Isaac Adongo writes: Government hides the True State of Energy Sector Debts as Investors Price for Huge Risks for ESLA Bond

The poor and incompetent handling of the issuance of the Energy Sector Bond has badly exposed the lack of depth in the knowledge of investor behavior in the Dr Bawumia-led economic Management team.
After extending the closure of the bidding for the bond, investors made a damming verdict on the 10-year bond: It simply reflected their assessment of the huge risks associated with the bond. In the end, investors subscribed to a paltry GHC902m out of the GHC3.6 billion, after government had spent so many months and resources of the taxpayers money trying to woo investors. This represents only a paltry 25% of the target. In other words, a whopping 75% undersubscription of the 10-year bond.
It can be likened to the scenario of a football match where Ghana only managed 25% ball possession and scoring “half a goal”.
The current economic management team can thus be likened to a decorated and over-inflated Xmas balloon: very big and beautiful names but empty in content.
The arrogance and ignorance with which government desperately pursued this bond issuance was surprising, especially against very sound homegrown expert advice and the IMF.
Government’s lack of candor smacks of deceit, bad faith and gross dishonesty to the general public and the prospective investors for that matter. This behavior creates the problem of information asymmetry. It is extremely worrisome that, Government consistently chose to hide from investors the true debt position of the energy sector. This raises very legitimate issue of transparency and what exactly could be the motive for not speaking the truth.
Fact is that, in just 9months, the NPP administration has added as much as $500m to the energy sector debts and it is important that, Ghanaians and investors know the truth. At this rate, they are likely to be adding about $1billion by June 2018. If you borrow $1.3 billion ostensibly to pay debts but end up adding $1billion more to the debt yearly, what problem would you have solved? Clearly, instead of pouring water into a leaking bucket Dr Bawumia and his team should rather stop the incompetent handling of the energy sector to stop the bleeding the economy like they just did in 9motnth by accruing $500m. They should burry the pride and seek counsel.
It is quite unfortunate that Dr Bawumia and his team did not know that the use of a Special Purpose Vehicle (SPV) to borrow without guarantee or strong balance sheet to support a fallback position for investors, it was going to generate enormous risks that must be covered in the coupon rate in what is called the risk premium. This is free knowledge for them.
The use of nuisance tax in ESLA as source of future inflows spanning several regimes of successive future governments exposes investors to high political risks. For government to insist that this is not public debt further heightens this risk to investors as scrapping of this nuisance tax by a future government will lead to investors holding nothing but a junk bond.
That is why a political consensus would have helped a great deal to assure and assuage or allay the legitimate fears and concerns of investors.
I found the strategy and tools used by Dr Bawumia and his team to be very strange. It is even more surprising, although understandable given the level of their incompetence that the government sought to market the issuance as if it was issuing a risk free government security when, in fact it had stated clearly that this is not public debt and was not willing to provide guarantee to investors to moderate the risks of using an SPV that has nothing other than it’s letterhead and the political risks of using a nuisance tax to back repayment over a 10 year tenure. The government’s pricing guidance of 17% to 19% was an insult to investors. Here is the reason: That price guidance means that the government benchmarked a risky bond to a risk free government security without paying a risk premium for the huge risks associated with this bond.
The approach used by the transaction advisers and government was to appeal to the same investors who buy government’s risk free bonds at the same 19% with full government guarantee. My question is, why should any rational investor buy this risky bond when they can get a risk free bond from the same government in a few weeks’ time.
The approach, tools, strategy and pricing of this bond was completely out of tune with the substance and characteristics of the bond. This is akin to government using a prospectus meant for selling cars to sell tomatoes. Better still, you don’t dance “adowa” or “agbadza” to a rock and roll music in a rock and roll club.
The IMF is emphatic and rightly so, that this is public debt. What is the wisdom in failing to issue it as a public debt to reduce the risk of the bond and increase investor appetite only to end up still treating it as a public debt anyway? This level of ignorance and sheer display of arrogance and incompetence of Dr Bawumia and his team is legendary. The incompetence has cost us all a higher interest rate to be paid on this bond.
Worse of all, extending the issuance for a second time for a week makes it difficult to believe that this money is needed to pay energy sector debts. It is clear that the money to be raised is very critical oxygen for a broke government living from hand to mouth and suffocating under severe revenue under performance. While people like myself will continue to advice, it will be left up to Government’s economic management team to decide how to treat those pieces of advice. Needless to say that if they had listened, the bond would have been oversubscribed even with a much lower interest rate and the current humiliating and embarrassing spectacle being faced by government might have been avoided and Ghana, our beloved country would have been the victor.

Thank you
Signed

Hon Isaac Adongo
(Member of Parliament Bolgatanga Central)

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