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General News of Friday, 30 July 2010

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DI: $265m STX Insurance Is A Rip-Off,

GOVT CAN SAVE $200M WITH MIGA

Thursday, July 29, 2010:- This week, the Ministry of Finance & Economic
Planning submitted, what it termed, “Revised Memorandum to Parliament” and
a revised supplier’s credit financing agreement between STX Engineering &
Construction Ghana Limited (as ‘Supplier’ – not ‘Lender’) and the
Government of Ghana in relation to the $1.5 billion financing of the
Security Services Housing Project.

In a press statement reacting to this new development after the agreement
was withdrawn from the floor of Parliament recently, the Danquah Institute
limited its comments to the fees and insurance premium, which it has
condemned as “a total rip-off”.

It has described the 17.34% insurance premium covering the credit facility
as “very fishy”, which should not have any place in any credible and
important financing agreement with a developing nation like Ghana.
It says Government can save the nation more than $200 million if it opts
for the kind of political risk insurance cover offered by MIGA, a member of
the World Bank Group, for developing states like Ghana.
The policy think tank says, “We are amazed by the insistence of STX and
the willy-nilly compliance of Government that STX must receive an upfront
payment from Government of 17.34% of the contract sum of some $1.5 billion
to arrange political risk insurance. This will mean an upfront payment of
$264.5 million (i.e. 17.34% of $1.52 billion) as part of the first
disbursement of the loan.”

The Danquah Institute does not understand why Government and STX have not
considered the MIGA option. The World Bank’s Multilateral Investment
Guarantee Agency is the pre-eminent agency in the world for the provision
of political risk insurance for projects in a broad range of sectors in
developing countries.

According to DI, the insurance premiums charged by MIGA range from 0.45%
to 1.75%, payable annually and not upfront.
On the basis of the MIGA insurance premiums, the rates charged by MIGA for
this project will range from US$1.01 million- US$2.62 million annually.
Over a 20 year period (i.e. as the terms of the STX loan stipulate), DI
estimates that the total sum payable will range between US$20.2 million and
US$50.5 million.
This puts the difference between the STX insurance premium per the
agreement and what will be charged by MIGA between US$210- 240 million.
“This means that Ghana could save over $200 million in insurance costs
alone if STX rather obtained political risk insurance from MIGA,” the
Danquah Institute says.

The policy think tank is therefore asking Government to ask STX to obtain
political risk insurance from MIGA.

In his July 27 news conference, Alban Bagbin, the Minister for Water
Resources, Works and Housing, defended why Government was adding insurance
premium to the sovereign guarantee.

He said, “The sovereign guarantee is simply the collateral for the loan
facility. The insurance is the guarantee against political and commercial
risk.”

Mr Bagbin went on to explain, “This became even more relevant with regards
to Ghana when the NPP, on taking over the reins of Government in 2001,,
drove out Malyasian investors in Ghana (Ghana Telecom, etc).”
He added, “In the case of Korea, the preserved risk is high because it was
the NPP that decided to unilaterally halt the repayment for two Korean Exim
laons and interest before it conclude HIPC arrangement.”
The Minister’s disclosure in fact supports the MIGA option, says DI. This
is because under the NPP, a Malaysian company teamed up with SSNIT for the
proposed construction of 100,000 housing units, a project, which MIGA
readily offered insurance against the very risks mentioned.
The Executive Director of DI, Gabby Asare Otchere-Darko recalls, “There is
already a recent precedent in Ghana. A few years ago, MIGA issued
guarantees to Metro Ikram Sdn. Bhd. of Malaysia covering the first phase of
its anticipated investment of a 100,000 affordable medium range and premium
housing development project in Ghana.”

He adds, “The joint venture project was between Metro Ikram and the Social
Security National & Insurance Trust, beginning with a pilot of 1,000 homes
in Tema. The coverage for that was for five years, protecting against the
risks of transfer restriction, expropriation, war and civil disturbance,
and breach of contract.”

“In spite of the high risk Government says comes with Korean loans it is
still committed to this soul-sourcing contract with STX. But, how high is
Ghana a risk to Korean firms to attract insurance premium which is more
than half of Ghana’s total capital investment budget,” says Mr
Otchere-Darko.

However, Mr Bagbin stated that the NDC has been able to restore the Korea
Eximbank’s relations with Ghana since Vice President John Mahama’s visit
there in March 2010.

“We find this even more curious,” says the DI Executive Director. “In the
same March, in Washington, MIGA and Korea Eximbank signed an MoU to
cooperate to promote private sector investment in developing countries.”

According to a press release at the time, “This partnership will enable
the two institutions to work closely on, among other things, mitigating
political (or non-commercial) risks in developing countries.”

The MoU was signed by MIGA Executive Vice President Izumi Kobayashi and by
Korea Eximbank Chairman and President Dongsoo Kim at MIGA’s headquarters in
Washington, DC.

The aim of the MoU is to strengthen cooperation between MIGA and the Korea
Eximbank in promoting foreign direct investment into developing countries
and support Korean outward investment, such as the STX housing deal.

The MoU will also facilitate general cooperation in specific projects
where both MIGA and the Eximbank are involved, Ghanaians were told, when
the Vice President returned from Korea that Korea Eximbank was involved in
this STX project.

DI further points out that MIGA can provide insurance coverage for up to
15 years (in some cases 20), which is within the terms of the STX supplier
credit facility.

Again, MIGA, in conjunction with the Public-Private Infrastructure
Advisory Facility—a multidonor technical assistance facility— has embarked
on a broad study of Ghana’s housing market with the objective of developing
a better understanding of its challenges and prospects.

“What can be more opportune than this STX housing deal in Ghana for MIGA
to provide insurance cover,” Mr Otchere-Darko says.

The revised STX agreement, which has been repeatedly criticised as too
expensive, maintains the financing cost to Government for the 30,000
housing-unit barracks at US$1,525,443,468. Out of that, $1.3 billion is
stipulated as representing construction, cost (or the EPC contract amount)
with the rest, impliedly but not arithmetically, covering the insurance
premium and other specified fees, namely management and arrangement (which
is now termed as ‘facility fee’ in the revised agreement).
At paragraph 14.3 of the agreement, it is stated, “The Government shall
pay to the Supplier 17.34% of the Facility for the purpose of arranging
political risk insurance cover for the Facility. The Insurance Premium
shall form part of the first disbursement of the Facility.”

On top of that, it states in paragraph 14.2 that “The Facility Fee and the
Management Fee shall form part of the first disbursement of the Facility”.
The two fees translate into $11,440,826.01 and $7,627,217.34, respectively.
Thus, according to Oubor Kuntando, policy analyst at the Danquah
Institute, “Ghanaians are being asked to pay $265 million upfront to insure
the 30,000 units construction, which we are being told is being
pre-financed by STX, issue upfront a sovereign guarantee for STX to source
funding for the construction and pay them an additional upfront fee of $19
million to manage and facilitate the supplier’s credit. After all of the
above, the agreement also demands of Government to pay for any unspecified
expenses incurred by STX and connected with the financial arrangement of
this very $1.5 billion facility!”

There are a number of related concerns with the insurance arrangement,
which have been pointed out by DI.
Mr Kutando enumerates them: “One, if the insurer has not as yet been
identified, what is the basis for a quote of 17.34%? Whose quote is it?
“Two, our checks show that it is also very unusual for any insurer to ask
for an upfront payment for insurance covering the total number of years for
a contract (in this case 20 years).”
He continues, “Three, the upfront insurance premium of $265 million is
inordinately high and is not consistent with best practice, particularly
when we can save more than $200 million by taking the MIGA option.”
The press release from DI goes on to say, “It should further be noted that
many insurance brokers apply to MIGA for political risk insurance. For
eligible brokers, MIGA caps their insurance premiums at US$250,000 per
annum. This only goes to buttress the point that what is being proposed in
the STX agreement is way too high.”
Notes to Editors
MIGA was created in 1988 as a member of the World Bank Group to promote
foreign direct investment into emerging economies to support economic
growth, reduce poverty, and improve people’s lives.

MIGA fulfills this mandate by offering political risk insurance
(guarantees) to investors and lenders, covering risks including
expropriation, breach of contract, currency transfer restriction, war and
civil disturbance, and non-honoring of sovereign financial obligations.

MIGA works actively with investors and host countries, helping to resolve
disputes before they reach a claims situation. The agency also offers
technical assistance to its member countries and provides free online
investment information and knowledge services. Since its inception, MIGA
has supported 600 projects in 100 developing countries, totaling more than
$21 billion in coverage. MIGA’s gross exposure stands at $7.5 billion. For
more in-formation visit www.miga.org

The Korea Eximbank is an official export credit agency providing
comprehensive export credit and guarantee programs to support Korean firms
in conducting overseas business.

Since its establishment in 1976, the Bank has actively supported Korea’s
export-led economy and facilitated economic cooperation with foreign
countries. Korea Eximbank’s primary services include export loans, trade
finance, and guarantee programs structured to meet the needs of clients
engaged in overseas business.

The Bank also provides overseas investment credit, import credit, and
information services related to business opportunities abroad. For more
information, visit www.koreaexim.go.kr.

For more information on the STX deal please visit our website,
www.danquahinstitute.org or call +233 (0)302 78 28 78

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