The Government of Ghana (GoG) has signaled its intention to return to the privatization of Ghana’s power distribution utility company (ECG). There are currently no details as to how this will be done. For several reasons, however, any mention of the privatization of ECG immediately triggers public interest. This is not just because of the opposition to the process expressed by the Public Utility Workers Union (PUWU) of the Trades Union Congress (TUC) but also because of other antecedent issues including the recent Power Distribution Services (PDS) scandal (which happened during the last incarnation of ECG privatization). Accordingly, whatever approach the Government uses, the issues that it will face will be numerous extending beyond the electricity sub-sector. [In an earlier paper my colleague, Ferdinand D. Adadzi wrote on some of the legal issues that arise in the context of Ghana’s PPP Act, Act 1039].
This Op-Ed is not meant to debate whether ECG should be privatized or not. It assumes the privatization will go ahead. It only seeks to draw attention to some of the multiple issues that must be well examined in advance of the start of the exercise. Among other things, the goal of this Op-Ed is to help focus public discussions away from the usual political divide. It is the hope of the author that the issues mentioned in this Op-Ed, will help steer the public debate past the usual political lines of “for” and “against”.
Unintended Impact of Problem Solving
Obviously, the proposed privatization of ECG is meant to solve some perennial problems including but not limited to the high level of indebtedness.
The author holds the view that, in any attempt to find a solution to a problem, it is important to ensure that the solution itself does not trigger more problems. Particularly, in the case of ECG, there are chances that the privatization will impact other national and strategic goals during or after the privatization. Whilst this Op-Ed is not intended to provide a detailed analysis or solutions, it is meant to get the public and policy makers to bring most, if not all critical issues into the equation, ahead of concluding on the approach to privatization. Hopefully, this will also help reduce the politicization of an otherwise technical and strategic exercise.
1. Accrued Liabilities and Matters Arising
It is anticipated that for the privatization to be attractive to the private sector, GoG will absorb the accrued debt of ECG as private sector operators are not likely to be interested in assuming responsibility for prior liabilities. The critical question, therefore, becomes – how will the debt be ring-fenced and retired by GoG over a defined period? Further, since ECG’s debt will continue to accrue interest after the privatization, will there be a freezing strategy on the debt to ensure it does not worsen GoG debt profile?
Whilst absorbing the liability, how will the Government take account of previous loans to ECG (GoG on-lending) — will it capitalize any yet to be amortized on-lending?
2. The Potential Ripple Effect of Electricity Tariff
Like any public utility, the distribution of electricity has immense social and economic impact with its inescapable ripple effect. For example, higher tariffs impact livelihoods, add to the cost of doing business and trigger inflation. The privatization strategy must, therefore, come with a multifaceted tariff strategy within which the private sector proponents may operate. Without a clear Government tariff strategy, the natural disposition of the private sector will be to minimize cost, recoup investment quickly and maximize profit. Such tariff strategy would be necessary to inform how the tariff regulator makes decisions on requests for future tariff increases.
3. Consequential Questions to be Addressed in Respect of the Tariff Strategy
There will be several consequential questions that must be addressed pursuant to whatever tariff strategy is adopted. These include the following:
(a) Lifeline Consumers
The PURC rate setting guidelines categorizes lifeline, medium and high consumers. Will Government give subsidies to “lifeline consumers” (in order to prevent the obvious social impact of commercial tariffs on lifeline consumers) and if so, will this be treated by the operator as a Public Service Obligation (PSO) in which case the PSO will lead to a potential recourse to the public purse? Or will the private sector make “lifeline concessions” and price it into a cross-subsidization tariff structure? Either approach will potentially have both economic and political impact.
(b) Industry Versus Household Tariff
It is reported that about 40% of consumption is household and about 45% are special load consumption of high consuming industries. Will there be discriminatory tariff for strategic industries which have multiplier job creation potential? Will the tariff strategy specifically require a higher tariff to domestic consumers as against selected industries? Will the GoG require beneficiaries of such lower tariff to demonstrate that it has translated into jobs and taxes accruing to the GoG?
(c) Direct Tariff Negotiations With Bulk Buyers
How will the policy on direct tariff negotiations of a private-sector-led ECG be regulated to prevent undermining bulk suppliers such as VRA? What will be the threshold Energy Commission will set on what constitutes bulk consumption in order to deliberately drive the growth of both light and heavy industries?
This is particularly important since the bulk consumers are in the “deregulated market” of the power sector. Even within the current regime, there have been allegations of instances where ECG, for commercial reasons, has allegedly negotiated tariffs (below that of generation companies in the deregulated market) which created challenges for some big manufacturers as whether to buy from ECG (in the regulated market) or directly from generation companies (e.g. VRA) in the deregulated market. The question is – to what extent can the private sector led ECG negotiate directly with bulk buyers and to what extent can the tariff regulator prevent ECG from undercutting bulk tariff agreed prior in time with generation companies?
4. A History of Knee Jerk “Absorption of Tariff”
Ghana has had a long history of policy makers who, after allowing utility prices to rise, are faced with the reality of public complaint especially from lower income earners (who constitute the bulk of the voter population and indirectly influence public policy formulation). In panic response, they announce knee jerk policies often designed to “absorb the increases in tariffs”. Such absorption subsequently leads to higher public debt. The consequential macroeconomic instability falls back on businesses who are called upon to pay more taxes in order to stabilize the adverse macro-economic impact. Will there be a strategy to avoid a recurrence?
5. Potential Impact on Water Supply
There is a direct link between the availability of power supply to water pumping stations and regularity of water supply to water consumers. It is often alleged that Ghana Water Company (GWCL) is frequently in arrears of its payment obligations to ECG. How will the intercompany (ECG-GWCL) relationship be handled in order to ensure that the invoicing and debt collection strategies of a private sector led ECG, does not lead to disconnection of power supply to water pumping stations. The social impact of such a scenario is obvious and needs no further elaboration.
6. A Debt-Ridden Company or Potential Cash Cow?
ECG is definitely a debt-ridden company now, but it is also a potential cash cow (otherwise, no private business will show interest). How will the privatization strategy achieve a balance between any requirement for GoG’s debt absorption (or write off) with benefits from the future profits that will accrue to ECG.
7. Equity Structure
Will GoG retain equity in the privatized ECG and if so, will all or part of GoG’s equity be on “carried interest” basis? If not, what happens if government is required to make capital contributions to equity? Will the Ghanaian tax payer have to cough up money towards future capital calls and what mechanisms will be put in place to ensure that there is reasonable return on capital to both the private sector and GoG sides of the enterprise?
8. Continuing Contracts and Transfer Pricing
As a going concern, ECG will have continuing contracts including the obligation to purchase fuel and other inputs. Allegedly, these are lucrative contracts as reported in the media. How are these contracts to be treated after the privatization to ensure transfer pricing is minimized in order to secure dividends accruing to the GoG side of equity holders.
9. The Take or Pay Obligation in ECG Power Purchase Agreements (PPAs)
How will GoG handle the take or pay obligation clauses in PPAs with Independent Power Producers (IPPs)? Will they be passed on to the private sector to re-negotiate and whose responsibility will it be to continue buying fuel for the IPPs? Will there be a recourse to the GoG even after the private sector takes over?
10. Waterfall Mechanism/ Energy Sector Levy Act (ESLA)
As in the case of the Tema Oil Refinery (TOR) levy, which was imposed years ago, the waterfall mechanism/ESLA did not achieve the goals they were set up for. How will these previous solutions be married into the privatization process and what carry on effect will it have?
11. Impact on the Government’s 24-hour Economy Strategy
One of the Government’s flagship policies – the 24-hour economy is yet to be fully rolled out. So far, it has gained interest and also been viewed with skepticism in some quarters. Obviously, businesses who opt to run around the clock operations will require around the clock stable power supply. Will the tariff policy of a private sector ECG take the 24-hour economy into account? Will the tariff be designed to encourage the adoption of the 24-hour economy by selected businesses so that they are encouraged to operate around the clock as a result of deliberate lower tariff at low peak periods?
12. Multiple Prepaid Meters
There are a multiplicity of prepaid meters currently in use by ECG customers and in recent years, ECG frequently introduced “new meters” almost at will. What will the harmonization strategy be? Will the end-user have to continue with this or will there be a metering uniformity approach? Will any harmonisation measure result in cost to the consumer?
13. Will ECG’s Assets be Disaggregated Between “Core” and “Non-Core” Assets?
ECG possess assets (asset such as “spare land”) that may not necessarily be required for the operations of a utility entity. Will the company’s assets be segmented and if so, will there be a “non-core assets” category that GoG may auction to earn some income to offset any accrued debt it will absorb?
14. A History of Failure of State-Owned Enterprises (SOEs)
In the late 80s and early 90s, quite a number of statutory corporations (ECG being one of them) were converted into private limited liability companies. The expectation at the time was that these SOEs (apart from those subsequently divested to the private sector) will be run as private sector corporate entities and make profits. The case of ECG is very similar to that of many other SOEs – it has become more indebted as a limited liability company than it was when it was a statutory corporation. On the other hand, other electricity distribution companies managed by the private sector (e.g. Genser and Enclave Power) must obviously be making profits otherwise, they would not have attracted private sector investments. The lesson is that it is not whether the entity is owned by the state, it is whether it is properly managed as a business. How will the privatization approach ensure that the private sector operator does not make ECG a more indebted entity?
15. Transfer Pricing Prevention and Dividend Strategy
There are numerous examples of entities in which Government hold shares but for which Government earns no dividends and ends up being saddled with debt. If GoG retains equity, what will be GoG’s position on dividends as a condition for sale? Will there be a mandatory dividend policy? Will there be benchmarks or cost parameters modelled in a manner to ensure GoG can forecast dividends after a specified period (when ECG becomes profitable). Can such dividends be drawn down ahead of the end of year financial statements? Can GoG borrow against such projected dividends?
16. Compact with USA Millennium Development Authority (MIDA), Millenium Challenge Corporation (MCC)
Will GoG receive any grant for ECG aspects under Ghana’s second Compact with the USA (focused on the power sector “Compact”)? Will there be additional capital expenditure incurred by the Government? Will the new government of USA continue with the Compact? What will be the implication of either scenario?
17. Impact of Access to Electricity
Since the GoG has a policy to increase citizens’ access to electricity, especially in deprived communities, how will this be achieved in a commercial led ECG operations?
18. Separating the Wheat from the Chaff
How will Government set parameters to separate serious bidders who have the technical and financial muscle from those who are just adventurers seeking transactional opportunities? Naturally, there may be “middlemen” who may parade the appropriate corridors – how will GoG minimize this and ensure there is greater transparency in the process?
19. Requirements to List on the Ghana Stock Exchange (GSE)
Will the new owner be required to list ECG on the GSE in order that ordinary Ghanaians can own shares and if so, will there be a requirement to list a specified percentage of the equity (in order to retain a percentage of dividends in local currency)?
20. Local Content and Growth of Private Sector
There are a number of “local content” related issues that must be factored into the process.
(a) There is an assumption that Ghanaian entities do not have financial wherewithal to take over a company like ECG. This may be true but there are other areas of already deepening local participation which can be further deepened.
How will the framework ensure that the private entity purchases inputs (e.g. cables and meters) from local suppliers? Without such arrangements, purchase from sources outside Ghana could adversely affect local players especially because ECG is a near monopoly.
Examples include:
(I) Supply of cables (Nexans Kabelmetal Ghana Ltd., Reroy Cables Ltd, Tropical Cable & Conductor Ltd., etc.)
(ii) Manufacture of meters and transformers (e.g. Alpha TND Ltd., Westrafo Gh Ltd, Ghana Electrometer)
(b) The marketing and sale of credit to the final consumer can be separated from distribution. If this is done, will the marketing and sale be reserved for local vendors and if yes, how will these vendors be selected by the foreign-led entity in a transparent process without politically exposed persons leveraging their influence to lodge themselves into the chain? Presently, the Energy Commission License Manual provides for separate licenses for distribution and sales so it may be important to indicate how the private entity will be given both licences.
(c) Further, how does GoG seek to achieve the over ambitious local content targets set out in the Local Content and Local Participation Guidelines issued the Energy Commission.
21. Potential Impact on GoG’s Industrialization Agenda
The Government has expressed its intention to pursue a value addition strategy. Already, many manufacturers claim they have been struggling to remain competitive as a result of the high cost of capital and high cost of utility. No country can industrialise if it is selling power to strategic industries for more than $0.06 per KWh (Ghana is selling above that price). Since a private sector led ECG will naturally be profit driven, what strategy will GoG use to balance the cost of power to industry (and the need to lower tariff to selected industries) in order to achieve the industrialisation objectives?
22. How will it Affect the Integrated Aluminium Industry
The potential of the integrated bauxite to aluminium sector as a game changer is well known. Whereas parts of this industry (e.g. VALCO and potential refinery) will remain bulk purchasers in the deregulated market (and will not rely on ECG), allied industries further downstream (e.g. entities involved in aluminium based fabrication of household items) will need ECG. It is therefore important that the privatization of ECG is not considered in isolation since these downstream industries are major job creators.
23. Climate Change, “Legacy Hydro”, Power Source Mix and Matters Arising
Recently, a lot of finance which goes to the power sector are designed to achieve green transition objectives in order to attract climate finance. This trend is likely to impact the sources from where a private sector led ECG procures funds for future investment. The ability to attract financing will also depend on the sources from which ECG gets its power to distribute.
Is there going to be a conscious policy on the power mix so that overtime (and in line with Ghana’s energy transition policy) the selected operator will increase the renewables component of the power mix that it distributes?
(a) There are already allied measures such as the Renewable Energy Fund which has not been funded – how will the fund be populated and will ECG be required to increase purchases from renewables?
(b) Net metering from household solar users – will the private sector entity be required to continue the net-metering arrangement and which incentives will GoG give to encourage private operators to continue with climate friendly net metering arrangements?
24. Legacy Hydro and Volta River Authority (VRA)
How will GoG leverage the advantage of the comparatively low generation cost from its Akosombo Dam (which is essentially a “legacy hydro” asset) in order to create a mix that enables GoG to provide targeted industry friendly tariff.
25. Board Appointees
If the Government has representatives on the board how would these representatives be chosen and how do they ensure that Government interests is protected at all times? What reporting mechanisms will GoG put in place to ensure the requirement in Ghana’s Public Financial Management law for government representatives to report to the Ministry of Finance is complied with (currently it is more flouted than obeyed).
26. Leveraging Ghana’s Position in the Trajectory of the West Africa Power Pool (WAPP) to Make Ghana an Energy Hub
Ghana’s location gives it an edge to become an energy hub in the WAPP trajectory. Perhaps with the right policies ECG can be transformed into a major power exporter to anchor Ghana’s power hub strategy. How will GoG align the privatized ECG operations to increase export to the West Africa sub-region through an enhanced distribution network under a power hub strategy?
27. Public Utilities Regulatory Commission (PURC) Role and the Proposed PURC Integration into the Energy Commission
Under the previous government, there were suggestions about merging the tariff regulator (PURC) with the Energy Commission (the sector regulator). Will the current Government pursue this and if so, how will this affect the independence of the tariff regulator especially in a private sector ECG?
28. Potential Impact of International Monetary Fund (IMF) Programme
To what extent will assumption of ECG’s accrued liabilities make Ghana’s debt stock any worse and how can the potential impact be minimized? Will this affect any re-negotiation with IMF in the current programme and if so, will it lead to policy changes that will lead to the assumption of higher risks by investors or cause policy inconsistencies?
29. New Investment Asset Class?
What benchmarks will the new owners be required to meet to develop ECG and its power distribution mandate into new asset class for which the investing public will be interested?
30. Impact on NEDCo and GRIDCo
Some indirectly related (but nevertheless relevant) questions will naturally pop up in the minds of potential investors so these must be thought about by policymakers. Examples include the following:
(a) If the ECG privatization model is successful, will the model be replicated for Northern Electricity Distribution Company (NEDCo)? [Apparently, there has been a very recent assessment of the lapses in NEDCo’s invoicing practices which was carried out by a very experienced power sector consultant and a lot of lessons may avail the new Minister on this].
(b) Will VRA and Ghana Grid Company (GRIDCo) be next in line? Irrespective of whatever happens to ECG, will GRIDCo’s operations be split between the infrastructure and operator roles to deepen private sector role in the transmission operations?
(c) Independent system operator – will an independent transmission system operator be appointed for GRIDCo?
(d) Transmission losses – it has been reported that ECG experiences transmission losses which adds to its costs. One report indicates transmission losses is about 20%. How will it be ensured that the losses are minimized and the cost is not passed on to the consumer?
31. External Pressure
How will GoG manage “external pressure” especially geo-strategic soft power – it is generally assumed that some public sector decisions are subject to such external pressure for geo-strategic reasons. How will GoG balance this vis-à-vis technical, commercial and Ghana’s own economic transformation strategy?
32. Redundancy And Matters Related To Labour
PUWUI has already expressed its reservations about the privatization. This is not surprising because privatization always encounter workers’ resistance. How will this be managed in order not to send wrong signals of potential risks to investors? How will potential cost related to redundancy be handled? What labour rationalization strategies will be adopted to minimize cost repercussions – such as redundancy and social cost of any layoffs?
33. Public Perception and Issues Bordering on Transparency
How will public trust in the transparency of the privatization of ECG be built? – public goodwill will be necessary for the future operation.
David Ofosu-Dorte
Senior Partner, AB & David Africa
David Ofosu-Dorte is the founder and Senior Partner of AB & David Africa, a pan-Africa business law firm with offices in multiple African countries. His experience cuts across almost three (3) decades of advice to businesses and governments in Africa in diverse projects, particularly in the infrastructure related sectors and public policy matters.
