Press Statement: Public forum on Gov't/STX Korea Housing Deal

The Danquah Institute and the Imani Centre, with support from the World Bank and our media partner, Citi FM. We were compelled to hold this emergency stakeholders forum of the Ghanaian building industry because of moves by Parliament to approve a US$1.5 billion Supplier's Credit Financing Agreement between STX Engineering and Construction Ghana Limited as Lender and the Government of Ghana in relation to the financing of the 30,000 housing units under the Security Services Housing Project. This comes out of the agreement signed on the 9th December 2009, between STX Korea and the Ghanaian government for a joint venture to build 200,000 residential units across all 10 major regional capitals of Ghana at a cost of US$10 billion.

Frank Tackie, the President of the Ghana Institute of Planners, representing also the Ghana Institute of Architects, the Ghana Institute of Engineers and the Ghana Institute of Surveyors, said alternative local building materials, local expertise and better value for money can be achieved if Government had focused on Ghanaian firms, materials and expertise rather than Korea.

Sammy Amegayibor, representing GREDA, also lamented how Government has refused to sit down with them to explore the option of getting the Ghana Real Estate Developers' Association to undertake the project because local contractors are more than capable.

Also at the forum, Robert Ahomka Lindsey, the former CEO of the Ghana Investment Promotion Corporation, made the point that foreign direct investment is to supplement local initiatives rather than as substitute. He charged local industry players to come together and offer a viable option to both Parliament and Government so that they have a practical alternative to look at.

Franklin Cudjoe of Imani stressed on the need to get local players to drive this project.

We welcome the intention of Government to undertake this huge project to deal significantly with the gross housing deficit in Ghana, estimated at 1 million, with Imani estimating that some 6.5 million Ghanaians are lacking in decent housing. However, we believe the deal raises serious questions. It seems to be more an agenda for a better Korea than a better Ghana.

Next month, July 2010, the President of the Republic of Korea (or South Korea), Lee Myung-bak is scheduled to visit Ghana, as part of an investment-promotion tour to selected African countries. He is coming to Africa as part of his manifesto pledge to build a better Korea. Going to Africa to bat for South Korean companies’ simpliciter. Korea, which relies on exports, suffered a US$8 billion current account deficit in 2008.

Asia's fourth-largest economy expected to meet the government's forecast of 5% growth this year without difficulty, economists said the Bank of Korea should prepare the nation for interest rate hikes soon, even while inflation remains still benign. Exports totalled $39.49 billion in May, while imports were at $35.12 billion, up 50.0% on-year. That resulted in a trade surplus of $4.37 billion, the largest since November, according to preliminary data from the Ministry of Knowledge Economy. Korea's Ministry of Strategy and Finance said annual inflation is likely to remain stable at around 2% in June. The central bank of Korea's interest rate is 2.00%, an all-time low which makes loans from Korea cheaper but not necessarily cheaper than what is currently available form the money market elsewhere.

On May 4, 2010 the Government of Ghana sought to push through several loan agreements under a certificate of urgency when Parliament was on recess. One 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 am ount of US$1,525,443,468.00 to construct 30,000 housing units for the security services - with 20,000 units for the Police Service (including 10,240 units), and the remaining 10,000 to spread among the other security agencies, including the Military and the Prison Service.

On March 4 this year, Vice President, John Dramani Mahama, led a Government delegation to South Korea to complete agreement formalities on the housing project and sign another MOU on an infrastructure establishment project with STX, targeting Ghana's oil.

Per the off-taker agreement signed in Seoul on December 9 and before Parliament today, our Government has agreed to off-take (or purchase outright) 90,000 units, representing 45% of the 200,000 homes which the Koreans intend to build in Ghana by 2015. Government is required to pay the Korean company, STX Engineering and Construction Ghana Ltd, a 45% advance purchase payment of US$4.5 billion and also mortgage our oil assets.

The details of the US$1.5 billion credit facility before Parliament is as follows:

The Agreement:

* STX to build 200,000 houses at $50,000 each. Total cost is $10 billion,

* Government of Ghana has committed to an off-take agreement for 90,000     units at a total cost of $4.5 billion

* First 30,000 units to be constructed at a cost of $1.525, 443,468.00 (including  an insurance premium).

Terms

* Interest Rate 2%

* Grace Period 5 Years (does not apply to interest)

* Repayment 15 years

* Maturity20 years

* Management Fee0.75%

* Arrangement Fee0.75%

* Grant Element36.93%

* STX is exempt from tax for its imports of materials and machinery

* STX is exempt from corporation tax

* STX’s expatriate employees will be exempt from income tax

* Government of Ghana to provide land and all permits

* Additionally, Government of Ghana is responsible for STX costs and  expenses in executing the project under the “Financing Documents” (including legal, accounting, travel expenses, and other out of pocket expenses) and any VAT on those expenses.

* STX has option to convert debt into oil on execution of the contract.

Issues

* The transaction is a supplier’s credit agreement. However, there is no indication in the agreement what the source of funding is. Who is ultimately providing the $10 billion dollars? Available records indicate that STX is facing a major liquidity crisis and does not have the balance sheet for this level of exposure. How can any due diligence have been conducted without any comment on the ultimate source of funds for this project? The Government of Ghana cannot take it as given that the funds will be available. The provider of the funding should be part of the agreement with the government of Ghana and should undertake to do so.

* What is even more worrying is that STX rather than providing these details is busy flying parliamentarians to view building sites in Dubai and Korea where they have undertaken work. This is not relevant. When a lender of this quantum of funds is spending resources to wine and dine you in an effort to convince you the borrower then you should be worried. The reverse should normally be the case!

* The Cost of $50,000 per house is inordinately high considering that the Government of Ghana is providing the land, permits, tax exemptions for imported materials and machinery, corporate tax exemptions, and paying for the costs and expenses of STX. With these incentives it is clear that these houses can be constructed for a fraction of the cost.

Taking the agreement at face value, there are a number of concerns:

* Once all these exemptions and incentives are taken into account, the effective interest rate for the loan will be much higher than the 2% quoted. What is the price of the land? The tax forgone, the expenses paid etc?

* There is no transparency in the area of reimbursable expenses. The agreement merely states that STX will be reimbursed for all costs and expenses including legal, accounting, travel expenses, and other out of pocket expenses and any VAT on those expenses within 10 days of demand.

* Under Section 9.6 of the agreement, repayments by the Government will be applied as follows:

* What are the expenses contained in (a) and (c) and how does Government budget for these if there are no caps?

* Should the Ghanaian real estate sector not be given similar incentives?

What would be the justification for not doing so? If you provided a Ghanaian real estate company free land, no litigation, all permits, cover their expenses (within 10 days of demand), and no import duty or corporation tax they will definitely build you three bedroom houses for less than $50000!

* Implications of this deal for Ghana’s debt sustainability are serious. Ghana’s total public debt stock stood at US$9,202.94 million (61.7 percent of GDP) at the end of December 2009 up from US$7,918.1 million (54.6 percent of GDP) at the end of December 2008 and breaching the prudent ceiling for the total debt stock of 60.0 percent of GDP set in the 2007 budget.   An Additional debt $4.5 billion for the Government off-take of 90,000 houses will increase the debt stock to a whopping 91.8% of GDP!

Edging Ghana towards pre-HIPC levels with an additional burden of servicing the debt. The annual debt service on this STX ($4.5 billion) loan (interest and principal) after 5 years will be over $400 million p.a. This means that in nominal terms the Ghana’s debt service on this single transaction will be close to Ghana’s total debt service ($560 million) at the time it became HIPC. The total package of $10 billion will make Ghana’s debt burden unsustainable to the extreme. This does not make sense considering that this investment does not enhance the capacity of Government to service the debt. Furthermore it does not leave the government any room to undertake more productive investment in other sectors like roads, water, railways, ICT and energy which will be necessary to drive growth.

* The housing project is supposed to be an affordable housing scheme for low income workers who will be provided mortgages by the Home Finance Company (HFC). How many workers will be able to afford mortgages for $50,000 homes in Ghana? Assuming HFC financing terms for 15 year mortgages at 12% (dollar), and no depreciation of the currency, this will imply a monthly mortgage payment of some GH¢1,300.00 ( ¢13.0 million old cedis).

How many civil servants, teachers or nurses earn ¢13 million a month let alone afford a mortgage payment of this amount?

Also, over half of the initial 30,000 units meant for the security agencies are one-bedroom flats! 9,300 of them 2-bedroom flats!

* The loan is designed as initially unsecured, but following execution STX has the option of converting the loan into a commodity (oil) swap. This is the first explicit mortgage of Ghana’s oil resources before a single drop of oil is produced. The off-take of 90,000 units implies the equivalent of $4.5 billion of Ghana’s oil revenues committed to STX.  For 200,000 units it implies a commitment of $10 billion or potential oil revenue.

* The agreement signed by the Government of Ghana with STX therefore violates the negative pledge clause embedded in Ghana’s other loan agreements with the IMF, World Bank, and holders of the sovereign bond. A negative pledge is a provision in a bond or loan agreement that prohibits the issuer or borrower from doing something (like pledging assets as security) that would give an advantage to holders of other bonds. This is why many loan agreements have negative pledge clauses, for example:

“So long as any Note remains outstanding the Issuer create, incur, assume or permit to subsist any Security upon the whole or any part of its present or future assets, undertaking or revenues to secure (i) any of its Public External Indebtedness; (ii) any Guarantees in respect of Public External Indebtedness; or (iii) the Public External Indebtedness of any other  person; without at the same time or prior thereto securing the Notes equally” .

“Security” means any mortgage, pledge, lien, hypothecation, security interest or other charge or encumbrance including, without limitation, anything analogous to the foregoing under the laws of any jurisdiction.

It is clear that the Government of Ghana and STX are aware of the negative pledge clause problem but attempt to find a way around it by agreeing that:

“The Facility shall initially be unsecured and shall rank pari pasu with other unsecured financial obligations of Government” (Clause 10).

The word “initially” however gives the game away as there is intention to subsequently pledge security for the loan by hypothecation. This intention is made clear in Clause 7.1.3.

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.

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. GREDA says, "We don't foreign firms to do this deal. If Government is providing all these incentives, including tax and VAT exemptions, free land then why can't Government do the same for us?"

According to GREDA, the private sector is already providing tw0-to-three bedroom buildings at $50,000. "The real challenge is how to provide affordable housing for the majority of Ghanaians."

As Kofi Bentil of Imani points out, Ghana has basically agreed to subsequently pledge it’s yet to be produced crude oil in exchange for the debt when the country is yet to agree on how the oil revenues are to be spent.

Our checks also show that this a clear violation of the letter and spirit of the Negative Pledge clause embedded in Ghana’s various loan agreements. This agreement with STX gives it an advantage over other creditors and Ghana’s various creditors can call on Ghana to immediately repay in full all its obligations to the extent that this clause has been violated.

* The Management and Arrangement fees are way too high while the grant element at 36% is too low considering all the incentives.

Alternative Solution

Housing is a major problem in Ghana and needs to be addressed urgently. It however has to be done in a financially prudent manner. The domestic/external private sector will be in a position to provide housing if the sector is given some of the same incentives provided to STX with no need to swap oil or burden the budget. The solution is a private-sector led one.

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 means that all the subcontracts coming out of this mass building project will all go to the contractor, which has the discretion of subcontracting with some local content. EPC agreement 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.

Ghanaians built Dansoman Estate. If there is one industry that Ghana has shown local capacity then it is in housing construction. There is nothing to suggest that the Koreans are coming with any exclusive technology that cannot be acquired either in Ghana or on the international market. Before STX signed this  200,000 housing units deal in Ghana, the total number of housing construction deals secured by this Korean company across the world adds up to only 32,544 units. This includes  27,900-unit STX Dalian Housing Development Project, in Bachagou, Dalian, China, which began in 2008 and is less than 20% complete. The Korean company got its first housing construction deal in 2007, totalling 299 units of that year. In 2009, it won contracts totalling 3,104 units.

The head of the Danquah Institute, for instance points out that at an average cost of $50,000 per unit, the STX project is "a very, very expensive deal for such a mass construction project. By breaking the project down you see how scandalously over-priced it is for a country where you can pick up a 3-bedroom bungalow for $45,000. Half of the 30,000 units - 15,240 specifically - comprise of one bedroom apartments; 9,356 two-bedroom apartments; 5,217 three-bedroom apartments; plus 122 three-bedroom and 65 four-bedroom bungalows for senior officers. Are we saying that Ghanaian firms cannot acquire the requisite technology,  equipment and expertise to do the same project at a far cheaper rate, enhance their corporate capacity, create more local jobs, and boost the economy and without any risk of repatriation of profit?"

We see this deal as a little more than a generous stimulus package from poorer Ghana for a Korean company which has posted cash-equivalent assets of some $2.3 billion and debts of $6.6 billion. Ironically, President Mills' government has watched Ghana's construction firms folding, as it cuts down on infrastructural expenditure with the excuse of having to concentrate on dealing with a huge fiscal deficit inherited from his predecessor." He adds that Ghana's construction industry was the worst hit last year. Contrary to a 10% growth projection, "the construction industry experienced a negative 2% growth in 2009.

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

We are calling on Parliament to pull the brakes on this deal and for the Government to sit down with the local stakeholders and explore with patriotic sincerity and commitment the viable option of offering similar incentives to our local industry players to undertake such a project.

End

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