Why $1.5bn Housing Deal With STX Korea Is Very, Very Bad For Ghana

It looks like a very, very bad deal - reminiscent of the bad old days of naive and greedy African politicians. Even before production begins, Ghana’s new-found oil wealth is being scandalously mortgaged for a deal that should have gone to Ghanaian companies at about half the price we are paying a foreign company that, according to reports, is neck-deep in debt and effectively insolvent. It is arguably a most unpatriotic piece of agreement even by the standards of a corrupt and undemocratic government.

One of the financial agreements that the Mills-Mahama administration sought to push through recently, under a certificate of urgency when Parliament was on recess, was a Suppliers Credit Financing Agreement between the Government of Ghana and STX Engineering and Construction Limited (subsidiary of the STX Group, Korea) for an amount of US$1,525,443,468.00 for the construction of 30,000 housing units for the security services. Thankfully, the Minority asked for some more time and details for deeper study.

As an ardent believer of a property-owning democracy and a fierce critic of the shameful, lacklustre commitment that the NPP showed in realizing this -- its philosophy -- when it was in office for 8 years, my initial reaction was one of great excitement to the news that a

public-private-partnership was going to add 200,000 new, decent, affordable homes to the local housing stock. I greeted the news with some chuffy grin of irony: it took a so-called capitalist party to implement a health insurance policy and it is taking a so-called social democratic party to democratise property ownership.

But the details, however, sketchy, reveal a very, very bad deal for Ghana. The $1.5 billion translates into $50,000 per housing unit.  Though, the drawings and quantity surveyor’s details are yet to be made available to Parliament for value-for-money scrutiny, $50,000 unit cost is at a very expensive rate for such a mass construction project. The homes to be built for police officers, soldiers and others and rented to them or sold to them on mortgage are between one-bedroom to three-bedroom apartments (flats). On top of that, the Government of Ghana is providing serviced plots of land to the company for the project.

This is the very deal that President Mills told Ghanaians with glee that he was sending his Vice President to the Republic of Korea, to “put the final nail in the coffin.” Well, true to the President’s unintended wish, some of us are very eager to see to it that the final nail is hammered into this particular made-in-Korea coffin and encourage Government to go ahead with such a wonderful programme but by rather looking within. These houses must be built for Ghanaians by Ghanaians, with Ghanaians and at a much lower cost.

My question is this? Why would the NDC agree to such an evidently silly thing? The deal stinks. We must be suffering from a terrible cold not to smell it. It exposes the old thinking of our undemocratic governments that any credit deal is good because you don’t have to pay for it readily. Being a supplier’s credit financing agreement, the NDC may see it as allowing them to build such a wonderful number of homes without forking out a pesewa. How many Ghanaian companies can offer such a deal, they might have asked, rhetorically? Not even if you put all of them together. But, wait a minute…

Clause 7.1.3 of the agreement provides the option of the credit facility to be converted into commodity trading after completion of the project, which time is put at five years, 2015. Specifically, the Koreans want us to convert the loan into “crude oil or other petroleum related resources on such terms as may be agreed between the parties.” This makes it a very safe credit facility for the lender.

This is where I believe the NDC government has shown gross incompetence and bad negotiation skills. When Vice President John Mahama hinted this week that Government may follow the NPP lead and revisit the capital bond market, he knew that our potential oil wealth was what would open the way, in spite of the much trumpeted fiscal deficit.

So, what stops them from going to the same capital market to acquire a loan to allow Ghanaian construction firms to build the kind of homes that the Koreans say they are going to build for us? After all, this Korean credit comes at a high cost of 4% interest rate per annum; it is not as concessionary as the memorandum to Parliament sought to suggest.

Moreover, the 200,000 homes construction would only began after Government has pre-financed 90,000 of them. With nearly 50% of the selling price (not cost price) of the 200,000 homes expected to pre-financed by the Government of Ghana, which groups of competent Ghanaian companies would not be able to find the capacity and financial space to undertake such an important project? We don’t need Koreans to do this if this really is the deal. WE CAN DO IT!

Ghanaian charity should not begin in Korea. The Government of Ghana should be more Ghanaian in its apparent efforts to offer charity to the private sector. STX Group of Korea has cash-equivalent assets of US$2.92 billion and a debt of some US$6.6 billion. This is a company in distress and in need of a stimulus package for solvency. The Government of Ghana claims to be hard on funds and cannot therefore rescue local companies in distress.

Yet, it can still enter into a credit facility of US$1.5 billion to rescue a Korean firm. And, all along, GREDA and AGI are quiet? Amazing...

The details of the credit agreement require more answers from Government than we are getting. For example, Clause 14.2 of the Supplier’s Credit Financing Agreement puts the facility fee at 0.75% of the US$1.5 billion facility and the management fee to the lender at 0.75% of the facility, both to be paid upfront. Yet the financing details of the said facility presented to Parliament puts the management fee at 0.50%.  As hinted above,

that same document to Parliament puts the interest rate on the facility at 2.00% fixed per annum. Yet, Clause 6.1 of the agreement states that “Interest shall accrue on each disbursement for each Interest Period at the rate of 2.0% per annum.” Clause 6.1.1 adds, “The duration of each Interest Period shall be six months…” This means, the accumulated interest rate per annum is 4.0% and not 2.0% as presented in the notes to Parliament.

Also worrying is the non-detailed assurance from Government that the project “will ensure a minimum of 30% local participation” and that a “project of this scale will certainly transfer technology to local counterparts at the end of the project.” This is merely chancing local content and technology transfer. Surely, GREDA and AGI can not be content with this!

The thing with supplier’s credit is that the party entering into the credit facility as the project owner does not see the cash – or the liquidated value of the credit facility. This is an EPC (Engineering, Procurement and Construction) Agreement. The key elements of any

construction contract are those which impact on time, cost, and quality. With EPCs the contractor is responsible for all design, engineering, procurement, construction, commissioning and testing activities. This comes with a costly disadvantage. EPCs can result in a higher contract price than alternative contractual structures especially the contractor will have to factor into its price the cost of absorbing risks that are usually shared.

Ordinarily, the risk of cost overruns and the benefit of any cost savings are to the contractor’s account; yet this particular EPC agreement is silent on much of this. Unlike a typical EPC agreement, this one contains no clear performance guarantees backed by performance liquidated damages (“PLDs”) payable by the contractor if it fails to meet the performance guarantees. There are no defects liability clauses, which, for example, oblige the contractor to repair defects that occur in the 12 to 24 months following completion of the performance testing.

This deal is so bad that it requires nothing but a ruthless administering of the final nail in its coffinesque state.

The author is a lawyer and the Executive Director of the Danquah Institute, a liberal policy think tank, based in Osu, Accra, Ghana.

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