Friday, 10 November 2017

Energy bond controversies

Adnan Adams Mohammed

The results of the issued energy bond has triggered a controversy between the minority in parliament and the issuers (that is, the technical advisor and government).
According to the Minority, it is highly alarmed having discovered that “an astronomical GHC80 million was spent on “administrative expenses” which essentially covers air tickets, hotel accommodation, per diems and other such expenses.”

Image result for energy sector bond

“We are unable to come to terms with how such huge amounts could be spent on the team that floated this bond especially given the embarrassing failure that they encountered,” the Minority spokesperson on Finance Cassiel Ato Forson said in a statement.

The Minority is therefore calling for an investigation into the expenditure since it suspects “massive inflation of costs.”

“When set aside the expenditures incurred during the floatation of bonds under the NDC government, we notice a wide and unacceptable disparity which can only be the result of massive inflation of costs. We demand an immediate enquiry into this scandalous affair and a detailed explanation from the Finance Minister over how these expenditures were incurred,” the statement added.

Information available in the Bond prospectus indicates that, GHS177,241,976 million was spent on the programme expenses. A breakdown of the expenses is as follows:

Item Amount                                                     % of Programme
Arrangers GHS 87,500,000                                 0.88
Legal Fees GHS 700,000                                   0.01
Reporting Accountant GHS 350,000                   0.02
GSE Application Fee GHS 1,600,000                  0.02
GSE Listing Fee GHS 800,000                           0.01
SEC GHS 3,500,000                                          0.04
CSD GHS 1,440,000                                          0.01
Administrative Expenses GHS 80,951,976          0.81
Printing, Miscellaneous GHS 400,000                 0.00
TOTAL GHS 177,241,976                                   1.00

According to the minority, the expenditures above are nothing short of scandalous. “We note that only about GHS700 million of cash was raised during the bond issuance. The remaining GHS4 billion was issued in a swap deal with banks which held the energy sector debt.

“This means that government merely paid back the debts owed them albeit over a staggered period equivalent to the duration of the 7 and 10 year bonds. A swap deal is done almost for free hence cannot be considered to have been part of the cost.

“This also means that the Finance Minister and his team have paid GHS177,241,976 for just about GHS700 million representing over 25% of total monies realized”, the minority exposed.

However, the Ministry of Finance has described the minority Parliamentarians statement on the Energy-sector Bond, issued by the ESLA PLC as fraught with various "factual untruths deliberately spun to allow them to reach their own preferred conclusions".

The Minority either did not fully understand the assumptions underlying the Bond Structure, and thus, failed to do the mathematics right or it was just being plainly malicious, that's according to the statement.

The statement further explained that, the Minority’s claim that the seven-year Bond closed at GH¢1.5 billion was inaccurate.

Adding that, a published information by E.S.L.A. PLC indicated that, the Bond was rather oversubscribed at GH¢2.53 billion, and the Bond issuer chose to accept GH¢2.4 billion at the cut-off interest rate of 19 per cent.

The claim that the 10-year bond was first closed at GH¢760 million was false because the Bids received in the first week alone amounted to GH¢872 million and not GH¢760 million as claimed by the NDC Minority, saying this information was public and verifiable. The statement said.

“The Minority claims the 10-year bond after extension closed at GH¢2.2 billion, again is false.”

Total bids received for the 10-year bond was GH¢2.79 billion of which E.S.L.A. PLC accepted GH¢2.29 billons at an interest rate of 19.5 per cent,” it emphasised.

It said in total, the E.S.L.A. PLC received bids of GHC 5.32 billion (GH¢2.53 billion for the 7-year and GH¢2.8 billion for the 10-year), representing 89% of the targeted amount of GH¢6 billion for the first tranche under the Bond Program.

E.S.L.A. PLC chose to accept the total amount of GH¢ 4.70 billion out of a possible GH¢5.32 billion; representing 78% of the targeted amount as this was what it preferred within its target price range of 19%-19.5%, it said.

Explaining further, the ministry said the Bond issuer made a decision based on a cost/yields consideration, which was prudent and not a failure.

“The Minority claimed that the projected consumption of petroleum products, used as a basis for projecting ESLA inflows was unrealistic. This was based on their assumption that monthly fuel consumption was equal through-out the year,” it said.

It said the historical data on consumption patterns, however, proved that this was a flawed assumption since fuel consumption in the second half of the year was often higher as a result of increased economic activity and seasonal weather patterns.

It said the E.S.L.A. PLC’s projected consumption of petroleum products was accurate and conservative and remained in line with historical patterns.

“The Minority claim that E.S.L.A. PLC could not meet the Debt Service Coverage Ratio (DSCR) of 1.25% but rather scored 1.1% DSCR,” it said. “They arrived at the 1.1% by dividing the expected inflows from the Energy Debt Recovery Levy of GH¢1.281 billion by GH¢1.158 billion in total interest payments for both the 7-year and 10-year bonds (i.e. 1.281/1.158 = 1.1)

“The Minority, however, did not recognise the addition of GH¢600 million Government of Ghana cash support (to be provided on demand) component, as stated in the prospectus, to the GH¢1.28 billion.

“They also did not add the starting cash of GH¢ 350 million in the Energy Debt Recovery Levy (EDRL) Account.

“It is instructive to note that the addition of the two missing components in the Minority’s assumptions, gives a total amount of approximately GH¢2.231 billion making the ratio now 1.926% (2.231/1.158). “This is far greater than the required 1.25% DSCR.”

The statement said it is unbelievable how the Minority would want the energy debts to be considered part of Government debt, when in 2016, the same NDC Government restructured about GH¢2 billion debt owed to commercial banks under ‘the VRA Phase One Restructuring Program’ using ESLA proceeds as a payment source.

“If ‘VRA Phase One’ and TOR debt restructuring were deemed prudent at the time by the NDC, and treated as a non-sovereign transaction, why not the E.S.L.A. PLC’s Bonds?”

It, therefore, described the NDC Minority’s stand on the “Energy Bond as inconsistent and baffling.”

Last Wednesday, the Minority Caucus in Parliament organised a press conference, saying the Government’s issuance of the Bond failed to achieve its targets because the process was fraught with irregularities.

It described the move as a total failure, which has caused financial loss to the State.

Meanwhile, the Fidelity Bank joint technical advisors to the issuance of the energy sector bond say the issuance of the bond witnessed a tremendous success recording GH¢4.7 billion out of the GH¢6 billion target, representing 85 percent subscription.

Edwin Effah, a Technical Advisor, said the bond was issued by ESLA PLC, a special purpose vehicle, to raise funds to pay the GH¢10 billion energy debts.

He said the seven-year bond was oversubscribed at GH¢2.529 billion above the target of GH¢2.4 billion at an interest of 19 percent while the 10-year bond closed with a bid of GH¢2.79 billion relative to the target of GH¢3.6 billion.

Mr Effah said out of the amount, GH¢2.29 billion was accepted by the ESLA PLC at a price of 19.5 percent.

He said in total, the bond issuer received bids of GH¢5.32 billion (GH¢2.529 billion for the seven-year bond and GH¢2.79 for the 10-year bond).

He noted that the formation of the ESLA PLC was an innovative initiative in Africa with no recourse to government.

According to him, it was a standard structure that is used in most developed countries to ensure an independent and transparent administration of levies or sources of income for purposes of debts payment and other strategic projects.