Ghana’s energy and stability, posturing versus policy.
In his 2019 mid-year budget speech, Finance Minister Ken Ofori Atta describes the ruinous financial implications of Ghana’s current power purchasing arrangements: 5,083MW installed capacity against 2,700MW peak demand of which 2,300MW has been acquired under ‘take-or-pay’ contracts for which the state must pay, whether the power is consumed or not. This translates into an “over a half a billion USD dollars” annual bill for unused capacity, according to the minister. Given that the projected total fiscal deficit for 2018 was USD2.5 billion, this is no small matter.
The government’s proposed remedy is to renegotiate these take or pay contracts. And in consideration of this, Ofori Atta recently quoted Martin Luther King’s Letter from a Birmingham Jailstating that: “an individual who breaks a law that conscience tells him is unjust and who willingly accepts the penalty… is in reality expressing the highest respect for law”. This is fighting talk. Moreover, it comes on the heels of another energy sector/public procurement scandal, where a private consortium has seen its contract to manage electricity distribution suspended.
Situation report
In adopting this strategy, the New Patriotic Party (NPP) administration wins points from a domestic audience tired of Ghana and Africa’s perceived timidity on the international stage. President Nana Addo Dankwa Akuffo Addo is widely cheered whenever he challenges ‘the mindset of dependency’. Ideas matter in politics, and there are few weightier to a polity than independence and self-respect. This approach also gains from the fact that the financial delinquency emanating from the energy sector is a threat to productivity and economic growth, the banking sector and the fiscal balance alike. Neither the problem nor the need for a solution are imagined.
And yet, this is a hazardous approach. In setting out his plans to replace the existing power purchasing agreements (PPAs) together with the quote from Martin Luther King’s letter from Birmingham, the minister signals the government’s willingness to abrogate contracts. A few questions follow naturally: (a) was it the government’s intention to suggest as much, (b) are key decision makers willing and able to see the policy through, or are they posturing, and (c) what is the outlook?
In response, we note that posturing and policy are points on a continuum rather than mutually exclusive or even separate categories. We have not encountered any serious proximate source who views Ofori-Atta as having made an idle threat. However, the minister’s statement should be viewed as part of a negotiation process that is fluid, and individualised contract by contract. Salient differentiators will include each agreement’s financial assumptions, terms, leverage, strategic context, and association with either of the major Ghanaian political parties. In other words, the threat is real, and it is worse for some PPAs than others.
Still, the key Ghanaian decisionmakers are eager to find alternatives to disputes since posturing and policy alike undermine the confidence required for the president’s investment-oriented ‘Ghana Beyond Aid’ mantra. Moreover, Ghana has tried similar strategies before, unsuccessfully. For example, when it attempted to renegotiate mining sector stability agreements to raise government revenue in 2012. Although the mechanics are different today, this earlier episode highlights the potential weaknesses of the current approach.
Additionally, there are cheaper steps that the state could employ before bringing out these litigious big guns. Namely, bolster transparency and over the medium-long term develop the market domestically and regionally. Since fiscal damage rests on the specific assumptions of individual agreements e.g. tariffs and input costs, demand forecasts, allowing the public at home and abroad to see PPA innards (absenting commercially sensitive information) could shape the behaviour of private and public actors in these negotiations and over the long-term. Other countries are doing so already. For market development, reforms introduced in 2008 and aimed at the creation of a spot have not been implemented. Theoretically, once regulations have been established and operationalised, IPPs would have more avenues to income generation and the country for a better power balance of power supply and demand.
Outlook
There is serious political and popular will to see Ghana’s existing problematic take or pay PPAs renegotiated. To that effect, bilateral discussions are expected to take place in the coming weeks and months and in the context of which the finance minister’s threat should be seen as shot over the bow.
In 2012, the then NDC government attempted to re-engineer mining company stability agreements to ensure higher government revenues but was thwarted. Here too, the government faces the risk of arbitration if contracts are broken. UK courts’ recent USD9 billion award against the Nigerian government for a failed contract is an indicator of the potential costs. Also contagion from the damage done to confidence in the Ghanaian investment climate. Ghana’s current sovereign debt situation as well as its development programme, make this precarious situation.
The public demand is for take or pay to be replaced by ‘take and pay’ agreements wherein the country only pays for energy consumed. However, IPP negotiators committed to the Ghanaian market and willing to show and amend some of the underlying assumptions for example input costs and duration in their PPAs may receive a warm welcome. Especially given that this government, feeling itself between a rock and a hard place, is eager for palatable new avenues to pursue.
For more information on:
the current power situation please see here,
the government plans please see here
and on decision making here.
All three sections are available together here. Additionally, to discuss further with the team please do drop us a line: questions@songhaiadvisory.com