Tuesday, 18 September 2018

The US$2 Billion Agreement with Sinohydro: Loan or Barter?

 Image result for china sinohydro

Government of Ghana under Nana Addo's led administration is ready for a US$2 billion Infrastructure Finance agreement with China's Sinohydro Corporation ltd. An agreement Government of Ghana described as barter trade, an Abrahamic Financial Transaction well known to us all.

Bartering is based on a simple concept where two parties negotiate to determine the relative value of their goods and services and offer them to one another in an Even Exchange. This is done in lieu of the use of money. This transaction doesn’t come that simple and Government of Ghana will rather have it described and recorded as Barter, than loan because:
1. Government appears haunted by utterances of its own officials in the past-"the politics of borrowing".
2.  The implications of loans on the country’s debt/GDP ratio and the concomitant sustainability issues.
But is this transaction really barter or a loan?  Here is some interesting information gathered from the agreement that exposes its true nature and intendment: Sinohydro is a contractor and under this agreement is required to pre-finance and build Ghana's desired infrastructure to the tune of $2bn to be paid for with the proceeds from the refined Bauxite over a 12year period. Instead of Government having to secure the funds to pay Sinohydro on deliverables, Ghana is giving a sovereign guarantee for this private company to go source and borrow from International Commercial Bank of China (ICBC) to fund the infrastructure projects for GoG. The terms of this transaction are charged to the Government of Ghana, which is 2.8% to 3.3% Interest per annum on the London Interbank Offered Rate (LIBOR), Commitment fee of 1%,
Management fee of 1.2%, Plus a premium of up to 9%

Ok, Sinohydro handles the Infrastructure, but a holding company is setup by an Act of Parliament, the Ghana Integrated Aluminum Development Authority, which will then contract other entities with the requisite expertise to off-take for the refinery. The takers will establish bauxite for a refinery.
In as much as this agreement may come as a novelty to the fund, IMF's inability to be decisive in the face of the facts is most disappointing if not appalling.
This agreement clearly departs from what a barter trade is known to be and i cannot think of it in other terms than a loan condition.
With IMF as Ghana's economic policy supervisor under the Extended Credit Facility (ECF), this agreement was certainly seen by the Fund and made to go through with all the possible consequences on our sovereignty.
However, Ghana's minority group in Parliament, not convinced that this arrangement isn't a loan, wrote to the IMF to take a second look at the transaction and provide further clarification. Should this transaction be factored into the debt stock of Ghana? They sought to know!
In a reply, the IMF Country Representative Natalia A. Koliadina told the Minority: “Given the complexity of the transaction, I am unable to answer your questions immediately”.
Clearly, Minority's query brought the supervisor to its toes, making IMF discover that, it didn't do a good initial assessment on the facility.
It has thus, asked for more time to take a better look at it so as to arrive at a conclusive accounting position on how it should be treated in our books. I find this a bit more refreshing and consoling.

Going forward, I hope IMF will aver itself to what some of our laws say.
Sales revenue of Government assets constitute public funds that must first be lodged in full into the consolidated fund or any such fund created for the purpose.

We discovered here that, the transaction mandates Government of Ghana to open an escrow account into which all future proceeds from the refined bauxite will be paid into for the purposes of servicing the $2 billion debt.
Again, Government is required to ensure that the escrow account has or is sufficiently funded to service the debt when due. The Government of Ghana is therefore mandated to make top ups to the fund to achieve this purpose.
I hope this doesn't get any more troubling. IMFs response and desire to revisit this agreement should be welcoming.

IMF still has some explanations to do relative to this agreement within the context of their definition of debt.

The IMF on its website says the term “debt” will be understood to mean a current, i.e., not contingent liability, created under a contractual arrangement through the provision of value in the form of Financial and Nonfinancial Assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract.
Debts can take a number of forms, the primary ones being as follows:
"(i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements)......"

This transaction must be viewed within the context of Ghanaian laws.
“Article 181(6) (a) (b) of the constitution explains that, to the extent that, this transaction creates a creditor- debtor relationship between the two countries: China and Ghana, there's a loan.
It must also be noted that, a loan payment is a charge on the Consolidated Fund.
Proceeds from all natural resources are supposed to be part of the Consolidated Fund on which state liabilities are charged. That is the flow.
The Public Financial Management Act (PFM) further makes it clear that, all public revenue must first be lodged engross into the Consolidated Fund.
We're told that, in this agreement, Ghana is paying the cost of the infrastructure projects to be provided by China Sinohydro from the proceeds/revenue of the natural resources (CASH), raw or refined bauxite.
Again, I note with surprise that, IMF seeks to exclude from what it may consider as debt, Contingent Liability.

Contingent liabilities are liabilities that may be incurred by an entity depending on the outcome of an uncertain future event. From the foregoing discussions, numerous risks have been unveiled as inherent in the transaction. To the extent that this agreement bears risk, it bears a contingent liability and I see sustainability issues if the risk crystalizes. You cannot for any moment discount the place of risk in finance.

Let’s please deal with the Accounting treatment of contingent liability:
1. If the likelihood of its occurrence is said to be probable and estimable, the transaction must be recorded and the liability disclosed.
2. If the likelihood of its occurrence is said to be probable but not estimable, you're required to disclose the liability
3. If the likelihood of its occurrence is reasonably probable and estimable, you're required to disclose the liability.
4. But where the likelihood of occurrence is remote, the transaction is said to be neutral and of no Accounting effect.

I hope IMF is able to clarify its position in a way that engender trust and confidence. It is prudent that, our exposure levels or all our liabilities are fully and properly estimated/quantified and provisioned least we run into debt sustainability issues probably leading to confiscations of state assets by Principals/Lenders.

China’s predator "Belt Road Initiative" (BRI) encourages developing countries into reckless indebtedness of spiraling rollercoaster of debt trap diplomacy. They ultimately proceed to take over strategic National assets in the likely event of loan repayments default.

23 developing countries have recently fallen victim to this, where Infrastructure assets of sovereign states have been confiscated by the Chinese Government.
There's really cause for concern. This is partly because most developing countries negotiation teams lack the requisite expertise.

If we must by all means do transactions of this nature, we should consider hiring the best brains of the world, legal and financial, to assist us on the negotiating table whilst we continue to develop the capacity for such tasks. This is not to suggest that we don't have such brains. We need to protect the public purse through value for money contracting and negotiations from possible overexposed Chinese debt, emanating from poorly negotiated "overpriced" infrastructure projects.

Let's not carry neophytes, partisan financiers and family and friends for such complex deals on behalf of corporate Ghana.

Written by:
Public Policy Expert,
Development Finance Major,
Certified Public Private Partnership (PPP) specialist.