DI'S Comments on the Decision of the Parliamentary Select Committee on Finance to Recommend the $1.5Bn STX Agreement for Parliamentary Resolution

Attached is the Report of the Finance Committee of Jul 5, 2010 on the $1.5 billion supplier credit facility between STX Engineering & Construction Ghana Limited and the Government of Ghana for the construction of 30,000 housing units of houses under the Security Services Housing Project. Below are the Danquah Institute's initial comments on the report submitted to the House

Issues identified:

Although the terms and conditions of the agreement are laid out in certainty. Sources of funding, according to the report, are far from certain. So, who is providing the $1.5 billion supplier's credit facility? In spite of the agreement describing STX Ghana as lender, STX Ghana is, in fact, merely an on-lender to the borrower - the Government of Ghana. The provider of the funding should be part of the agreement with the Government of Ghana and should undertake to do so. It is difficult to accept the claim that due diligence have been conducted on this facility without any clarity on the ultimate source of funds for this project? For Parliament to approve this deal is as good as offering a blank cheque of a Sovereign Guarantee to STX with which it can go shopping for funds. So in the absence of clarity on itemised sources of funding, what weight can be placed on the terms of conditions provided by STX even if they do meet a concessionary requirements?

We noticed further that while the Arrangement Fee remained at 0.75%, the Management Fee has been reduced from 0.75% to 0.50%. This reduces the total amount of fees specified to $20 million - a figure which is still very high, especially considering the financial obligations of the agreement which are all placed on the shoulders of the Government of Ghana. If the source of funding is the Korean Government and that the funds borrowed are not coming directly to GoG, then what accounts for this unusually high percentage rate of Arrangement Fee (0.75% of the total sum of the facility), especially, when the agreement at Paragraph 14.1 stipulates that "the Government of Ghana shall within 10 business days of demand pay all expenses incurred [by the Lender] (including legal, valuation and accounting fees, travel expenses and other out-of-pocket expenses), and any VAT on those expenses"?

In spite of GREDA's apparent comfort that Government says the deal will now provide for 70-80% local content, the Agreement, according to the Finance Committee report still maintains, ad verbatim, the original words as provided under Paragraph 6(3) of the Off-Taker Agreement that STX commits "to directly or indirectly use local resources of Ghana for at least thirty percent (30%) of the resources for the Housing Project..."

The report makes it clear that the demand by members of the Committee "to be sure that the Government of Korea was actually backing the project" was not satisfied. It reads, "To this end, the Ministry of Finance & Economic Planning presented to the Committee a letter from the Korean Ambassador to Ghana indicating that the Korean Government has identified the Global Infra Fund as part of the sources from which the Korean Government is supporting the STX Group," the company that has 66.96% shares in STX Engineering &

Construction Ghana Ltd.

Checks made by the Danquah Institute has so far drawn a blank on any information about this so-called Global Infra Fund. It would be helpful to know if this is a new sovereign fund apart from the established sovereign wealth fund of South Korea, known as the Korea Investment Corporation. Officially, we are being told it is fairly new with hitherto limited

resources to support the investment drive of Korean companies.

Also, the Ambassador's letter made it known that the support would be for the STX Group, which has several other subsidiaries which it may seek to support from its share of the nascent Global Infra Fund, as well, including STX Finland Oy, which was compelled to fire its President, Martin Landtman, just this week, in its efforts to "improve the situation for the company in a challenging economic environment."

The letter from the Embassy made no categorical claim that the Korean Government was directly going to invest in the $1.5 billion Housing Project in Ghana and by how much as has been claimed recently by both the CEO of STX Ghana, B K Asamoah, and the Chief of Africa Division of the STX Group, Kim Yong-Chan, who maintain that the Korean Government is to fully fund the $1.5 billion credit facility for the Ghana Housing Project. The Ambassador's non-committal letter also c onfirms the statement from Park Young June, Vice Minister at the Office of the Korean Prime Minister, who visited Ghana recently that his Government "might" support the Ghana Housing Project, according to his translator.

In fact, the Korean ambassador only sought to argue that the STX Group, backed with Ghana's sovereign guarantee, can raise the money from the capital market: his letter states: "Messrs STX Business Group, which is the Korean partner of the STX Engineering & Construction Ghana Limited, is a good standing conglomerate group in Korea. Since its current financial standing is over US$25 billion turnover per annum, it is eligible to obtain

any credit facility without Korean Government support in Korea and any part of the world. It is particularly so when the repayment is well guaranteed by the Government of Ghana, which is prerequisite for acquiring credit facility for the project."

Furthermore, the Committee received no letter of comfort from the STX Group indicating any financial commitment from it to this Ghana Housing Project. This only adds to the suspicion that the STX Group has no intention to invest any substantial money in Ghana beyond the advance payments it expects from the Government of Ghana as indicated in the

Off-Taker Agreement for the construction of 90,000 housing units; in the hope of using income from that to finance the construction of the additional 110,000, which would only take place if HFC could demonstrate capacity to buy the 110,000 off STX after construction; an investment requiring HFC to raise some $5.5 billion!

When some members of the Committee raised issues over the financial burden involved in Government paying for the $4.5 billion cost of 90,000 housing units as its commitment to the off-take agreement with STX to build 200,000 housing units in Ghana in five years, Government's response was rather curious. To the argument that the 45% would amount to US$4.5 billion, which would amount to about 30% of Ghana's GDP and immediately double our external debt, Mr Seth Terkper, Deputy Minister of Finance & Economic Planning "explained that with prudent loan management, this facility will not substantially impact the debt sustainability ratio of the country in the medium term."

It is instructive to note that since the credit facility comes with a five-year moratorium, it obviously has no medium term impact on our ability to service the loan. But, since the 30,000 units are to serve as barracks and the project is not therefore a self-amortizing kind (which would pay for itself), the Deputy Minister's assurances appear rather hollow if put

under scrutiny. Again, the lack of capacity of HFC, (which has an associated off-take agreement to 'buy' the majority of the 200,000 housing units under the Housing Project) to buy the houses and sell them on to the public through mortgage financing, could seriously place Government's debt servicing capacity at risk, especially when the financing arrangement is supported by a sovereign guarantee.

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 per annum. 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 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 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 report could not also provide answers to Members' query over how much each housing unit would cost. Not even a reliable estimate could be provided to them by any of the two sector Ministries involved. The report reads: "To this, the Committee's attention was drawn to Paragraph 2 of the Off-Taker Agreement which states that 'Based on preliminary information, the Housing Project is estimated to cost US$10 billion on a turn-key basis. STX will use its best endeavour to maximise the financial, geological and design criteria to obtain a minimum cost per unit of housing that is commensurate with the design and quality that  will meet the requirement of GoG. The actual and final price per unit of the houses to be acquired by the GoG under the Housing Project shall be agreed between GoG under the Housing Project shall be agreed between GoG and the Project Company after the Project Company and STX have completed a full-scale project cost analysis.'"

The above statement from the report reinforces the argument of the Danquah Institute that the supplier credit agreement, as presented to Parliament in its current form, is too premature for parliamentary approval since the quantities of cost are yet to be determined. If Government went by this method of agreeing on the total sum and then proceeded to craft unit cost items to fit or justify the total amount of $1.5 billion it would not be in the national interest. It would amount to issuing a blank cheque to STX to go and spend and come back to Government to justify.

GREDA had presented a petition to the Joint Committee of Finance and Works & Housing. At their meeting with the joint committee on Monday, July 5, GREDA presented a case, backed with drawings, comparative analysis and cost estimates, including cost per unit, that it could build 30,000 housing units for Government at a total cost of $540 million. This is nearly a third cheaper than the financing package offered by STX. The Finance Committee would only say, "Whilst the Committee took the petition into consideration in coming up with this report, the Joint Committee's report on the said petition has been prepared separately for submission to the House."

It is instructive to note that in recommending to the House to adopt its report and approve by resolution the $1.5 billion supplier credit facility, the Finance Committee was absolutely silent on the all-important question of whether the agreement constitutes value for money. The Committee could only conclude that it "finds that the project would be of immense socio-economic benefits to the various security agencies as well as provide employment to the teeming youth."

This report was prepared by the Research Department of the Danquah Institute

©2010

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