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ENERGY BOND TURNS ENERGY BOMB.
The Government of Ghana announced the issuance of an energy sector bond with the hope of raising 6 billion cedis and a possibility of an additional 4 billion cedis, making a total of 10 billion cedis. To start with, the government was expecting to raise about 2.4 billion cedis from the issuance of a 7 year bond and about 3.6
billion cedis from the issuance of a 10 year bond, for a total of 6 billion cedis.
Ladies and Gentlemen of the media, let us be very clear about what has happened. The failure of this bond (bomb) is attributable to the clear lack of confidence of investors in the economy and its managers.
After an extensive road show costing the tax payer millions of Ghana cedis, the government delegation that was authorized by the President and his Cabinet to carry out the transaction failed to achieve the stated objective. The seven year bond that was expected to raise 2.4 billion cedis could only close with a subscription of 62.5% (1.5billion out of 2.4billon), even after an extension of the closing date of the bond, it was further extended before the government could realise the 2.4 billion cedis.
Furthermore, the government could only raise 760 million cedis out of the projected 3.6 billion cedis from the 10 year bond, representing 21 percent of the expected amount. The government however decided to extend the closing date for the 10 year bond due to the abysmal patronage, but that could only raise 2.2 billion out of the targeted 3.6 billion representing 61% patronage.
WHY THE FAILURE? UNREALISTIC ASSUMPTIONS.
It must be noted that between 2012 and 2016 the consumption of various petroleum products in Ghana increased significantly as a result of the electricity shortages. To be specific, within this period, household and industrial demand for petrol and diesel for energy (electricity) production increased significantly. In 2016, when the electricity supply situation improved, the consumption for petroleum products declined from 3.36 million metric tonnes in 2015 to 3.13 metric tonnes.
Total consumption for the first half of 2017 stood at 1.4 million metric tonnes, and is expected to reach 2.96 million metric tonnes at the end of 2017, lower than the 3.13 million metric tonnes recorded in 2016.The projected consumption is equivalent to the 2012 consumption of 2.96 million metric tonnes. It is surprising therefore that the government has made the assumption that consumption for premium (petrol) for 2017, will increase by 3.58% and gasoil by 1.9 % over the 2016 figures. The projected consumptions are grossly overestimated. Any analyst who understands the Ghanaian economy will find this assumption unrealistic and may not have much confidence and interest in the bond. It is therefore not surprising that the participation rate of investors was very low. Ladies and Gentlemen, in plain English, the assumptions underpinning this bond was fundamentally flawed.
THE INABILITY OF GOVERNMENT TO MEET THE DEBT SERVICE COVERAGE RATIO.
The Ministry of Finance communicated to the investors through the prospectus that the Energy Debt Recovery Levy of the Energy Sector Levies Act will cover 1.25 percent of the debt service requirement during the moratorium period and the amortizing period. The government has projected an amount of 1.281 billion cedis for the Energy Debt Recovery Levy for 2017.
Again, the government had projected to raise 2.4 billion cedis from the 7-year bond and 3 .6 billion for the 10-year bond. Assuming that the interest on the 7 year bond is 19%, as we have been told, and a 19.5% percent of the 10 year bond, the interest payment for the first year alone will amount to 456 million cedis for the 7-year bond and 702 million cedis from the 10-year bond. The total amount of interest payment for the first year will be 1.158 billion cedis.
Based on this, the DSCR will be equal to (1.281/1.158 = 1.1). Clearly this calculation breaches the Debt Service Coverage Requirement (DSCR) as communicated by their own prospectus. Again, it is not surprising that the investors decided not to participate in this risky transaction. Any fund manager with a strong risk management back office will not sanction the purchase of such a risky bond.
CONFUSING BOND STRUCTURE complex no track record and unknown.
According to the prospectus, the status of the bond is senior, unsecured bonds backed by an assignment of the Energy Sector Levy Act (ESLA) receivables by the sponsor to the issuer under the assignment agreement dated 12th October, 2017.
Surprisingly, the status as communicated was full of contradictions simply because: (i) ESLA, as the name implies, is a tax revenue which came into force by an act of parliament. Assigning a parliamentary backed levy is, in itself, a government guarantee and cannot be interpreted as unsecured; (ii) the ESLA is like any other government revenue which is subject to successive government policy change.
The ten year bond is expected to run through about three different administrations and cannot be seen as having been ring-fenced to the extent that future governments can’t review it; (iii) the vehicle that has been used has no track record, it is unknown to the investing world, and it is not rated.
It must be recalled that the leveraging of the ESLA for the issuance of this bond vindicates the erstwhile Mahama administration and proves the NPP which opposed it, wrong. It is a matter of public record that the then opposition NPP and its leader and now President of Ghana insisted that ESLA be scrapped and promised to do so when voted into power.
There is also a lack of clarity on the status of the Energy Sector Debt which informed the enactment of ESLA in the first place. It is reasonable to believe that more debt would have been added and that the 31St December, 2016 cut off point for the purposes of issuing the bond is misleading. This lack of clarity has
implications for the amortization of the debt.
We therefore urge government as a matter of urgency, to conduct a comprehensive audit of the Energy Sector Debt with a view to providing an update.
It is equally important to stress that significant work had been done under the
NDC administration, which set up the ESLA, to pay down the debt.
By the time the NDC left office, about GHS 2.2 billion of the debt owed the Banks had been refinanced. Additionally the remaining balance of the debt to the
banks had been successfully negotiated to be settled within a reasonable time.
NO PRIOR PARLIAMENTARY APPROVAL.
Government went into the international financial market to raise an amount of 6 billion cedis with a possibility of an additional 4 billion cedis, making a total of 10 billion cedis, with a vehicle called ESLA PLC i.e. Energy Sector Levy Act Public Limited Liability Company. The Energy Sector Levy is a public tax measure enacted by an Act of parliament. The government by forming a public limited liability company using tax revenue approved by parliament without prior parliamentary approval is in clear breach of Ghanaian law. Assigning the Energy Sector Levy Act to the issuer’s amounts to collateralization of tax revenue without prior approval of parliament, which is illegal and unconstitutional.
Furthermore, the formation of a public limited liability company without prior parliamentary approval is illegal and unconstitutional.
CAUSING FINANCIAL LOSS TO THE STATE.
According to the prospectus that was issued on the 17th of October, 2017. The ESLA PLC is unrated but an independent special purpose company which is being sponsored by the Government of Ghana (rated B3 Stable (Moody’s); Bpositive (S&P); and B, Stable (F itch)). The government could have saved up to 200 basis points if they had gone to the financial market on the strength of Government of Ghana ratings, rather than the ESLA PLC which is unrated and unknown. Simply put, the state could have saved 2% of 6 billion cedis times 10 years, which is an equivalent of 1.2 billion cedis over the period. The government delegation has woefully caused financial loss to the state as a result of this gross incompetence.
We intend to summon the minister responsible for finance to appear before
parliament to answer to the circumstances that led to the willful breaches of the laws and constitution of the Republic of Ghana through this reckless conduct. Such gross disrespect for the constitution and parliament will have no place in our current democratic dispensation where actors like the Finance Minister arrogate to themselves the status of 12th century despots.
This singular failure of bonds issuance in this administration has brought Ghana’s image and integrity into disrepute. Ghana has become a laughing stock for this gargantuan failure and bomb that cannot be located with the recent U825 million Ghana Post GPS even in the middle of river Oti. We therefore call on the Minister for Finance to apologize unreservedly and in no uncertain terms to the good people of the Republic.