana (GoG) is concluding that there is no valid payment security, and that it’s unable to consider that a valid and enforceable payment security was furnished by PDS in fulfillment of an essential Condition Precedent for the transfer of ECG’s asset to PDS.

In a press release dated, October 22, 2019, “The United States of America notes this decision with regret. Based upon the conclusions of the independent forensic investigation, the U.S position is that the transfer of operations, maintenance, and management of the South Distribution Network to the private concessionaire on March 1, 2019, was valid, and therefore the termination is unwarranted. As such, MCC has confirmed that the $190 million funds granted to Ghana at the March 1 transfer to the 20-year concession from ECG to PDS is no longer available.”

With Energy Commission restoring license to ECG to distribute and retail power etc, and MCC & MiDA out of sight, government must in the coming weeks inform the citizenry of it next course of action. But before such an announcement on the type of private sector participation government will undertake, government must honor its debt obligation to ECG. The energy sector is suffering from severe financial distress. The financial distress chain ends with government. Ghana Gas owes GNPC because VRA is unable to pay Ghana Gas because ECG is not able to pay for the power VRA generate that is as result of government inability to honor the debt obligations of ECG.

There is no doubt that ECG needs an urgent recapitalization and competent technical management team. Concession is the most ideal route for Government of Ghana to take, however, government must be transparent and willing to accept constructive criticism in this new process. A concession would bring maximum return to government, including but not limited to the responsibility of funding all new investments as well as maintaining all existing assets. There is also an argument to be made for budget certainty since the concessionaire will be responsible for financing capital expenses and operating expenses. We can also articulate the issue of risk transfer etc.

Government of Ghana must consider both public and private institutional arrangement for the recapitalization of ECG. SSNIT can be a public institutional investor while GoG looks at encouraging the tier 2 and tier 3 pension scheme providers (i.e. the Petra Trust Co. Ltd, United Pensions Trustees Ltd, Universal Pensions Master Trust Limited) as the private sector institutional investor. There can be a special provision for a local consortium to join. There must be a consideration for a foreign investor participation but limited to management and technical operation. Example: Public Institutional Investor = 30%, Private Institutional Investor = 50, Foreign Investor = 25% (their selection should be considered primarily on their managerial competent, technical operatorship and proven track record in the industry) and Consortium of Politically Non-exposed Ghanaians = 5%.

GoG must be willing to give incentives especially to the private institutional investors, give them some tax breaks and concession after all GoG is noted for giving very ridiculous incentives to foreign investors. Give these incentives to the private institutional investors, which you are assured of majority of their revenue retaining in the economy.

Finally government must stay off ECG, enough of the political interference. One lesson from the botched PDS deal is that ECG has competent management team that can deliver results if they are given a free role without any political interference. It was the due diligence and the consistent and the persistent manner in which ECG decided to verify the reinsurance guarantee allegedly provided by Alkoot, that uncovered the misrepresentation and fraud detected in the insurance guarantee.

In addition, in the botched PDS Deal, ECG was almost as a spectator in the whole PSP transaction, they were sometimes compelled to act while political appointees take the major decision. ECG must take full control of the next PSP transaction, offering it competence and expert opinions.

(The writer is a Research & Policy Analyst at Institute for Energy Security)