Feature Article of Monday, 19 July 2010
Columnist: Otchere-Darko, Gabby Asare
Gabby Asare Otchere-Darko
South Korea, with a population of 48.5 million and a GDP of $930 billion, has a per capita income of $26,000. Ghana, with a population of 24 million and a GDP of less than $15 billion, has a per capita income of around $600, having fallen last year.
A Korean company, STX, wants to build 200,000 housing units in Ghana for $10bn. Yet, a more ambitious, productive and forward-looking proposal to build a new industrial, science, business and education city of 500,000 inhabitants, Sejong City, 95 miles south of Seoul, would cost less than $14bn ($13.7bn)! What does this say about Ghana and the vision of her leaders?
The controversy over the purported $10 billion STX housing project reveals something very fundamentally wrong with Ghana’s leadership and development agenda. It adds to the impression that there is no clear, considered direction or development agenda, which Government is flowing.
In order to appreciate the implications of this STX project to our nation’s development, Government should have first asked a few questions as to what it would wish to do, as a matter of development priority, if it were presented with an investment opportunity of nearly 70% of Ghana’s GDP over the next five years. That is what any responsible, we-know-what-we-are-about, forward-looking government with its eye on the ball must do.
The Danquah Institute, nonetheless, commends President Mills for taking that wise decision on Friday, July 15, 2010, to withdraw the STX deal from Parliament but for further work to be done to it. Our suggestion to the President of the Republic is that any further work on this housing construction must not be limited to the four corners of an STX-sponsored deal. His intention to provide decent accommodation to our security personnel and other public servants and help facilitate a booming competitive and affordable housing industry must not be forsaken.
He should use this withdrawal opportunity to explore wider into the many home-based options available to him. He must delve deeper and find manifestation to his pre-2009 placard that Ghanaians are capable of managing their own affairs. He has an opportunity to do something cost-efficiently significant to tackle Ghana’s housing deficit and, in the process, stimulate our economy in a way never seen since the first decade of post-independent Ghana. He need not blow it.
The Danquah Institute’s most fundamental issue with the entire STX project is that the Mills administration is allowing the commercial interest of a foreign company to dictate Ghana’s development priorities and at a cost that is potentially detrimental to the nation’s development. This is so because, without even getting into a debate over cost inflation, the STX project has not come to Ghana to be plugged into a planned government programme. STX appears to be rather the provider of the motherboard for the infrastructural expenditure priorities of the Ghana Government for the medium term, especially, when there was no indication of anything remotely similar in the 2008 manifesto of the governing party.
Ghanaians should join the Danquah Institute in asking this basic question: how best can we utilise an additional $10bn, $4.5bn or even $1.5bn investment in our economy? How would such an investment fit into the development programme of the country? Who, what and how should such investment be driven?
A detailed analysis of the 2008 Manifesto of the National Democratic Congress leaves the analyst with no hints of anything near this project to construct 200,000 housing units in Ghana between 2010 and 2015 and at a total cost of $10bn as presented in the December 9, 2009 off-take agreement between STX, a Korean firm represented by its Ghanaian subsidiary, and the Government of Ghana. Nothing close to this project featured in that document which supposedly represents the vision of the Mills administration for the four-year term.
There are several other priority areas in the manifesto, including a broad commitment to social housing, of course. However, the Mills vision for a Better Ghana projected no highlight of any such singular construction project which requires government to commit, either by credit or cash, billions of dollars. What is even philosophically curious is that 55% (or 110,000) of the homes promised in the STX deal are to be put out on the open market to boost property ownership instead of social housing. Remarkably, the Social Democrats have abandoned their principles but in a hasty, ill-informed pursuit of a property-owning democracy.
"The NDC believes that governments must place the needs of the working people before the needs of those who already have more than they need. We are certainly not against wealth accumulation by individuals and groups," said the 2008 NDC Manifesto.
"But as a Party that is anchored to the social democracy philosophy and espouses the tenets of our ideology unashamedly, all our efforts must be geared towards protecting and supporting the vulnerable, the disadvantaged, the marginalised and the have-nots in society," the NDC document stated.
Not even the last state of the nation address gave any clear policy direction involving this philosophical volte face to promoting and prioritising property ownership as against social housing.
When President JEA Mills gave his state of the nation address to Parliament on Thursday, February 25, 2010, this was what he said about the housing situation in Ghana in his prepared text under the title, HOUSING:
“Madam Speaker, let me put it very bluntly! The spectacle of homeless people and street children in our urban areas is not acceptable and cannot be tolerated!
“In most countries of the world, housing for the lower and lower-middle income groups is the responsibility of the Local Authorities, and Ghana should not be an exception!
“Beginning this year, in addition to whatever the Central Government is doing in the Housing sector, we shall expect our Metropolitan, Municipal and District Assemblies to invest a sizeable proportion of their District Assemblies Common Fund in rental housing for lower and lower-middle income groups.
“To make sure this happens, the Assemblies will be directed to commit a substantial portion of their Common Fund allocations to rental housing.
“A National District Assemblies Rental Housing Project Task Force will be established to oversee the project and make sure that this problem is given the highest priority.
“Madam Speaker, our predecessors started a number of ‘affordable’ rental housing projects in some parts of the country but none of them was completed. I have directed the Ministry of Water Resources, Works and Housing to complete all those housing projects to help alleviate the acute housing problem facing the country.
“The Engineer Corps of the Ghana Army will once again play an integral role in Government’s rural infrastructure expansion programme. To this end, we will be re-equipping and resourcing the Engineer Corps to enable the establishment of an additional Regiment in the Northern sector.”
Note, nowhere in the President’s prepared text, which was - with admirable efficiency - emailed to media houses moments after it was delivered, was the $10 billion dollar housing project mentioned. It was merely mentioned in passing. If in doubt, go back and view the TV footage.
You may also wonder, why will a president who goes as far as to introduce a policy, albeit debatable, that allows the Engineer Corps of the Ghana Army to compete with the private sector for contracts turn around and get a Korean company to build barracks for the Army?
Out of the 30,000 housing units for the security agencies, 10,000 are earmarked for the Police and 10,000 for the Military and others as state-owned accommodation.
The more the Danquah Institute thinks about this project the more obvious the slapdash approach of Government to it becomes. It seems to have come as an apparent eureka ‘opportunity’ to Government; yet, one that was grabbed and pushed and with no time and commitment to think through it properly. Typical of a nation, the leadership of which has been, as a tradition, more concerned about form than substance, about show than the whole, the deal had to be passed quickly; in time for the President Korea to render the sod-cutting ceremony at the Tesano Police Depot.
If this $10bn housing project was really a well-considered project in Government’s scheme of a national development programme for Ghana, it would have competed in the President’s February address for centre-stage with plans for the oil industry and the other ‘flagship projects’ which the President identified: namely a fast-track rehabilitation of the Western Railway, a deep sea port, a ‘world-class communications infrastructure” and “also fast-track the development of a road transport network that will meet the economic, social and environmental needs of Ghana in the years ahead.”
This is what got renowned columnist, Ebo Quansah of the Daily Guide, to write, a few days later, with some pessimism the following:
“One of the dangers inherent in the pronouncement last Thursday is that it has the tendency of inducing Ghanaians to lose faith in the President and his administration.
“When the head of state promised 200,000 housing units to be built as Government measures to ease the housing problem, where is the guarantee that the promise will stand the test of time?
“Vice-President John Mahama, according to Prof. Atta-Mills, was scheduled to leave the very night of the State of the Nation Address, for Korea to, as he put it, ‘put the final nail in the coffin of the project’.
“… When Minority Leader Osei Kyei Mensah-Bonsu seconded the motion to thank the President for his address and wondered whether Government policies were ever going to bear fruits, he used the ‘nail in the coffin’ phrase to explain the source of his consternation.”
We attribute the President’s gaffe to the off-the-cuff nature of the pronouncement on the Korean housing deal. He was not prepared for it and subsequent events have shown that the project itself has not been prepared and Parliament is not prepared for it and Ghana should rather prepare for itself an alternative that has Ghana and Ghanaians driving it even if with some foreign support.
Now, why is this significant? The joint venture project between the Government of Ghana and STX, a Korean company, is supposed to be a $10 billion investment to construct 200,000 houses within the next five years. It is extremely important to note that $10bn is likely to be more money than may be accrued to Government directly from Ghana’s oil production within the next 15 years.
The $10 billion project is 67.71% of Ghana’s GDP. (Note, Ghana’s GDP was $14.7bn - according to the official exchange rate - in 2009 as compared to $16.12bn in 2008). The $4.5bn off-take portion represents 30.47% of our GDP and the $1.5bn, 10.15% of GDP.
Yes! This is the kind of purported investment being dangled at us. This is the kind of investment and indebtedness to which the current Government wants to commit Ghana and her future.
Is it therefore surprising that the Koreans continue to struggle to convince us on the crucial issue of source of funding beyond the sovereign guarantee that our government is prepared to issue to them? The fact that our sovereign guarantee is the only discernible source - or avenue - of funding should prick us sorely to look more within for answers to our housing needs.
The amount involved amount to the single largest investment programme in either nominal or real terms to which any Government of Ghana has had to commit public funds. So it would have required of Government to think through this project more deeply than it appears to have done before going along head-on with it. It is the kind of investment that can make or break a nation. The fact that something is needed and the fact that there is an opportunity to satisfy that need should not mean that we should abandon our critical sense of balance and consideration. Committing an entire nation to such a historical investment should not be done in a rush.
Since 2003, Korean leaders have been going back and forth on a similarly big and controversial project to build a new city; even there, more technical work has been done and there is better clarity on investor commitment than what we have before us in Ghana today.
The loopholes eloquently exposed by the two Parliamentarians on the Minority benches when the STX deal finally came up for debate on the flour of the House on July 14, only went to confirm our earlier warnings that the deal was still in its pre-development phase and was not in the national interest.
The Minority requested to see both the purported Joint Venture Agreement and three-paged Off-Taker Agreement for a ten-billion-dollar project! We continue to insist that the EPC Agreement must also be presented to Parliament for full scrutiny before the other essential issue of value-for-money analysis can be sufficiently done.
The recital of the controversial off-take contract, signed by Albert Abongo on the orders of President Mills and inherited by Alban Bagbin and supervised by Vice President John Mahama is worth quoting here.
It reads: “(i) Whereas the Government of Ghana (GoG) intends to initiate a housing development project (Housing Project) whereby (1) over the next five (5) years, 200,000 housing units will be built in ten cities in Ghana, forty five percent (45%) of which the GoG will become an off-taker to meet some of the accommodation needs of security agencies of Ghana (the GoG Off-Take) and HFC will become an off-taker (as the principle mortgage finance provider) of the remainder (ie 55%) and (2) 300 units will be built on the Build Lease Operate basis to house members of the Parliament, Ministers and State Protocol Department and visiting VVIPs thereof.”
Directly, Government, per the off-take agreement, has agreed to invest cash of $4.5 billion, on top of lands, tax exemptions and other out-of-pocket financing costs, including potentially some $750 million in purchasing insurance premium to back its sovereign guarantee for an STX supplier credit facility for 90,000 housing units to be directly purchased by Government. Let us, for now, ignore the additional 300 housing units for the comfort of the political elite.
The $1.5 billion supplier credit facility, which was withdrawn from Parliament for further work on Thursday, July 15, represents the single largest credit agreement ever entered into by any Government of the Republic. Yet, it was only a footnote in the President’s state of the nation address.
Why is this relevant? It is relevant because it supports the view of the Danquah Institute that the nature of the $10 billion project shows that Ghana’s development agenda is being allowed to be driven by the commercial interest of a Korean conglomerate, supported somewhat vaguely by the Korean government.
Government cannot dismiss without deeper professional interrogation the proposal from the Ghana Real Estate Developers Association, which states effectively that Ghanaians can undertake the entire 200,000 housing constrcution, complete with onsite infrastructure and social amenities and at some $3.7 billion.
Even if the GREDA option could cost Ghana $5 billion, it is still half of the STX option. And, with Government off-taking even 50% of the homes at the cost of $2.5bn, it would give GREDA the credit-worthiness basis to undertake project financing to fund the rest.
But, even before going ahead, Government and local building professionals should ensure that this project is demand-driven. That may mean either the numbers being lower or requiring the local operators to become estate owners/managers to feed the significantly larger rental market than the mortgage market as envisaged by the STX deal.
The Koreans, per the off-take contract, were only seeking to build and sell to government and HFC for onward mortgage financing. The truth is that mortgage financing is not where the demand, of a nation with a $600 per capita income, can be found, predominantly. What is required are estate developers with a long term commitment to Ghana. Estate developers who can service the rental end of the market. A massive injection of housing units can help saturate the rental market and therefore address effectively the obnoxious situation of landlords demanding in excess of one-year deposits from tenants. The leading role of the State Housing Company, for example, in making this a commercial reality for the mid-lower and lower end of the housing market can be critical.
Involving local players directly in driving any such massive housing construction project would mean establishing a Housing Bond and borrowing from our local banks. There is nothing stopping Government from engaging the banks to provide funding for this project at a negotiated interest rate that is significantly lower than the going rates.
Also the packaging of such a project should not mean raising the total amount in one big supplier credit facility as presented by STX. It could mean raising up to $200m in the first year and similar amounts annually in subsequent years. Looking inward to raise such amounts will represent a major boost for our banks and other areas of investment market in Ghana. It will increase the capacity of our banks to offer credit to the private sector.
It cannot be lost on the President that latest statistics from the Bank of Ghana (Friday, July 16) indicate that “in real terms commercial bank credit to the private sector fell by 3.4% at end-May 2010 compared with a growth of 19.1 per cent at end-May 2009.”
The Monetary Policy Committee of the central bank reported further that its credit conditions survey conducted in June 2010 “shows a general net tightening of credit to small and medium sized enterprises and households for mortgages. Loans to small and medium sized enterprises and households were however tightened through increases in margin for riskier loans and security and collateral requirements.”
Of the total outstanding bank credit to the private sector of GH¢5,873 million (22.7 per cent of GDP) in May 2010, only 9.9% was to the construction industry. Again, the construction industry was the worst hit in 2009, suffering a negative two percent growth.
We began this article by asking Government to pose this question back to itself: if it had $10bn investment opportunity what would it want to do with it, as a matter of our development priorities. Perhaps, the biggest political controversy in Korea today involves a multi-billion dollar construction project – the Sejong City project.
In March 2010, President Lee Myung-Bak’s government unveiled proposals to develop a 16.5 trillion won or ($13.7bn) new city called Sejong, some 95 miles south of Seoul to be built by 2020.
The big idea is to promote an equilibrated regional development in South Korea, where about 50 percent of population today lives in Seoul or its surroundings. But it was a revision of an earlier revised plan and this latest revision triggered intense opposition that threatened to break up Mr Lee’s ruling party.
The government of Korea decided to drop a rather controversial plan elaborated in 2005 to shift a number of ministries to the new city, after the supreme court ruled as unconstitutional a 2003 plan by the previous president to build a new administrative capital there away from Seoul.
So the current model of Sejong City is envisioned as a hub of education, business and science. The scientific hub is planned as a self-sufficient city able to house about 500,000 citizens. It will bring 246,000 new jobs by 2020, have a modern railway system and be linked to the rest of the country by 9 highways; and, all this at $13.7 billion!
The city is expected to attract 17 trillion won worth of investment over the next 20 years. Sejong city will accommodate cutting-edge technology research institutes, universities, schools, hospitals, parks and cultural facilities such as libraries, museums and concert halls.
Named after a respected 15th century monarch who is known as the inventor of the country's written alphabet, Sejong City is a futuristic project, which is eco-friendly planned. The government plans to build the Korea Rare Isotope Accelerator, the Basic Science Research Institute, and the Convergence Research Center in the city by 2015. And the Korea Advanced Institute of Science and Technology and Korea University plan on constructing research campuses in the city as well.
On the electronics front, companies including Hanwha, Woongjin, Lotte, and Samsung, the largest business group in Korea, are setting up shop in Sejong. Samsung, Hanwha, Woongjin, Lotte and Austria`s SSF have agreed to invest a total of 4.5 trillion won ($4 billion).
Samsung Group will make the largest investment of 2.05 trillion won. Hanwha Group follows Samsung with1.33 trillion won in investment to be spent on research, development and manufacturing facilities for new businesses, including solar energy and producing solar cells and solar modules.
Woongjin Group will invest 900 billion won into air and water purifiers and other environment-friendly products, including solar power generators. Lotte Group, the country’s fifth largest conglomerate, will put in 100 billion won for a biofood research center.
Austria’s SSF, a manufacturer of solar power cell modules, plans to spend 138 billion won on Sejong city, making it the sole foreign investor so far.
The Korean government left some 1.9 million square meters of land in the city open for foreign investors. Cheap land, tax benefits and eased rules are offered as incentives for companies investing in Sejong.
For investors in need of plots spreading half a million square meters or more, undeveloped land will be sold at around 400,000 won ($333,000) per pyeong (3.3 square meters).
Nevertheless, on June 29, 2010, in a political blow to President Lee Myung-Bak which threatened the stability of his government, South Korea's Parliament rejected that multi-billion-dollar government plan to develop that new city as a science, business and education hub by 2020.
The vote means Mr Lee's government must start work to implement the earlier plan, originated by his predecessor Roh Moo-Hyun, to effectively build a new partial administrative capital by 2014. Mr Lee had said the original plan, which will cost about 22 trillion won ($25.3 billion) would cause inefficiency and waste taxpayer money!
If Ghanaians were presented with a similar choice: a new administrative capital or a new science, education, industrial and business city, it is obvious that the overwhelming majority of Ghanaians would opt for the latter.
But, perhaps, the politicians of industrialised Korea have the luxury to choose an administrative city after they have spent decades building a better export-led Korea with Korean chaebols at the forefront, supplemented, of course, by some foreign investment. Chaebols are large South Korean private business groups, with activities ranging from farming to ship building, that consist of several smaller members or units; which have historically maintained close connections with the government.
That, Mr President, is how your contemporary in Korea inherited the industrialised Korea he is still working to make better.
The author is the Executive Director of the Danquah Institute