Flashback: Position of Ghana on the Arrangements with Valco

In January 2003, the Government of Ghana and the Volta River Authority (VRA) on one part and representatives of Kaiser Aluminium & Chemical Corporation (Kaiser) and the Volta Aluminium Company (Valco), its 90% owned subsidiary which operates an aluminium smelter in Tema, Ghana on the other, met in Washington, DC, USA in the hope of resolving a dispute via the process of mediation under the supervision of the eminent American Jurist, Judge Stephen Schwebel, one-time President of the International Court of Justice at the Hague, Holland.

Subsequent to the breakdown of the mediation, Kaiser and Valco have filed a Request for Arbitration to the International Chamber of Commerce. Ghana's position was and still remains that long-term partners ought to solve differences via dialogue rather than via an acrimonious legal battle.

We in Ghana believe that our commitment to ensuring that we provide optimal energy services to all our stakeholders should not be wavered even in the face of Request for Arbitration filed by Kaiser and Valco to the International Chamber of Commerce. Naturally, Ghana is prepared to go through this process if that is the wish of Kaiser/Valco.

We in Ghana are resolute that our message is right and that we are prepared to bring our case into the public arena in a proactive manner devoid of unilateralism.

Background

Over forty years ago, the Republic of Ghana took a bold decision to build an energy infrastructure for development that could propel the vision of an industrial and commercially sound economy. The Volta River Development Project in Ghana was thus implemented with the construction of the Akosombo Hydroelectric Generating Station, in the process also creating the Volta Lake.

Ghana contributed 50% of the funds for the project and sought loan financing from the World Bank, the United States Agency for International Development and the US EXIM Bank among others. Ghana was solely responsible for investment in associated infrastructure such as the development and creation of the industrial township of Tema, which included the new Port at Tema. With the assistance of the US Government, Kaiser Aluminium accepted to build an aluminium smelter in Tema to off-take power from the new hydroelectric power station.

To facilitate the participation of Kaiser, a complex set of agreements - referred to as the Valco Agreements - were executed. Among these agreements was the Master Agreement with its scheduled documents including the Power Contract and the Long Term Tolling Contract. With Kaiser and Reynolds Metals holding 90% and 10% equity respectively, the Volta Aluminium Company (Valco) was also incorporated.

In recent times amendments have been made to various provisions of the Agreements essentially to establish greater equity and fairness in the arrangements between Valco and Ghana for the mutual benefit of both parties, as provided for in Article 49 of the Master Agreement.

Furthermore, even though the parties have attempted since 1994 to evolve a new power contract for the future that has not succeeded, VRA has gone out of its way to assure and provide Valco with energy. Moreover, VRA has continued to provide power, effectively extending credit to Valco because Valco has refused to pay the agreed minimum price. To date, significant arrears have accumulated which Valco has unreasonably withheld and which Valco should pay.

1. Ghana's Constitution requires that all international business or economic transactions involving the Republic of Ghana as a party must be subject to the consideration and approval of Parliament.

1.1. The Valco Agreements fall into the category of agreements that require parliamentary ratification. Furthermore, the Volta River Project (Supplementary Provisions) Act, Act 96 of 1962, specifically subordinated the Master Agreement and all its scheduled documents including the Power Contract to the control of the Constitution

1.2. Ghana's position is that the 1997 exercise of the option to renew the Power Contract by Valco after the expiry of the initial 30-year period of the agreement should have been subjected to due Parliamentary consideration and approval. This has not been done thereby rendering the purported exercise of the renewal option non-effective.

2. Hydro energy can therefore no longer be the sole source of energy to supply Ghana's Power needs. Valco like all other customers can only benefit from the mixed hydro-thermal power system. Today Ghana's power needs are met from a generation mix of 35% cheaper hydro energy and 65% thermal.

2.1. Sole dependence on Hydro puts the strategic national resource - the Akosombo Dam - in considerable and potentially irrecoverable danger.

2.2. The low level of the Volta Lake considerably limits the output of the power system and severely constrains the VRA's capability to produce hydro power

2.3. Notwithstanding the above, Ghana can meet all of its energy needs utilising the significant thermal power facilities it has prudently introduced to complement Hydro.

3. The price payable for power supplied to Valco must relate directly to the cost of production.

3.1. The link to the world average power prices payable by aluminium smelters must be seen in the context that such prices in the reference countries reflect the cost of producing electricity in those countries. The Valco insistence to have its prices pegged to the average prices without reference to cost is untenable.

3.2. Ghana has proposed 3.0US Cents/kWh. Even this price would not remove the requirement for Government to subsidise VRA's operations to meet the shortfall in tariff revenue from Valco so that the commercial viability of VRA is not threatened. It is unacceptable that Ghanaian taxpayers have to subsidise a private company.

3.3. After 35 years in Ghana, Valco continues to insist that it should be treated in a unique category and be allowed to pay rates for power that are far below the cost of providing that power in Ghana. It costs the Volta River Authority 6.5 US cents/kWh to actually produce electricity from its mixed hydro/thermal system. It is worthy of note that the cost of producing hydro power alone is 2.5 US cents/kWh. The ordinary Ghanaian pays in the region of 7.8 US cents/kWh whilst other industrial customers pay well over 4.5 US cents/kWh. Up till today, Valco has been paying 1.1 US cents/kWh and has resisted efforts to make it pay a more realistic price reflecting the current costs of producing power in Ghana.

4. Valco owes significant arrears in payments from its utilisation of power from January 1999 to December 2002 which have been unreasonably withheld thereby further worsening VRA's financial viability.

4.1. Arrears arise from Valco's recognition of necessity to introduce thermal power into Ghana Power System. Valco thus agreed to the introduction of Thermal Complementation Element (TCE) by the VRA as part of the pricing mechanism effective January 1999. Valco paid the TCE for a few months before unilaterally discontinuing payments

4.2. VRA, notwithstanding the non-payment of TCE by Valco, has not terminated supply of power.

5. The Bankruptcy Proceedings of Kaiser, the primary shareholder of Valco with 90% shares is a matter of critical concern for the Government.

5.1. Valco has failed to respond to requests by Government to provide complete disclosure on the bankruptcy and its impact on Valco.

5.2. From information available to Government, Valco is owed an unsecured sum of nearly US$146 million by Kaiser. Government fails to see how such a huge debt could have accumulated and is very concerned that the bankruptcy process may compromise Valco's recovery of the amount.

5.3. Government is also concerned that the result of the bankruptcy proceedings may impact on Valco's continued existence as a going concern. This is so particularly in view of the complex tolling and revenue arrangements between Valco and its shareholders, who incidentally are also its sole customers.

5.4. The threats inherent in the possible outcome of the bankruptcy gives further concerns to Government about Valco's ability to pay for power (including its past unfulfilled obligations with respect to the TCE)

6. Government vehemently disputes the claims by Valco that requesting them to pay a fair price and allocating energy in a manner responsive to the conditions of the Ghana Power System amounts to expropriation.

6.1. It would be inconceivable to suggest that an action by Government to achieve a power rate that is consistent with the realities of the time amounts to expropriation.

6.2. The parties via Article 49 of the Master Agreement expressly agreed to effect changes in the terms of the Valco arrangements to reflect changing circumstances. The circumstances of today relating to the power generation mix and its associated costs of production is a fundamental basis for ensuring recognition of the need to adjust the power rates payable by Valco. Valco cannot continue to be insulated from the true costs of producing power in Ghana. Ghana can no longer subsidise Valco's power consumption at the expense of its citizenry when such funds are critically needed for our national development.

6.3. Ever since Ghana signed these Agreements in 1962, Ghana has gone out of its way to respect them and to protect the existence of Valco's operations. There has never been any intention to expropriate or nationalise Valco's operations, even though the Master Agreement gave Ghana the legal option of taking over Valco's facilities with compensation after the initial 30-year period of the Agreement

6.4. Over the past 35 years, a number of amendments have been made to various schedules in the agreements increasingly to normalise the operations of Valco in the context of the Ghanaian economy especially after the pioneer company status relief and tax holidays granted Valco expired.

Of critical significance is the fact that, over the past fifteen years, some movement has been achieved towards the full normalisation of the operations of Valco in respect of water rates, smelter site lease payments and port dues. Ghana intends to work with Valco to complete the cycle, including placing Valco under the general laws of Ghana in respect to customs duties and taxation. Indeed, Ghana has also made the requisite overtures to Valco with respect to Energy Allocation, Power Rate, the Tolling Fee and has over the past few years sought to conclude arrangements with Valco that would broadly reflect the circumstances of the times.

7. Ghana has been in a state of Force Majeure since November 2001 and any excessive extraction of water from the Volta Lake to meet the power demands of Valco is a recipe for national disaster.

7.1. The VRA's notice of Force Majeure continues to subsist. The Volta Lake, which serves as the reservoir for hydroelectric power production at Akosombo, experienced very low inflows of water in 2002. This occurrence has impaired the VRA's ability to produce optimal quantities of energy from the hydro-electric facilities. Valco is all too aware of this fact.

7.2. With the thermal power sources that have been developed to complement the Ghana energy system, Ghana is capable of supplying its customers, including Valco, with electricity reliably but this has to be paid for. The genesis of the power allocation to Valco for 2003 represents the technical and operational conditions on the ground.

8. Ghana cannot ignore the changed circumstances today.

8.1. Article 49 of the Master Agreement specifically enjoins both parties to act to revise the Agreements to reflect changing circumstances. This includes a review of its Pioneer Company Status and move towards normalisation of Valco's operations in all areas to the mutual benefit of both parties

8.2. Ghana is not using its Constitution or other legal subterfuge as an excuse to unilaterally effect unwarranted changes in the Valco Agreements. The need for change is a consequential response to the tenets of the Valco Agreements themselves. Valco as a Ghanaian corporate citizen is all too aware of the physical conditions on the ground.

9. Ghana has expressed strong disapproval for false aspersions.

9.1. Contrary to the false aspersions cast against Ghana in international circles, Ghana would continue to respect and collaborate with all its business partners including Valco and Kaiser and Ghana also expects that Valco and its shareholders will accord the Government of Ghana and its officials due respect at all times and also cease from creating false impressions about the Government of Ghana in order to win unwarranted sympathy

Finally, in spite of the impending Arbitration proceedings, it is Ghana's expectation that a mutually satisfactory arrangement would ultimately be agreed by both parties so that the long-standing business relationship that Ghana and Valco have nurtured over the past 35 years would continue.

The Government of Ghana wishes to reaffirm its commitment to good governance and the rule of law, constitutional democracy and freedom of speech. We would not relent in our efforts to promote the private sector as the primary engine of growth in Ghana.