Tuesday, 18 September 2018

Economists divided over US$2b Synohydro bauxite deal

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Adnan Adams Mohammed

Since the ministry of finance announcement of Ghana -China bauxite agreement of an amount of US$2.0 billion in a barter trade, many economists and think-tanks have expressed reservations and defense of the deal. 

The government announced its readiness to sign the deal during the mid-year budget review in parliament.  But, the minority in parliament immediately challenged the description of the agreement as a ‘barter’ as put out by government.

The minority further petitioned the International Monetary Fund (IMF) and World Bank to stop the government from furthering the agreement and requested the two Breton Woods institutions to false government of Ghana to give better description of the deal which the minority says is a loan and not barter.

This has since then generated a heated debate for months now.

Meanwhile, contrary to the minority in parliament description of the deal, a policy think-tank, IMANI Africa, has stated that the agreements in relation to the US$2 billion deal between the Government of Ghana and China’s Sinohydro Group Limited, does not constitute a loan agreement.

“None of the agreements currently before parliament constitutes a loan agreement,” IMANI Africa stated in a release last week that on the assessment of the deal..

The Minority in Parliament has argued that the arrangements was a loan and not barter as touted by government.

Ranking Member of Parliament’s Finance Committee, Cassiel Ato Forson suggested that the Akufo-Addo government is clearly attempting to hide the US$2 billion bauxite-for-infrastructure deal, from the debt log.

A letter from Natalia Koliadina, IMF Resident Representative in Ghana, in response to the Minority’s petition over the deal, seeking clarification from the Bretton Wood institution said the matter has been forwarded to the IMF’s Washington D.C. Headquarters for determination during the upcoming review mission under the Extended Credit Facility.

Per the agreement, Ghana will exchange refined bauxite with US$2 billion worth of infrastructure from the Chinese firm.

In the released document on the assessment of the deal, IMANI said: “The appeal to the IMF by the minority in Parliament, where understandable given the importance for clarity, may well turn out to justify our position. Unless as we explain that given the complexity of the deal, the government may have unknown to the country actually entered a loan agreement to actualise the deal. That would be shocking”.

IMANI also indicated that: “What is also true from an assessment of the ‘term sheet’ is that the Government of Ghana and Sinohydro do intend to enter into a loan agreement. To the extent that Sinohydro hasn’t yet committed to the actual financing in the MPSA, the agreement before parliament cannot be construed as a loan agreement. However, Ghana must enter a loan agreement to keep this deal alive”.

IMANI further pointed out that government has no contingency plan to finance its obligations in case the timelines for a refinery plant to process bauxite is not operationalised as expected.

IMANI is of the view that: “Without rigorous attention to every detail, Ghanaian leaders risk bungling these projects (as happened in the past and is happening in other African countries) and Ghanaian citizens would be left carrying the can”.

There are fears that, the arrangement has the potential of leaving the country with partly completed projects or judgement debts.

But, the Minority in Parliament is insisting that the $2 billion bauxite deal is a loan despite attempts by the government to make Ghanaians believe it is barter and won’t bloat the country’s debt stock.

According to the Minority, the agreement is similar to the US$3 billion petroleum-based China Development Bank (CDB) loan agreement the country went for when it wanted to build a gas infrastructure.

The Minority insists that the mode which was supposed to be used to service the CDB loan is a similar model being used by the Akufo-Addo government for the current $2 billion bauxite deal adding that “if CDB arrangement is a loan arrangement, what makes Sinohydro arrangement a barter agreement?”

“The attempt to confuse the issues is understandable since the NPP vociferously rejected this structure while in opposition,” Ato Forson argued in a statement issued last week.

The government has sealed an agreement with the Chinese government to sell Ghana’s bauxite to China’s Sinohydro Group Limited and in return receive $2 billion to undertake infrastructural projects in the country [Ghana].

However, some economists and Minority in Parliament are opposed to the deal calling on the government to classify it as a loan.

The Minority subsequently petitioned the International Monetary Fund (IMF) over the issue seeking clarification as to whether the facility is a loan or not.

Apparently, speaking at the 2018 edition of the Economic Forum last week, Vice President Dr. Mahamudu Bawumia insisted that the agreement is not a loan but barter.

He went on to give further information on how the agreement will be implemented.

Dr. Bawumia said Sinohydro wouldn’t be the same company mining the bauxite, “and they are not taking our raw bauxite.”

“I know Sinohydro is not a mining company. Rather the government, in our plans, has set up a holding company by an Act of Parliament, the Ghana Integrated Aluminum Development Authority, which will soon enter into joint venture arrangements with potential mining and aluminum refinery companies. The takers will establish bauxite mines and a refinery. We are going to have a situation where it will not be Sinohydro. Sinohydro will be providing the infrastructure, but Ghana will choose its partner to set up the Integrated Aluminum Development Industry in Ghana. The partners could be from the US, Australia, Canada or China,” Dr. Bawumia said at the forum.

“After mining and refining, the government of Ghana will then use her share of the refined bauxite to pay off whatever cost of the infrastructure provided by Sinohydro Corporation after a period of three years, on condition that Sinohydro would have completed the infrastructure projects that the people of Ghana have asked them to do. So it’s a quite different arrangement. We want to add value to our bauxite reserves which are around 900 million metric tons, worth about $50 billion in the market. If we refine this bauxite it could be worth almost $400 billion, and we are talking of using a two billion dollar facility to unlock all of this potential,” the Vice President added.

Ato Forson, former Deputy Minister of Finance maintained in his statement that the deal is a loan because per the agreement brought to Parliament, “Sinohydro is borrowing from International Commercial Bank of China (ICBC) to fund the infrastructure projects for GoG [Government of Ghana] adding that “Sinohydro, therefore, requested for a Letter of Support from the Government of Ghana as a Sovereign Guarantee.”

“With the letter of support, Sinohydro then assigns all its rights and obligations under the arrangement to ICBC. Is Ghana so unattractive in the capital market and to fall on a Chinese company to front for us in borrowing from the International Commercial Bank of China (ICBC) which we have done business with in the past?”

“Mr. Vice President, you and I know that in conventional practice, a Letter of Support as a Sovereign Guarantee is only required in loan transactions and not in barter arrangement.”

The MP noted that, per the terms of the US$2 billion agreement, the Ghana government is supposed to open an escrow account into which all future proceeds from the refined bauxite (our natural resources) will be paid into for the purposes of servicing the US$2 billion debt.

“Also, the Government of Ghana is mandated to ensure that the escrow account has enough balances to settle debt service and repayment when due. The Government of Ghana is to top up any short fall for debt service and repayment. This totally contradicts the Vice Presidents claim that the government of Ghana will use her share of the refined bauxite to pay off whatever cost of the infrastructure provided by Sinohydro Corporation. Mr. Vice President, this is simply a supplier’s credit and cannot be so complex to comprehend,” Ato Forson added.

Adding to the debate is the Coordinator of the Third World Network, Dr. Yao Graham. He cautioned government against rushing into agreements with powerful nations such as china that may lead to Ghana’s raw material being exported.

He argued that, for example, the model being adopted by the government in signing the US$2.0 billion bauxite deal with China is not new but an old system that has allowed the country’s natural resources to be exported in their raw state without adding value to it.

Dr. Graham has expressed the dissatisfaction at government’s attempt to achieve a transformational agenda by using “old fashioned” model that has not worked.

“That worries me. It worries me because in this discussion I don’t get the sense of what the nature of the transformation agenda that we have and how the Chinese connection fits in. I think we are too focused on only the commodity export in exchange for Chinese finance”.

“For example, take agriculture. If you are going to collect more tractors and come and use them in a certain agriculture system which in my view has a lot of problems that needs to be solved. The machinery may not be terribly useful. The framework that the minister set is an old-fashioned raw material raw export for value for development model,” he stressed when speaking at the Second Edition of the Citi Business Forum themed; “After China What Next”?

Economists are wary that, government’s approach in dealing with the Chinese will face fundamental challenges if Ghana is going to export raw materials from the bauxite.

Government has therefore been advised to first study how countries such as China learned from other countries to develop a unique economic model to propel economic development.

For instance, it is important for the government to understand how the state of China plays critical roles in the country’s development drive. Also, Ghana as a nation may not get the full benefit of a state to state agreement with China since the Asian country is a sub-continental power.

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