Beware of the Chinese, when they come bearing loans

Ghana’s Parliament has been given effectively two days (today (August 24, 2011) and tomorrow) to approve a $3 billion commercial loan called the Master Facility Agreement (MFA) from the state-owned China Development Bank (CDB). The MFA, once agreed, will be followed by subsidiary agreements (12 mega ones) dealing with a multitude of specific items that the facility is to fund. Government is expected to make its own contribution of15% of the total amount of $3 billion, representing $450 million.

This amount is twice the size of the biggest loan facility ever taken by Ghana, which was the ill-fated, accident-prone $1.5 billion STX suppliers’ credit facility for public housing to the Koreans approved by the legislature on August 3, 2010. Moreover, the cost of this single Chinese loan facility to Ghana is more than the total external debt of $4 billion inherited by President Mills on January 2009 when he took over.

This is a loan from the Chinese government that doesn’t come cheap; it is a commercial loan, attracting an interest rate of 6 months Libor + 2.95% for 15 years for the first tranche of $1.5 billion and 6 months Libor + 2.85% for the second tranche of $1.5 billion payable in 10 years. Chinese loans come with their own conditionalities, notable of which are Chinese contractors, Chinese labourers, and, perhaps, half-Chinese half-Ghanaian kids to boot.

The agreement states expressly that the Government of Ghana must make sure that a minimum of $1.8 billion of the $3 billion total amount must go to Chinese firms, who will, of course, freely repatriate that to China. It does not say a minimum of 40% local content. The danger with this is that a minimum of 60% Chinese content can easily translate into a maximum of 90%.

Under Section 2, paragraph 3.1, page 16, which deals with the loan facility, it reads that the borrower, Government of Ghana, “shall apply all amounts borrowed by it” to “approved projects, including by payment to approved contractors involved in such approved projects provided that a minimum of 60 percent of each of the Tranche A facility [of $1.5bn] and the Tranche B facility shall be paid to PRC [The People’s Republic of China] Contractors.”

This predominant Chinese content requirement effectively gives China the single largest role in Ghana’s oil and gas industry once the black gold is drilled. It also consolidates the incomparably huge stake that China has in Ghana’s infrastructural development.

(i) The $500 million Western Corridor Infrastructure Renewal Project, which focuses on rebuilding the Takoradi-Kumasi and Dunkwa-Awaso lines is a design-build-maintain contract to be undertaken by Chinese firms.

(ii) The $150 million Takoradi Port rehabilitation project is another design-build-maintain contract for the Chinese.

(iii) The $100 million Sekondi Free Zone Project, which seeks to develop onsite infrastructure and utility services for a proposed industrial minerals processing estate, including an Alumina Refinery that has already been given to a Chinese company, is in fact a build-operate-transfer contract to be done by Chinese firms.

(iv) The $100 million 5,000 hectare Accra Plains Irrigation Project is another build-operate-transfer contract for the Chinese. Peculiar, however, with these BOT deals is the fact that the contractor is not responsible for providing funding, since the responsibility for contracting the loan is directly on the Ghana government.

(v) The Eastern Corridor Multi-Modal Transportation Project, which is put at anything between $150-500 million, involves the procurement of ferries, pontoons, upgrade of  fishing landing sites and port, with the works to be done by Chinese firms under  design-build-maintain contracts.

(vi) The Chinese have been offered another lucrative deal of $150 million for the deployment of an ICT-based integrated communications platform “to enhance security and surveillance of all infrastructure and facilities in the Western Corridor Oil Enclave.”

(vii) The Chinese can also bank on another BOT project estimated to cost between $150-200 million “to enable accelerated completion of stranded road construction works on key congested road arteries for the [Accra] metropolis, especially (i) Nsawam Road (Achimota-Ofankor segment; (ii) Dodowa Road (Tetteh Quarshie-Haasto Junction); and (iii) La Beach Road.” Meanwhile, Government recently raised money from a bonds issue of over $300 million.

(viii) This facility, as stated earlier, gives China a significant control of our oil and gas industry.  Out of the $3 billion an “allocated amount of $850 million” is for the Western Corridor Gas Infrastructure Project, involving the construction of an offshore gathering pipeline (construction of which is already underway), to fund the early phase construction of a gas processing plant, an onshore trunk pipeline, including a gas dispatch facility, retrofit of the Tema Oil Refinery to enable TOR process natural gas liquids and a deployment of helicopter fleet for enhanced surveillance of facilities. Though the entire project will done by the Chinese under a series of design-build-maintain contracts, the project will be supervised by the newly created Ghana National Gas Company, headed by Dr Sipa Yankey.

(ix) The Chinese, per this facility, will also get the contract to build the $200 million Takoradi Petroleum Terminal Project at Pumpuni.

(x) Chinese road contractors also have a $150 million road construction project in the Western Region, which puts the cost of building a one kilometre road at $1 million. This inflated price is quoted for roads construction on lands already owned by the state.

Parliament is also asked to approve the use of the Annual Budget Funding Amount (ABFA) under the Petroleum Revenue Management Act, 2011 (Act 815) “to support repayment of the facility, under the escrow mechanism agreed with the China Development Bank and submitted earlier to Cabinet for approval.” It goes on to state in no uncertain terms, “Under the escrow arrangement, the relevant permissible portion of the proceeds of crude oil sales under commercial contracts with Chinese offtakers will be used to repay the facility.”

In order for Ghana to be considered for this multi-billion dollar credit line from China, Ghana is negotiating a series of “commercial off-taker agreement for the lifting of Ghanaian crude oil” and that the proceeds from this sale to China will grow through the perfunctory pipeline of the Petroleum Holding Fund at the Bank of Ghana into the ABFA to end up in an escrow account “to be established offshore for the purpose of servicing the loan and meeting the GoG’s counterpart funding commitments  through a related loan servicing account.”

What this means is that we are getting loans on commercial terms from China, repayment of which is tied tightly to proceeds from our share of the oil, thus offering no risk whatsoever to the economic superpower. On top of that, at least 60% of the $3bn must go to Chinese firms, which will enjoy tax breaks and, in some instances, like the $100 million Accra Plains Irrigation Project, will be undertaken by a Chinese firm on a Built-Operate-Transfer contract, even though in this case the contractor is not providing funding.

The Chinese have gone extra lengths to guarantee repayments schedules are met, even if to the detriment of all other things. Under Section 7 of the agreement, which deals with Representation, Undertakings and Events of Defaults, they have secured an undertaking that no other deal is done outside of the pipeline procedures which will see our oil revenues go through to end up in the designated escrow account.

Under Section 16.21, titled ‘No other oil-linked Finance Transaction’, it states: “Neither the borrower nor any public entity is participating in, has undertaken, or is otherwise enjoying the benefit of:  (i) any oil pre-export financing transaction; or (ii) any financing transaction of a nature and/or structure similar to the transaction contemplated in the Transaction Documents in which the proceeds from the sale of the oil under the transactions described above are paid to an account other than the Petroleum Holding Fund.”

Under Schedule 1 (Conditions Precedent to First Subsidiary Agreement), before the lender will agree to release any funds, the requirements include “Evidence that the annual principal and interest payments due under the Master Facility Agreement and each Subsidiary Agreement have been included in the current annual fiscal budget for the Republic of Ghana.”

This will invariably determine the pace of development of the projects, since the Chinese will only give us much as they can be hundred percent certain (not of our ability to pay) but that the money for the payment is in the bag. The catch with this is that for Government to ensure that the project remains on course other projects expected to be funded from our oil proceeds are likely to suffer. This then reduces the Petroleum Holding Fund and the ABFA to a mere pipeline for the offshore escrow account dedicated to service the Chinese loan. On the tail end of Ghana’s upstream oil, China will be there to first make sure that they are the first to take our share of oil produced in Ghana and, secondly, to guide the movement of the payment for that oil into the escrow account.

Paragraph 4 of Schedule 1, which deals with the “Offtaker Agreement”, puts the point above beyond doubt. The Chinese say they will fund the first subsidiary agreement only after receiving (i) Evidence that the Exporter [of Ghana’s share of the oil] is entitled and able to sell crude oil of the type and in the amounts referred to in the Offtaker Agreement. (ii) Evidence that the amounts to be received by the Exporter under the Offtaker Agreement are sufficient to support the payments to be made under this Agreement and the  Subsidiary Agreements. (iii) Evidence that the term of oil supply under the Offtaker Agreement extends at least 6 months beyond the latest Final Repayment date under the Subsidiary Agreements.” Apparently this portion is “subject to further discussion.”

It may be worth asking: have the people of Ghana agreed to all or any specific portion of proceeds from their share of the oil meant to support the national budget to be fence-walled for this $3 billion transaction and several others in the pipeline?

On top of that, Parliament is asked to allow Government to use part of its remaining share of oil revenue that goes into the budget to cater for its 15% share of the $3 billion project. Moreover, the structure of the project could easily see 80% of the facility going directly to Chinese contractors. With Ghana providing 15% of project financing, this could see a mere 5% of contracts being given to Ghanaian companies. This deal, like the STX deal and Korea, appears to be more designed to build a better China than a better Ghana.

Since the deals from this Chinese facility, including the $850 million Western Corridor Gas Infrastructure Project, under a design-build-maintain contract, will see China procuring a significant hold on Ghana’s oil industry, it requires a more considered explanation from the President of the Republic on his vision for Ghana and where he sees Ghana in about 15-20 years from now, both debt and development profile.

This single deal appears to have determined for Ghanaians what they are to do with much of their oil revenues over the next 15 years or more. For instance, Government can only access the facility after submitting “an application for a subsidiary agreement... in relation to each eligible project proposed to be financed under a subsidiary agreement” for the Chinese to decide whether to approve of it or not and the length of grace period to provide for repayment to start.

Nevertheless, we would have by this time already given access to our oil to the Chinese since the agreement says the following: (i) the Exporter [Ghana and of its oil] has to sell per the offtake agreement amounts of oil “sufficient to support the payments to be made [into the escrow account to cover the loan] (ii) there must be “evidence that the term of oil supply under the offtaker agreement extends at least 6 months beyond the last final repayment date [of the facility] under the subsidiary agreements.”

We need to know the details of these off-take agreements for our oil, especially the price at which it is to be sold to the Chinese. This is important considering news of what is happening in Angola where a Chinese syndicate, the Newbright International, assisted by the China International Fund, was able to persuade the Angolan elite to channel their fast-expanding oil exports to China through a new joint venture, called China Sonangol, chaired by an Angolan. Contracts, signed in 2005, gave the company the right to export Angolan oil and act as middleman between Sonangol and Sinopec, one of China’s oil majors. The fear is that such Chinese buccaneers, assisted by some ‘greedy bastards’ may be cutting themselves a large slice of Ghana’s small oil-resource cake.

An article last week in the economist, brought out the dangers in Africa’s new cosy development funding relationship with China. It makes the point that, rather than fixing Africa’s lack of infrastructure, Chinese entrepreneurs and Africa’s governing elites look as if they are conspiring to use the development model as a pretext for plunder.

The article, “The Queensway syndicate and the Africa trade, makes the point that China’s oil trade with Africa is dominated by an opaque syndicate and that ordinary Africans appear to do badly out of its hugely lucrative deals.

There is nothing on the face of this deal that convinces me that Parliament should take two days to approve of it, after the joint committee took two days to consider its available details, when under the first tranche, it lists one of the funding projects as carrying an “estimated amount of $150-500 million” price tag! We must get serious. To have as much as $350m being the difference between the lowest and highest estimate of a project which can be half the cost of the difference is unbelievable. What kind of serious financial scrutiny can Parliament expect to do when there is such a huge disparity?

The state of the deal creates the unfortunate impression that it is being pushed in such a half-baked omnibus fashion because of the upfront arrangement and commitment fees which could fetch immediately nearly $40 million upfront thank you to the arrangers and fixers of this deal.

Paragraph 11, which deals with up-front fee, says the “Borrower shall pay to the lender an up-front fee equal to zero point two five percent (0.25%) of the total commitment [of $3 billion] of which half shall be paid on or before the day falling twenty (20) days after the execution date [the date of this agreement]; and half shall be paid as a condition precedent to the first utilisation under the first subsidiary agreement.”

What this means simply is that within 20 days that the loan is approved by Parliament the lender shall be paid $3.5 million. This is even before the Chinese agree to fund any of the specific projects listed under agreements subsidiary to what is before Parliament today. And, the remaining $3.5 million will be paid before the Chinese will agree to funding a single project from this facility!

There is also a ‘commitment fee’ to be paid by the borrower of 1% per annum, equivalent to $30 billion of the total amount of $3 billion to be paid within 60 days of the execution date and 1% per annum in subsequent years on the “undrawn and uncancelled portion” of the total amount. Curiously, no specific interpretation (as required) is provided for ‘commitment fee’ under the Interpretation section of the agreement.

We need to ask some serious questions now, focusing on the real value of the contribution China is making on the industrialisation efforts in Africa. Whilst Africa is certainly in need of the volumes of investment in infrastructure on the continent being provided by China, we should wake up to this new form of effective colonisation and not see what is on offer as Christmas hampers.

In May 2009, I wrote a piece on President Obama’s visit to Ghana, saying we must not ignore America’s interest. After all, whatever his connection to the African continent, Obama is President of America – and acts in the interest of its people at home above all else. America was interested in our oil and so was China, I stressed.

With significant discoveries being made in the Gulf of Guinea oil basin, off the coast of Ghana, Equatorial Guinea, Congo and Cote d’Ivoire, according to the Energy Information Administration of the U.S. Department of Energy, the United States will be importing in the year 2020 over 770 million barrels of African oil a year. And Ghana with its stability, notable responsiveness to America, deepening multiparty democracy and promising investment climate is seen as the perfect epicentre for the growth and fulfilment of this interest. In the eyes of America, geography, geology and ideology all favour Ghana as the gem in the crown of this new policy.

What about China, I asked? The U.S. is not alone in seeing Africa as a better bet to provide a secure source of energy. I warned that there was a new scramble for Africa’s raw materials, especially energy resources, brought on by China’s astonishing industrial growth and its deepening influence in the global economy. It is the second largest consumer of oil in the world behind the United States. The International Energy Agency projects China's net oil imports will jump from 3.5 million barrels per day in 2006 to 13.1 million barrels per day by 2030.

In 2006, 9 percent of Africa’s oil exports went to China (with 60% of Sudan’s oil export China-bound). The U.S. received 33 percent. Already, China has sped past Britain and France to become Africa’s second-highest trading partner behind the United States.

How Ghana must utilise its new strategic importance was what the Danquah Institute saw at the time as the most important task on the desk of the newly-elected President JEA Mills. The Danquah Institute argued that with the discovery of significant oil potential offshore, Ghana has not only new international importance, we also have cause for greater confidence and strength in our global interactions, particulary when it comes to negotiating international transactions, such as this.

“The increased interest of both China and the United States in Ghana can add extraordinary oomph to Ghana’s development – but this can only happen if we become smarter, more strategic and more assertive in our dealings with these two powerful nations,” I wrote.

As a recent OECD paper points out, with the entrenching of reform, market opening and liberalisation, Chinese state-owned firms - enjoying access to capital from the so-called policy banks most notably China Export-Import Bank and China Development Bank – are now establishing a strong foothold in Africa and beyond. But are we, as Africans, getting the best for our people? It does not seem so. Not so far, at least. Is this not time that we start a national debate here in Ghana on Chinese money, the good, the bad and ugly aspects and prospects of it?

The author is the Executive Director of the Danquah Institute, a policy think tank in Accra, Ghana. This e-mail address is being protected from spambots. You need JavaScript enabled to view it

---

Add this page to your favorite Social Bookmarking websites

 

Comments

Add New Search

watches-happy (175.42.35.xxx) 2011-08-27 08:10:04 link:http://www.watches-happy.com/iwc-watches-iwc-ingenieur-watches-c- 116_120.html comes with great quality, creativity and innovation, which is superior value for revenue for the advantageous cost and discount price of it.Each Luxury link:http://www.watches-happy.com/iwc-watches-iwc-ingenieur-watches-c- 116_120.html produced is examined carefully by our quality test section and each watch is inspected again before being sent to our client. link:http://www.watches-happy.com/iwc-watches-iwc-ingenieur-watches-c- 116_120.html come in varied designs and style patterns and all the designs of the replica IWC Ingenieur link:http://www.watches-happy.com/iwc-watches-iwc-ingenieur-watches-c- 116_120.htmllook absolutely gorgeous. These watches will certainly make your dream come true. Reply 0 0

perfect-watches-replica (175.42.35.xxx) 2011-08-27 08:10:16 link:http://www.perfect-watches-replica.com/bell-ross-watches-c-7.html have appeared as the most highly revered and best appoints.The reason that link:http://www.perfect-watches-replica.com/bell-ross-watches-c-7.html are so popular is that they are high fashionable and very reliable.Famous link:http://www.perfect-watches-replica.com/bell-ross-watches-c-7.html are known for their premium engineering and the brand link:http://www.perfect-watches-replica.com/bell-ross-watches-c-7.html has turn a symbol of high-end watch-making.The huge admiration that the elegant design and high quality of link:http://www.perfect-watches-replica.com/bell-ross-watches-c-7.html is what triggered the demand to create this timekeeper style at affordable prices. Reply 0 0

replica-watch-brand (175.42.35.xxx) 2011-08-27 08:10:28 All Luxury link:http://www.replica-watch-brand.com/Wholesale-tissot-motogp-watche s_c816 sold at link:http://www.replica-watch-brand.com are brand-new and superiority.Our link:http://www.replica-watch-brand.com/Wholesale-tissot-motogp-watche s_c816 is crafted to meet the exact specifications of the original designs, Each link:http://www.replica-watch-brand.com/Wholesale-tissot-motogp-watche s_c816 is paid tight attention in manufacturing, and inspected carefully before it was taken out of the warehouse so that each client can receive an assured product from us.It is our desire that you do experience the joy of shopping when buying one of our Luxury link:http://www.replica-watch-brand.com/Wholesale-tissot-motogp-watche s_c816 at our site. Reply 0 0

too long mafio (41.93.135.xxx) 2011-08-30 10:52:03 gabby's article is very insightful. however, it is too long. in an era where the ndc is messing up left right and centre and there are soo many issues to comment on, may i suggest that u keep your articles short, maybe devide them into parts and futher break down the technical words. that stated, you,re cool. Reply 0 0

objective julian (41.66.228.xxx) 2012-01-05 17:43:19 i do appreciate the over all comment been made. want to know the radical measures ghana need to take to be more than what we are now.... Reply 0 0

Write comment
Name:
Email:	do not notifynotify
Website:
Title:
Please input the anti-spam code that you can read in the image.

Powered by !JoomlaComment 4.0 beta1

!joomlacomment 4.0 Copyright (C) 2009 Compojoom.com . All rights reserved."