Feature Article of Monday, 5 March 2012
Columnist: Bidi, Kwame E.
Investment thrives on risk, doesn’t it? The higher the risk, the higher the returns. However, the return can go in either direction --a big win or a big loss. Ghanaians like to frame it slightly differently and for a good reason – a gargantuan win or loss. It is the task of the wise investor to carefully assess their risks, both obvious and hidden, subject them to rigorous quantitative and qualitative analyses before taking a decision. This is especially critical when the investment is being made with the taxpayers' money.
The government of Ghana is about to make a very big loan deal with the Chinese government. The protracted loan has generated a lot of controversy in Ghana starting from 2011. It involves Ghana taking a $3 billion loan and paying back with 13,000 barrels of oil daily for the next 15.5 years. It’s called “trade-by-barter” and its underlying principle is simple: use what you have to get what you need. China has a healthy load of cash, much of which has to be invested outside of its economy to ensure macro-economic stability. Ghana has oil and needs capital to bring its infrastructure to a point that maximizes gains from the product. So, the two countries have decided to help each other out through trade. It's that simple. The complication, however, comes from the fairness of terms of the agreement.
Going by the current price of crude oil ($107/barrel), the government will have to pay back 7.9 billion to the Chinese government by the duration of the contract. Thus, interest on the loan alone is almost 5 billion -- about 1 billion short of double the actual loan amount. Excellent return on investment for the Chinese government! But what about Ghana?
Two renowned professors hold diametrically opposed views on the loan. The US-based Ghanaian Professor of Economics at American University and President of Free Africa Foundation, George Ayittey, who came up with the initial figures, is of the opinion that the deal is bad for Ghana. The Professor-President of Ghana, John Evans Attah Mills, however, believes the deal is good for the nation and is bent on pushing it through. Professor Mills completed his doctoral thesis in the area of taxation and economic development and is obviously not a newcomer to quantitative analysis. So why are the two professors at odds with each other on the Chinese loan? And by the way, Daily Guide reported on February 29 that government of Ghana’s lawmakers have already voted in favor of the loan agreement.
Does the deal make an investment sense to you from the figures above? Should the government go ahead and take this level of risk with taxpayers' money? Before you jump to a hasty conclusion and risk breaking a leg or two, pause and reflect for a few minutes. Well, as it turns out, the answer is not that simple when the assumptions behind the figures are laid bare. The decision even becomes slightly...well, call it "nightmarish" when the raw numbers are toasted in the microwave of econometric analysis. Did I say toast in a microwave?
First, the figures presented earlier assume that the current price of crude oil ($107/barrel) will stay constant over the 15.5 years of the contract’s life. Second, it does not control for future rate of inflation. Third, the computation fails to factor in future discount rate over the contract period. Bright Simons, the Director of Research at an Accra-based think-tank, was quick to add one more factor which almost eluded me initially: the figures assumed a zero rate of depreciation for the Ghanaian currency (Cedi) over 15.5 years. At this stage, I guess you're beginning to appreciate why the deal has "occupied" the Ghanaian airways for over a year. The Ghana government’s financial analysts surely did price projection for crude oil over the 15.5-year period, taking into account historic prices of crude oil as well as interest and inflation rates. They might have also analyzed potential national and global events that could affect the future price of crude oil. Examples are the financial health of major trade partners in Europe, the US and Asia; global economic growth projections (because it affects demand for energy), and market analysis for alternative energy sources. Perhaps, they also controlled for the future of conflict-ridden oil producing nations such as Nigeria (thanks to Boko Haram) and Iraq.
In fact, government officials are more optimistic about the loan than most critics could imagine. The Chief Executive officer of Ghana National Gas Company (GNGC), Dr. Adjah-Sipa Yankey, is reported by Reuters as saying the $700 million gas project which the loan will finance will be able to pay off the $3 billion loan after five years. "Once we start operations, in between four-and-a-half to 5 years we will generate enough money to pay of[f] the entire loan and start making profits", Dr. Yankey said to to Reuters in 2011.
And, yes, critics of the loan, including Professor Ayittey, and many opposition party members, have done their own analyses, too. The opposition Member of Parliament (MP) for Manhyia, Dr. Mathew Opoku Prempeh, is reported as saying the nation stands to lose $2.325 billion from the loan agreement. He continued, "… [The] negotiated agreement makes mockery of the people of Ghana, and…smells of corruption..." Another opposition Member of Parliament is quoted by AllAfrica.com as saying the contract "...breached the Petroleum Revenue Management Act 815 of 2011, section 18(7) which precludes collateralization of the nation's oil for a period not more than ten (10) years.” It is important to point out that a major rival financial institution, the International Monetary Fund (IMF), is also opposed to the loan deal.
On their recent posts, Professor Ayittey and Kofi Korsah further clarified the terms of the loan agreement. According to Ayittey, the infrastructure projects, which the loan is meant to develop under the Ghana Shared Growth and Development Agenda (GSGDA), will be built with Chinese construction workers, not Ghanaian workers. This is happening at a period when the unemployment rate is hovering around 11% (2000 est). He labeled the deal as a "chopstick mercantilism with a human face.” Kofi Korsah, a London-based Ghanaian, mentioned that per terms of the contract, the loan will be disbursed not in bulk but in tranches over a five-year period, which further goes in favor of China.
It is important to keep in mind that the Chinese government is in business to make money, obviously. The Chinese financial analysts likely did their own financial analysis and made projections before crafting the terms and conditions of the loan. Should their assumptions hold, they hope to make a good profit from the deal. A profit for China could mean a loss for Ghana and vice versa. However, for a small economy like Ghana, with no benefit of scale, unlike that of China, even a slight loss could have far-reaching consequences. It is nonetheless possible that the deal would be mutually beneficial, although China still stands a better chance, given the present terms of the agreement -- at least from a layman’s perspective.
The onus lies on the government of Ghana to double-check its facts and assumptions (both explicit and implicit) before signing the contract, as it has far-reaching ramifications for the nation's nascent economy. Another option is for the government to push for re-negotiation of aspects of the loan to make it fairer for both parties. Given the information above, should the government of Ghana commit the nation to the $3 billion loan agreement with China or not? Which of the professors’ views do you side with? Is the answer still as simple as it seemed from the beginning?
Kwame E. Bidi
The author is a 2009 graduate of University of Ghana currently studying for his Master's degree at Heller School for Social Policy and Management, Brandeis University, Massachusetts. He is a columnist for major online news media in Ghana and other parts of Africa. His scholarly interest lies in political economy and international development.