Friday, 10 November 2017

Banks to write-off 40% of energy debt

Adnan Adams Mohammed

The government has called on the local banks to write-off 40 percent of the energy debt it owes them as part of measures to address the US$2.5 billion ‘legacy debt’.

This follows a recent floating of energy bonds to offset the debt which failed to yield the intended targets.

Some experts fear the latest move by government could adversely affect the operations of the banks.

Deputy Finance Minister Kwaku Kwarteng in an interview noted that the initiative is mutually beneficial to the financial institutions and the state.

Image result for energy sector bond

“As far as I am concerned there is nothing wrong with calling your creditor and saying as far back as eight years ago the government came to raise some money for this energy sector and the reason the debt has ballooned to this stage is because of the huge interest, so you the bank make a deal and write some of the interest off or any discussion that the energy sector levies act PLC [the company] can engage in with their creditors so indebtedness will go away for me is good enough.”

According to Hon. Kwarteng, the current arrangement with the banks is a good thing and better for the banks.

“They themselves are aware that this whole project is much better for them because if we didn’t do this, the indebtedness of these energy sectors will still be there [and] the banks will still be suffering.”

Managers of the Energy Sector Levies Act (ESLA) who have been given the mandate by Government to issue the bond, were seeking to raise GHS6billion under the two separate bonds.

But it accrued a total of GHS4.6 billion after it closed the auction last Friday.

The seven-year bond received the targeted GHS2.4 billion while the 10-year bond accrued about GHS2.2 billion, below the target of GHS3.6 billion.

The managers also accepted an interest rate of 19.5% for the 10-year bond.

Mr Leonard Gikunno, a technical advisor, said the energy bond programme had a five-year expiry and with this flexibility, ESLA PLC could go to the financial market at any period to draw more funds from prospective investors to meet the GH¢6 billion ceiling.

He said the bond was part of a broader set of initiatives by the government to raise money outside of its fiscal space to engender sustainable economic growth.

Mr Gikunno averred that ultimately, the bond would help the country resolve the high non-performing loans within the banking sector and provide liquidity to the banks to allow them provide credit to businesses for expansion and create jobs for the teeming unemployed youth.

The energy sector debts, otherwise known as the legacy debts, came about as result of the country’s over-reliance on thermal power from 2010 to 2015, which compelled the Volta River Authority (VRA) to import crude oil at the world market price of US$120 per barrel.

During this period, about 20 commercial banks provided loans to VRA, Electricity Company of Ghana and other power producers to import crude oil and natural gas for power generation.

However, these State-Owned Companies (SOEs) could not repay the loans within the specified period to the banks due to the depreciation of the local currency, the Cedi, therefore piling up the debt stock.

In view of this, the power generation companies could not open new letters of credit to support the financing of their operations, which disrupted their operation and affected power supply thereby plunging the country into a long period of power crisis.

Therefore, in a bid to address these challenges in the energy sector, Parliament promulgated the Energy Sector Levy Act (ESLA) in 2015, to charge specific levies to pay the debts.

The levies were independently administered outside the government’s consolidated fund, with the Ministry of Finance expected to report on it periodically to Parliament.

The Energy Sector Levy Act helped generate receivables for the energy debts management and repayment designated as Energy Debt Recovery Levy (EDR Levy), which in 2016 alone generated GH¢1.28 billion.

On the back of the ESLA, Government through the Ministry of Finance invited proposals from local financial institutions and their associates to structure and securitize the EDR levies for the permanent resolution of the energy debts on a long-term basis.

This process necessitated the formation and incorporation of a special purpose vehicle known as ESLA PLC with no recourse to Government in order to source funding from the local financial market to offset the debts once and for all.