• Kofi Amoabin

Managing VRA, TOR, ECG Debt and Oil Revenue with Privatization!!!

The debt level of Volta River Authority (VRA), Tema Oil Refinery (TOR), and the Electricity Company of Ghana (ECG) pose such a significant threat to government revenue that unless steps are taken to control the debt, Ghana might not see any benefits from its future oil exports. For a long time, TOR, VRA, ECG and the Government of Ghana (GoG) have been indebted due to the way our energy needs and resources have been managed. As Ghana gets ready to receive revenue from oil exports, the debt level of state parastatals must be capped and disposed of, so the public can benefit from the revenue in exporting oil. Then, the government must educate the public and manage the expectations from the oil revenues.

Ghana will not be a major oil exporter, and the revenue received would probably not change things for the average Ghanaian. However, oil revenue could help Ghana improve its budget and trade deficits and, if determined, invest in its people by improving some of the basic human services important to Ghanaians.

It is way too common in Africa to have higher hopes for better and then for things to fall apart. Crude oil producing countries in Africa have, on the surface, been seen as resource rich but materially or financially poor. Most crude oil exporting countries have failed to manage the expectations for oil revenue because the high levels of expected revenues were not realized. Most of the time, in anticipation of higher revenues from oil, governments will step up borrowing and government institutions will increase spending in anticipation of higher budgetary allocations. In order to not repeat the same mistakes, the government of Ghana must limit spending and borrowing, and strategize so that new revenues can be applied to our future needs, and propel our nation to middle income status.

In 2003, when Standard and Poor (S&P) assigned a credit rating of B+ to Ghana, the S&P noted that “ TOR, VRA, and ECG accumulated large quasi-fiscal losses.” Subsequently, the government of Ghana adjusted the price of fuel, and the cedi became relatively stable, but VRA still owes its creditors. The ECG owes VRA and cannot afford to pay. In addition, the GoG also owes its utilities bills to VRA and fuel bills to TOR but is unable to pay. Also, TOR does not have the credit rating to import its own crude oil. The VRA is also struggling to find the funds to import crude oil for its power plants.

This maze of debt among VRA, TOR and ECG must be addressed so that the new revenue does not go to paying down old debt and keeping us in the ‘throwing good money after bad syndrome.’ If the VRA, TOR and ECG would make their financial statements public, rather than providing pieces of information, the financial statements would most likely show that these three enterprises do not have any cash flow and are probably bankrupt. The best solution would be for the government to divest them. Economic power must be concentrated in the viable private sector.

The TOR imports crude oil and refines crude into basic products. TOR sells refined products to entities that do not pay, and, at the end of the day, TOR is left with huge losses. The poor Ghanaian worker assumes the debt of TOR through higher taxes or new tariffs. The best solution for everyone is privatization. By privatizing TOR, the government will be out of the petroleum refinery business and divorce the government from any potential risk of loss, and Ghana’s credit rating will improve.

Currently, the ECG buys electricity from the VRA at a bulk rate and retails the electricity to customers. With privatization of ECG, just like telephone service in Ghana, other companies can step in and compete for the business of retailing electricity now monopolized by ECG.

The VRA produces electricity by operating a hydro dam, thermal plant, and others to generate electricity for sale. Why is it that only the VRA can generate electricity for sale to ECG? With privatization of the VRA, the immediate benefit will be that other companies will step forward and generate electricity for sale. A privatized VRA poses no risk to the public.

In Texas, USA, the retail price of electricity is about 12 cents per kilowatt-hour (kWH). There are about three major private electricity producers, 5 transmission and distribution companies, and over 20 retail electricity providers. The deregulation of power has expanded the private sector. Recently, with the deregulation and expansion of the private energy sector, renewable energy sources have been tapped, adding capacity at a cheaper price. According to the American Wind Energy Association (AWEA), power companies are using wind energy and high efficiency wind turbines to generate electricity at 6.5 cents per kWH. To reiterate, in Texas, which has major offshore petroleum exploration and production facilities, over 2500 megawatts (MW) of electricity generating capacity was added in 2008 by using wind energy. Moreover, across the USA, over 90 percent of all new U.S. generation capacity has been added via a combination of natural gas and wind power. This successful experiment in Texas and the U.S. proves that divesting or deregulating such companies like the VRA will bring new companies and new ways to boost our energy mix.

As a country, we have a good experience with divestiture. For example, most Ghanaians will agree that the service we are getting from Ghana Telecom (GT) under Vodafone, as the majority shareholder, is better than when GT was 100 percent government-controlled. Also, by opening up the telecom industry in Ghana, now we have Zain, MTN, etc., and there is competition, making services greatly improved for everybody. And more importantly, the expanded telecom sector has been a major boost for job creation. With proper planning, Ghana could be an IT hub. For example, Texas-based ACS, a business services processor, employs over 1,000 people in Accra.

By privatizing the electricity generation and distribution, petroleum refining and marketing markets in Ghana, the country stands to take hold of a major commodity in serious shortage in West Africa. Even though the West Africa region has one of the biggest reserves of oil and gas, there is a serious lack of processing capacity. The demand for electricity and refined petroleum products exceed the supply, and Ghana stands to reap huge financial benefits if its electricity generation and distribution markets are privatized. A privatized VRA could generate electricity for sale across West Africa for profit. Also, other companies will invest capital and tap Ghana’s huge potential in renewable energy, creating jobs for our economy.

In a presentation to parliament recently, the CEO of VRA said in his remarks that ECG owes VRA about $767 million, and the government of Ghana also owes the authority $250 million. He went further to say, “progress had been made on the payment of that debt through an arrangement whereby the ECG pays $5.2 million every week.” Can the ECG realistically pay $5.2 million a week for the next 150 weeks to pay off its debt to the VRA?

The authority’s problem is compounded by the fact that it has lost money year after year, but gets government support to stay in business. In stating the losses, the CEO said, “the authority made an operational loss of $30.7 million in 2004, while in 2005 it made an operational loss of $35.7 million.” If VRA has year-to-year operational losses, then technically, VRA is bankrupt, and could punch a big hole in the government’s expected revenue. The VRA could eat into the expected oil revenue and deprive the average Ghanaian of the financial benefits of exporting oil. In Africa, it should not be difficult to find countries that produce and export crude oil, but the citizenry sleep in darkness because electricity cannot be generated efficiently.

Cash flow problems prevent the ECG and VRA from being truly innovative. Power is now transmitted via electricity superhighways. West African countries could be linked by electricity superhighways, and, then power generated from renewable energy or clean energy or natural gas could be connected to the superhighways for sale outside Ghana. The VRA, TOR and ECG must find ways to deliver energy, across West Africa, at a cheaper rate. Electricity is much cheaper around the world and Ghanaians must demand lower power rates.

The Ghanaian economy is at a very crucial juncture. The government must make bold decisions and turn Ghana into a prosperous nation, or face doing things the same way, and face poverty, higher deficits and inflation, and not benefit a bit from exporting oil. Instead of being a drag on our economy, VRA, ECG and TOR could be positioned to be major economic power houses in West Africa. Once privatized, these companies could even lead in establishing Ghana as the hub for trading electricity, crude oil and natural gas contracts in West Africa. This will take Ghana to a whole new level, because Ghana will realize additional revenue streams from generating, exporting, selling and trading electricity across West Africa.

As a country, we should manage our affairs to benefit the majority, and for the case of Ghana, as in most West Africa countries, the majority makes less than $2 a day. So, when government-owned enterprises lose millions of dollars and accumulate debt, which is assumed by the government, it means the poorest among us are forced to carry the load.

If Ghana gets 10 percent ownership of both Jubilee and Tano fields, then it will generate a very small amount of money. Jubilee and Tano are forecasted to produce 200,000 barrels of oil per day (bopd). This means initially that Ghana will be getting 20,000 barrels of oil per day (bopd). But as a country, we use over 50,000 bopd to refine for gasoline and other petroleum products. So where does Ghana get the difference to meet its needs? Here is the dilemma, even though we are oil exporters, we could also be buying on the world market to meet our needs. Initially, the only benefit to having the oil is the 20,000bopd. But, what if these 20,000 barrels go to TOR, where the crude is refined, and then TOR continues to face losses?

Temporarily Ghana will see a big jump in its GDP for the oil exported and the 10 percent equity taken in oil. As a nation, if the Jubilee and Tano fields export 180,000 bopd, at the current world price of $80 per barrel, this is about $5.25 billion in exports per year. According to the World Bank, Ghana’s GDP stood at $16.6 billion, unadjusted for inflation, at the end of 2008. Oil exports alone will mean over 20 percent growth in GDP. But the revenue for the exports belongs to the exploration and production companies, and not the Ghana government. This means we can have a very high or strong GDP growth and still have high levels of poverty if we do not manage other sectors of our economy well. This is what has eluded so many oil-producing countries. Like other countries exporting oil, Ghana may actually get poorer.

To benefit from the offshore oil, Ghana must develop a good relationship with the operators so that they can sell to Ghana the crude we need and also raise the possibility of refining the oil in Ghana so that we can meet our fuel needs; get the jobs at the refinery and the infrastructure that will have to be developed and then sell the refined products in West Africa or export the refined products. Without an industrial complex processing the crude and gas, we cannot put our hopes in the expected revenue from oil production.

In the 1980s, crude oil traded under $13 a barrel, and in 2008 crude oil dropped to $33 a barrel from a high of $145 a barrel. As the euphoria about the expected oil revenue builds, one should bear in mind the question of who determines the price of crude oil. For Ghana to benefit from its oil find, the National Planning Committee and the Energy Ministry must seek all talented Ghanaians, and get them involved in the process of managing our expectations for oil revenue. Some of the critical skills needed in Ghana at this point could be Ghanaians who are knowledgeable about trading the oil and electricity markets so that the Energy Ministry, National Planning Committee and Parliament, can be guided.

To succeed, the government must divest of TOR, VRA, and ECG, or else the expected revenues from oil exports will be gobbled up by these huge monopolies. Together VRA, TOR and ECG owe about $2 billion. The expected revenue from Jubilee, based on current crude oil futures price as quoted on the Chicago Mercantile Exchange/NYMEX, is about $511 million per year. This means that if even all the revenue from Jubilee is applied to the debt of TOR, VRA, and ECG, it will take four years to pay off the debt. The S&P has put Ghana on a credit watch for a possible downgrade from B+ to B, and is monitoring fiscal governance in Ghana. TOR, VRA, and ECG pose significant financial risk to the future of our nation, and could trigger our credit downgrade. For the government to be able to limit spending and borrowing, so that it can invest in the future of our nation and improve the welfare of the average worker, the government of Ghana must seek new ideas and solutions in dealing with TOR, VRA and ECG. These organizations can sink the new government revenue from oil and make Ghana yet another victim to the oil curse.

The author, Kofi Amoabin is the CEO of DFC Global (Ghana) Ltd. DFC specializes in oil and gas services and commodities trading. DFC has offices in Houston, Texas and Accra, Ghana.