Ghana’s Power Sector: Insights Into ECG’s Concession Agreement With The Private Sector - Goodman AMC




Goodman AMC embarked on a study into Ghana’s power sector to find out how the Government of Ghana is dealing with the current power crisis in Ghana. The research findings in parts of Accra and Kumasi on the Electricity Company of Ghana (ECG) has made it clear on how the Government of Ghana has decided to operate ECG.

The following findings were developed as a result of Goodman AMC’s interactions and interrogations with some ECG staff and access to documents which proves and ascertains these findings as a valid document.

From our interactions with staff of ECG, Goodman AMC has also been able to identify the stand of ECG workers on the Government of Ghana’s decision to award ECG on concessionary basis to a private entity

Background
The Government of Ghana has decided to give out the Electricity Company of Ghana (ECG) on concession, to a private entity for over a 20 year period. This is part of activities under the Millennium Challenge Corporation (MCC) of the USA’s second compact with the Republic of Ghana. This follows recommendations made by the international Finance Corporation (IFC) of the World Bank that the best option to address the challenges in the energy sector in Ghana is to introduce private sector participation in the distribution section of the sector.

They provided the Government of Ghana with two options which were;

1. To enter into a concession agreement with a private entity or
2. To partially privatize ECG.
The Government of Ghana has therefore decided to give out ECG on a concession agreement.


The Concession Agreement
This is an arrangement where Ghana enters into a contract with a private partner. The private partner or concessionaire will have total responsibility for operating and maintaining assets of ECG during an agreed period of time which is between 20 to 30 years. The concessionaire will also be responsible for all capital investments as well as operation and maintenance costs of the Electricity Company of Ghana and the Northern Electricity Distribution Company (NEDCo).

Under the arrangement;

1. Assets will still be 100% owned by the state. ECG will become an asset holding company.

2. Electricity market will still be regulated by technical and economic regulation.

3. PURC will still ensures quality of service and customer satisfaction and will still set tariffs.

Merits of Concession Agreement
1. This deal will allow the concessionaire to be able to adopt innovative solutions to problems and enhance strong incentives to make efficient investments to enhance revenue.

2. Ghana’s power companies will still be owned by the government.

3. It will also reduce political interference in the sector which will lead to a better and stable service delivery and will help in attracting private capital in the sector.


The Millennium Challenge Compact II
This is called the Power Compact and it’s under the Theme- ‘Powering Ghana for accelerated and sustainable growth’. As approved by the Ghanaian Parliament, it is an international agreement and has the force of international law and supersedes any local laws.

The Government of Ghana has therefore delegated some (not all) of its responsibilities to the Millennium Development Authority (MiDA).

It involves a United States Government grant of $498.2 million and a Government of Ghana contribution of $37.4 million which will all amount to $535.6 million. The duration of this compact is 5 years from its entry into force (EIF).

Goals and Objectives of the Millennium Challenge Compact
1. Increase private sector investment and the productivity and profitability of micro, small and large scale businesses.

2. Increase employment opportunities for men and women.



3. Raise earning potential from self-employment and improved social outcomes for men and women.


The Millennium Development Authority (MiDA)
The MiDA is a statutory organization established in 2006 under Acts 702 and 709 as it was amended. It has a board, a management team, staff and stakeholder committees. It is the primary agent to implement the Power Compact program and to perform the Government of Ghana’s right to and obligation to oversee, manage and implement the program.

The Authority’s responsibilities include managing the implementation of the projects and their activities, allocating resources and managing procurements

Powers of MiDA
1. Perform designated rights and responsibilities and to bind the government to the program.

2. Make its own budget and implement decisions of its board.

3. Expend MCC Funding.

4. Acquire own, possess and dispose of property in its name.

5. Sue and be sued in its name.

6. Enter into, be bound by and enforce contracts in its own name.

7. Open bank accounts in its own name.

8. Engage implementing entities.

9. Insure against all normal commercial risks.

MiDA Compact II Project Listing Tranche 1

ECG Financial and operational turnaround project.

NEDCo Financial and operational turnaround project.

Regulatory Strengthening and capacity building project.

Access Project.

Power Generation Sector Improvement Project.

Energy Efficiency and Demand Side Management.

The ECG Financial and Operational Turnaround Project: This project consists of five activities to be executed with the results geared towards the reduction in implicit subsidies (created by losses, under-pricing and under billing), ensure ECG is commercially viable, ensure ECG recovers its costs and invests in maintenance and expansion without requiring regular financial support from the government. The five activities to be undertaken are:

1. Private sector participation (PSP) activity

2. Modernizing utility operations activity

3. Reduction in commercial losses and improvement of revenue collection rates activity

4. Technical loss reduction activity

5. Outage reduction activity.

The NEDCo Financial and Operational Turnaround Project: This is similar to that of ECG above

The Regulatory Strengthening and Capacity Building Project:  This project consists of two activities. These are:

1.Capacity building of the sector's performance monitoring capabilities to ensure better accountability and reporting.

2. Tariff review and regulation activity.

The Access Project: This project is to help improve access to reliable electricity among micro, small and medium enterprises in selected markets and economic enclaves in urban and rural areas in the ECG and NEDCo target regions.

The Power Generation Sector Improvement Project: This project will support measures with the aim of opening up the power sector and making it lucrative to private investment in order to reach the Government's goals to have adequate installed generation capacity to meet demand.

The Energy Efficiency and Demand Side Management Project: Energy efficiency and demand side management project will implement policies and investments that represent a cost-effective means to bridge the electricity demand and supply gap.


The Electricity Company of Ghana (ECG)
This is wholly owned by the Government of Ghana and operating under the Ministry of Power. The Company was incorporated under the Companies Code, 1963 in February 1997. It began as the Electricity Department on 1st April 1947 and later became the Electricity Division in 1962. It was subsequently converted into the Electricity Corporation of Ghana by NLC Decree 125 in 1967. Until July 1987, the responsibility for distributing and supplying power in the country rested on ECG. The Government of Ghana created the Northern Electricity Department (NED) as a subsidiary of Volta River Authority (VRA) in 1987 which took over from ECG the responsibility for the running and development of electric power systems in Brong Ahafo, Northern, Upper East and Upper West Regions. The Company is responsible for the distribution of electricity in the southern part of Ghana namely, Ashanti, Central, Eastern, Greater Accra, Volta and Western Regions.

ECG requires about $200 million every year to address its investment gap in order to meet annual power demand growth rate of about 10 percent.

Functions of ECG
1.To transmit, supply and distribute electricity.

2.To purchase electricity energy in bulk (from the Volta River Authority) or any other supplier for distribution. 

3.To construct, reconstruct, install, assemble, repair, maintain, operate or remove sub-transmission stations, electrical appliances, fittings and installations.

4.To execute national electrification programs on behalf of Government. 

5.To carry out any other activity incidental or conducive to the attainment of the objectives specified in the instruction above.

Government of Ghana’s Indebtedness to ECG
The Ghanaian Government and its public institutions are ECG’s biggest debtors. 40% of ECG’s monthly bills go to the Government of Ghana. According to a statement put out jointly by the workers of ECG, VRA and GRIDCO in January 2015, the total Government indebtedness to ECG was GHC1, 247,597,280.51 as at the end of October 2014. This constituted more than 62% of debts owed to ECG.


ECG Workers Position on the Concession Agreement
75% of workers of ECG sampled for this Goodman AMC report are not in favour of the Ghanaian Government’s decision to give the company to a private entity for a concession agreement. They believe, the objectives and rationale for Government’s decision could be achieved without a private concession agreement. The major problem facing the company is the inadequate power given them for distribution to Ghanaians.

Majority of the workers are not happy with the situation with them being at the receiving end of insults and abuse from Ghanaians. ECG placed third on Goodman AMC’s annual list of the Top 20 Worst Places to Work in Ghana.

Concerns of ECG Workers
There is the fear that, the concession agreement will result in a massive layoff in their ranks and it is a major concern to them. Apart from this concern the workers blame the Government of Ghana for most of their woes. They do not understand why successive Governments fail to pay debts owed the company but instead the Government of Ghana is willing to pay the concessionaire as a condition for their agreement. They also rue the political interference in their work from Government which includes:

Government through the PURC not setting realistic tariffs and the non-payment of Government subsidies which all add up to their losses.

The constant changes of their Managing Directors by government. They voiced their displeasure when the then Director; Hutton-Mensah was removed in 2014.

Government/Political interference in their procurements and service delivery. Contracts are awarded to individuals who do not merit them. An example is in the procurement of sub-standard metres by these companies for ECG. The company currently has different metres for different jurisdictions. They also cited the Self Help Electrification Project (SHEP) metres meant for rural areas which are found in some urban areas. This they say affects the stability of the ECG network and denies the company revenues.

Government should concentrate on increasing the power generation capacity of the country. They do not understand why they should be blamed, when they only distribute the inadequate power given them.

Under the tenure of Hutton-Mensah, ECG has initiated some changes in the course of their service delivery which were not apparent when the company was being assessed by the IFC in 2012.This they believe makes the data used in advising the Government obsolete. These changes their fear will be apparent in a period of 5 years by which time the concession agreement will have commenced and credit for the transformation given to the concessionaire.

An example is the Strategic Business Unit (SBU) concept which is currently being piloted on a 2 year duration in the Ashanti Region. The investment of US$7,494,587.15 is aimed at enhancing operational efficiency and profitability.

ECG Workers Alternatives to the Concession Agreement
Government should eliminate any form of interference in the work of ECG.

Government should source funds within the country instead of always looking to the outside world. They suggested, accessing pension funds from SSNIT and Second Tier Pension Funds as it’s done in other countries.

Government should list the ECG on the Ghana Stock Exchange to raise capital to support the company’s operations.

Entry Into Force (EIF)
The Government of Ghana is to proceed in a timely manner to complete all of its domestic requirements for the Compact to enter into force.

Conditions Precedent to Entry into Force (EIF)

Before this Compact enters into force;

1. The Program Implementation Agreement must have been signed by the parties thereto,

2. The Government must have delivered to MCC;
  • a letter signed and dated by the Principal Representative of the Government, or such other duly authorized representative of the Government acceptable to MCC, confirming that the Government has completed its domestic requirements necessary for this Compact to enter into force and that the other conditions precedent to entry into force have been met
  • a signed legal opinion from the Attorney General of Ghana (or such other legal representative of the Government acceptable to MCC), in form and substance satisfactory to MCC
  • complete, certified copies of all decrees, legislation, regulations or other governmental documents relating to the Government’s domestic requirements necessary for the Compact and the PIA to enter into force, which MCC may post on its website or otherwise make publicly available.

3. MCC shall not have determined, at the time of the Compact’s entry into force, which the Government has engaged in a pattern of actions inconsistent with the eligibility criteria for MCC Funding;

4. The Government must have delivered to MCC evidence;
  • that the tender documents for an Acceptable ECG Private Sector Participation (PSP) Transaction have been released for competitive selection through an open and transparent process acceptable to MCC;
  • of substantial compliance with the Gas Action Plan, including providing copies of the executed agreements required in accordance with the Gas Action Plan;
  • that a long term Gas Sector Master Plan, acceptable to MCC, has been approved by the Government;
  • of substantial compliance with the Electric Distribution Utility Payment Action Plan; and
  • of approval and implementation of quarterly tariff adjustments in accordance with the existing formula for each of the calendar quarters between the initial CIF Disbursement and entry into force of this Compact.

Date of Entry Into Force
This Compact will enter into force on the date of the letter from MCC to the Government in an exchange of letters confirming that MCC has completed its domestic requirements for entry into force of this Compact and that the conditions precedent to entry into force have been met to MCC’s satisfaction. The Compact will remain in force for five (5) years after its entry into force, unless terminated.

Acceptable ECG - Private Sector Participation (PSP) Provider
Acceptable ECG - Private Sector Participation (PSP) Provider means a competitively selected private sector entity which meets the following criteria, as determined by MCC:

1. has relevant technical experience and a proven track record of helping electricity distribution companies of similar size and scope as ECG to become profitable;

2. has relevant experience in developing countries;

3. has adequate financial capacity as evidenced by the ability to satisfy the minimum equity threshold and tangible net worth requirement set forth in the tender documents released by the Government for the Acceptable ECG PSP Transaction; and

4. is selected through a bidding process based upon parameters to be designed to maximize value for the Government of Ghana and meet Government objectives.

Acceptable ECG PSP Transaction
Acceptable ECG PSP Transaction means the long-term concession agreement among the Government and an Acceptable ECG PSP Provider that leverages private capital to address operational and commercial competencies necessary for the specific challenges of ECG’s operation which meets the following criteria, as determined by MCC;

1. includes a strategic partner meeting the requirements of the Acceptable ECG PSP Provider;

2. results from an open, competitive, and transparent process;

3. encourages local participation at both the ownership and operational levels;
is sensitive to local customs and conditions;

4. ensures the equitable treatment of ECG staff; and

5. applies a corporate-wide approach with respect to operations, management and governance of ECG.

Conditions Precedent to Initial Tranche II Funding Disbursement
Each of the following conditions must be met to MCC’s satisfaction prior to the initial Tranche II Funding Disbursement:

1. The Government must provide evidence that an Acceptable ECG PSP Transaction has achieved Financial Close and, if necessary, received approval from the Ghanaian Parliament to execute such Acceptable ECG PSP Transaction;

2. The Government must provide evidence of substantial compliance with the Tariff Plan; and

3. The Government must provide evidence of substantial compliance with the Electric Distribution Utility Payment Action Plan.


Timeline Till Concession Commences
June 2015: MiDA/GoG sign contract with IFC for transaction advisory services.

November 2015: Launching of Request for Proposal (RFP) for PSP.

November/December 2015: Entry into Force (EIF) of Ghana Compact II.

May/June 2016: Receiving of Proposals for PSP.

October/November 2016: Negotiations and Signing of Contract.

April/May 2017: Concession commences.


Conclusions
1. ECG is undergoing changes and the concession agreement will come on between the company and a private entity.

2. Ghanaians will pay more for electricity in anticipation of removal of Government subsidies and the payment of higher tariffs than what is currently happening.

3. About 30% to 40% of ECG staff will gradually be laid off before and after the concession agreement takes off in order to make the company lean.

4. Political interference in the affairs of ECG will lessen when the agreement takes off.


By: goodmanamcllc.com







1 comment:

  1. Kudos Goodman AMC!!,but have you read about what the ranking member of finance in parliament said about their inability to scrutinised the MCC document before it was passed, interesting 275 MP's, check again on what former diplomat Craig Murray said on this DEAL.

    ReplyDelete

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