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Ghana’s Energy Sector Growing Debt, A Time Bomb!
 
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14-Apr-2017  
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Undeniably, Ghana’s Energy Sector State Owned Enterprises (SOEs) have not been shining examples for many. They are discussed often in the press for all the wrong reasons. The era of bad press has seen no end in sight as they are now being consumed by a mountain of debt. The debt levels are alarming and frightening and concern to stakeholders.

The level of indebtedness is akin to the situation as existed in the early 1980s just before Ghana embarked on economic reforms under the auspices of the Breton Woods institutions. However, the situation now is more deleterious as the debt threatens the banking sector and potentially the central government’s fiscal and debt management.       

The energy sector SOEs comprises the Electricity Company of Ghana (ECG)- responsible for the distribution of power; Ghana Grid Company (GRIDCo)- for transmission of electricity and the Volta River Authority (VRA)- for power generation; Independent power producers (IPPs) in the sector sells their power to the VRA. These SOEs have become synonymous with crisis management, administrative weakness and inertia which have persisted for several decades and have fast become a common feature. Governmental level intervention through policy reforms has not yielded the desired result at ameliorating and positioning the sector as a viable and profitable one.

Among the challenges of the sector is the huge indebtedness to private banks and central government. These debts are a creation of a long legacy of ineptitude, interference and continue resistance to reforms. Perhaps, the notion of the formation of SOEs is part of the problem. Their creation started in the early 1950s and was seen as a tool for rapid industrialisation through the policy of import substitution industrialisation (ISI) – see Potter, A. (2015). Privatisation in Ghana: Successes During Economic Collapse and Authoritarianism.  However, the concept was not well thought through and faced challenges right from inception. Political interference in the operations of SOEs was rampant and resulted in poor performance. In the face of poor performance, the central government still injected significant resources through heavy taxation and contracting of loans for the operations of these non-performing SOEs. The reason was more political than economic.

Their indebtedness now poses a threat to Ghana’s economy as local banks exposure is at all-time high. Without government intervention, possible banking failure is imminent as deleveraging of their debt gets impeded by drying financial position. The President, H.E. Nana Akufo-Addo was aptly correct when he indicated in the State of Nation Address (SONA) that the net debt of the sector is about 2.4billion Dollars, of which over 800 million is owned local banks in Ghana. This situation is certainly worrying as it could trigger banking failure.

But is this the only challenge of the sector to Ghana? No. There is one area of exposure which has received less attention from policy planners, and that is the exposure of central government to the sector in the form of contingent liabilities by way of guarantees and on-lent facilities. Some rough estimates put the total exposure to the sector at USD 1.65 billion. It is a looming time bomb since some are explicit and other implicit debt. Without swift measures instituted, it can collapse the economy. They are potentially a time bomb due in part to its impact on fiscal and debt planning and management in the event of default.  The exposure has increased particularly in the last decade. Without proper structures to mitigate the exposure, fiscal collapse is a possibility. The increase in central government exposure through implicit and explicit liabilities is a wary as the consequential impact could be dire especially when the sector has proving overtime not to be viable as expected.

It is sad that a sector that in has proved profitable in most developed liberalised countries has become albatross for central government fiscal planning in Ghana. The success in developed countries is on the fact that the sector is above political interference, and administrative efficiency is near optimal, regardless of the ownership structure therein. The reverse is the situation of similar companies in developing countries. Political interference, administrative inertia and inefficiencies are their common features. In most of such countries, including Ghana, such companies pose a financial threat to both the private banks and government due to excessive borrowing exposures.

The sector’s indebtedness raises concerns about the sustainability of the sector over time. In response to the concerns about the sector, government in 2012 introduced the Energy Sector Levies Act (ESLA). The ESLA was introduced by government basically to address the exposure of the banking sector to the energy sector SOEs especially VRA. Regrettably, the ESLA only targeted the exposure of private banks to the sector with governmental level exposures not covered by the act. ESLA, we understand has not even been managed well, and money received from it diverted for other purposes. Such developments certainly are bad, and breaches citizens’ trust in government. 

The central government exposure is worrying because they are contingent liabilities which are obligations whose timing and magnitude depend on the occurrence of some uncertain future event outside the control of the government. Contingent liabilities could arise from several sources including; guarantees and Government Lending, Public Private Partnerships (PPPs), Social Security funds, banks, primary dealers (PDs), etc.  Like other obligations, they can have an impact on government finances – budget and debt size (fiscal risk). They are particularly dangerous when the total liabilities are kept off central government balance sheet and not properly monitored. The magnitude of their impact is explained by the hugeness of the exposure arising from such liabilities to the government. The potency of unaligned contingent liabilities of central governments could unexpectedly hurt fiscal sustainability rectitude of a sovereign nation. Series of events especially the Asian financial crises which predominately was trigged by contingent liability monitoring failure lends credence to why contingent liabilities needs monitoring. 

The potentiality of the identified central government exposure to cause havoc to Ghana’s economy is not in doubt due to the magnitude of the exposure. Bridled with political interest and the weak legal regime, fiscal policies have in the past not helped to ameliorate the surge in growth of issuance of guarantees and on-lending facilities to the energy sector companies. They have fast become a worrying situation as most of the energy sector SOEs still are not financially independent and frequently relies on central government support. In fact, their reliance on central government has increased in cases of some of the SOEs. However, their capacity to generate enough revenue is never in doubt, if and only if they are allowed independence. The capacity to reduce technical and efficiency loss means more resources to even pay down past facilities guaranteed by the government.

In concluding, let me reiterate that central government support by way of guarantees and on-lending to SOEs are not necessarily a bad thing. They are leveraging tools which enable SOEs access cheap funds for investment purpose. Such helpful funding system should have a well-structured approval process given the inherent liabilities thereof. The need to conduct credit risk assessment, risk quantification and also doing adequate planning towards mitigating any potential risk(s) is not only prudent but a credible way of conducting government business. It thus ensures that there is value for money and ultimately reduce possible exposure uncertainties to budget planning and implementation. The energy sector SOEs enjoy strategic protection from the government, and it will take governmental action to make them efficient. Reducing interference, appointing right management and enhanced capacity building are a sure way to position them in a business manner and reduce possibly the potential unexpected contingent liabilities arising from them. The timing bomb can be stopped from decimating!
 
 
 
Source: Kwadwo Kyeremeh ([email protected])
 
 

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