Proposed USD2.5-bil. bond to retire Ghana's energy-sector debts likely to improve operator and banking industry performance

Following the announcement, the ministry reported that it has selected two local banks – Fidelity Bank Ghana and Standard Chartered Bank Ghana – as joint transaction advisers and lead managers for the planned bond issuance, to be conducted through a ring-fenced special purpose investment vehicle (SPV).

Despite a history of over 10 years of market deregulation, Ghana's energy sector is debt-ridden largely as a result of procurement-related practices: purchases of fuel to power the country's thermal plants, and the indebtedness of state bulk distribution companies (BDCs) which import petroleum products into the country. Since 2010, companies operating in the industry, particularly the state-owned enterprises (SOEs), have had difficulties managing their core liabilities, increasing their credit and liquidity risk exposure with a corollary effect on the balance sheets of their counterparty creditor banks.

Cycle of indebtedness – energy-sector debt matrix

In the downstream petroleum sector, government interventions to cap electricity and fuel prices imply that the full cost of these products are often not passed on to consumers, leading to under-recovery; thus, the government regularly finds itself having to pay the BDCs the price differential to reflect the full cost of the landed products. The National Petroleum Authority, the industry ombudsman, charged with regulating imports of petroleum products into the country, has not been effective in setting cost-reflective prices due to perceived political interference in its operations.

Within the power sector, debts accrued are due to domestic banks providing funding for crude oil and natural gas purchases by SOEs such as the Volta River Authority (VRA) to fire the country's thermal plants, including financing unpaid receivables. Another dimension of the spiralling debt problem in the power sector is the inability of the Electricity Company of Ghana (ECG), the monopoly state distributor, to settle its indebtedness to the VRA and other independent power producers (IPPs). ECG's operations suffer from technical and commercial losses estimated at 25% of all power procured. ECG management also claims that government agencies, among its top customers, do not pay their bills on time, leaving it without adequate cash flow to settle indebtedness to the VRA and IPPs punctually.

A large part of energy-sector debt is owed to domestic financial institutions and trade creditors – fuel suppliers. Although these legacy debt arrears are not Ministry of Finance direct or guaranteed debt, they have repeatedly been highlighted as posing systemic risks to Ghana's domestic banking sector, which is burdened with high non-performing loans estimated at 24.7% and low asset-quality (see Ghana, 14 June 2017: Ghana's banking sector shows credit growth recovery but asset-quality deterioration likely to erode capital buffers).

According to the government, the net debt in the energy sector as at December 2016 was estimated to be USD2.3 billion; USD782 million is owed to the domestic banks and USD440 million to fuel suppliers. Additionally, USD226 million is owed to Ghana National Petroleum Corporation (GNPC) and USD314 million to Ghana Gas Company Limited, the national gas aggregator; the debts include USD122 million owed to Bulk Oil Storage and Transportation Company Limited (BOST), USD77 million owed to CENIT Energy, USD62 million owed to GRIDCO, and USD19 owed to Asogli Power.

Energy-sector levies and debt restructuring

A priority of Ghana's National Patriotic Party (NPP) administration, led by President Nana Akufo-Addo, is addressing the country's power outages, locally known as 'dumsor'. In line with its electoral manifesto, the NPP government is seeking to implement its 10-year Power Sector Master Plan (see Ghana: 31 May 2017: Power contract audits in Ghana likely to lead to contract renegotiations, with outright project cancellations unlikely). To clear up energy-sector arrears, the NPP government has said that some of the receivables from the energy sector levy passed in the Energy Sector Levies Act (ESLA) will be ring-fenced and securitised to repay legacy debts. In December 2015, the previous National Democratic Congress government enacted the Energy Sector Levies Act (ESLA) to address the sector's rising indebtedness and banking-sector exposure to energy-sector SOEs, especially the VRA. The law allows the consolidation of energy sector levies and taxes on petroleum products, and for the proceeds to be ring-fenced to retire energy sector legacy debts. According to a report issued by the Ministry of Finance in May 2017, USD700 million (GHS3.2 billion) of energy-sector levies were collected in 2016.

Outlook and implications

Restructuring energy-sector debt from the proceeds of a long-term bond is highly likely to improve operating firms' liquidity, particularly that of SOEs and the country's domestic banks. Restructuring the debt of SOEs such as the VRA and Tema Oil Refinery will strengthen their financial condition and permit them to repay bank borrowings. In turn, this will strengthen banks' balance sheets, reduce non-performing assets, and enhance profitability. The International Monetary Fund has expressed concern that the planned debt issuance will increase the public-debt stock. However, the government is counter-arguing that the proposed energy bond would be issued via an SPV rather than the state, and be serviced using ring-fenced energy-sector levies.

Despite the positive reform efforts, systemic risks still persist in Ghana's energy sector from recurrent delayed payments by ECG to IPPs and the VRA. To address distribution challenges, the government is receiving USD498 million under the United States government-backed Millennium Challenge Corporation (MCC) Power Compact. Under the deal, a private-sector concessionaire will invest additional finance and operate ECG's assets for 20 years. Additional policies to improve sector sustainability include the application of automatic tariff adjustments and the elimination of subsidies.