PDS: Gov’t Shouldn’t Rush Into A New Concession Agreement

As is now widely known, the concession agreement between the Government of Ghana (GoG) and Power Distribution Services Ghana Limited (PDS) has been terminated by the GoG. Under the agreement, PDS was to manage the staff and assets of Electricity Company of Ghana (ECG) for 20 years, making new investments and introducing operational efficiencies to improve reliability of electricity supply in Ghana. The cancelation of the agreement so soon after PDS began operations raises questions about the concessionaire selection process.

The GoG said it terminated the agreement because the performance guarantee PDS provided to secure the deal was fraudulently obtained and therefore invalid. In a subsequent statement, the U.S. embassy in Ghana disagreed with the GoG’s decision, declaring that an independent forensic investigation had concluded that the transfer of ECG assets to PDS had indeed taken place in a proper manner.

These conflicting claims are extremely disturbing. It is unclear from the U.S. embassy statement whether the referenced independent investigation was conducted separately from the one carried out by the GoG. Given that the GoG had worked closely with the Millennium Challenge Corporation (MCC) over the last several years on the process to set up the concession agreement, one would think that on such a critical issue, the two sides would speak from the same script. The onus is squarely on the GoG now to act expeditiously to clarify this difference of opinion and explain to the public why its version is the truth, if indeed that is the case.

National conversation on the matter over the last several weeks has centered primarily on questions about the performance guarantee and subsequent forfeiture of the Tranche II amount of $190 million under the MCC Compact. However, there is one major issue the GoG and the general public should collectively and seriously think about before the country enters into another concession agreement.

In the initial stages of the search process through which PDS became the concessionaire, the GoG and MCC were said to have agreed on a split of 80/20 percent foreign/domestic ownership. However, the structure was later changed to a 51 percent domestic and 49 percent foreign ownership at the insistence of the GoG following the election of a new administration. Four of the six shortlisted contenders subsequently sent letters to the Millennium Development Authority (MiDA), the GoG-appointed body overseeing the selection process, notifying it of their intention to withdraw from the bidding process. One remaining bidder was disqualified, allegedly on conflict-of-interest grounds. That left Manila Electric Company (Meralco) as the sole contender. It won the contract and then formed the PDS consortium with a group of Ghanaian investors.

Engie Energy Services, Enel S.P.A., Tata Power Company Ltd., and a consortium that included EDF SA, are said to be the bidders that withdrew. All four are household names in the global electricity industry. They are highly reputable multinational companies that, most likely, would have been better placed, both technically and financially, to manage ECG. The diminished foreign stake, with its attendant loss of management control, is perhaps what made the contract unappealing to them.

It is also quite likely that had any of those four won the bid, they would have had no problems providing the type of ironclad performance guarantee that such a transaction required. It is standard practice for such companies to deal only with insurance companies that are equally well recognized globally, and can easily insure large deals. Ghana has therefore lost $190 million because, by the GoG’s own action, it limited itself to a counterparty that ultimately could not properly satisfy one of the most important conditions of the agreement.

Favoring a majority Ghanaian ownership would be understandable if domestic investors were, out of patriotism, willing to accept lower returns on their capital than their foreign counterparts. It doesn’t appear as though anyone has made that argument. Domestic capital is preferred at times because it is considered more patient. But in this case the GoG was entering into a defined-term agreement, backed by a performance guarantee, so fear of capital flight shouldn’t have been much of a concern.

In light of the bitter experience with PDS, the GoG must explain better its rationale for introducing the Majority-Ghanaian-ownership stipulation. According to press reports, the GoG wants to use restrictive tendering to find a new concessionaire within three months. That would be a huge mistake. Ordinary Ghanaians, who ultimately bear the enormous costs often associated with such hastily made decisions, deserve an answer to why it is so important to have a majority stake held by domestic investors in any future ECG concession. By rushing into another agreement, the country risks finding itself in a similar situation a year or two from now because of failure of the GoG to expand the field of candidates—something that would increase the likelihood of a more successful choice.

The sorry state of Ghana’s electricity sector is largely the result of an accumulation of policy mistakes by successive governments. Ghanaians are paying exorbitant electricity tariffs because of that, and suffering in multiple other ways as the national economy continues to be burdened by power sector-related debts and contractual liabilities. Whatever next move the GoG makes must be carefully scrutinized to ensure it doesn’t make an already bad situation worse.

 

 Patrick Asare is a CDD-Ghana D&D Fellow in Energy and Power. He is a principal in the Supply and Logistics department at UGI Energy Services, LLC in the United States and has deep knowledge of both the electricity and gas markets.

 

Source: CDD Ghana