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Opinions of Sunday, 20 June 2010

Columnist: Otchere-Darko, Gabby Asare

The Quest Of STX To Build A Better Korea With Ghana

Gabby Asare Otchere-Darko

I will begin this article by asking anybody interested in knowing about the various documents - agreements, MOUs, letters, etc - on the $10 billion STX proposal for Ghana to visit You may even have the opportunity to read a letter from cabinet marked confidential. This STX deal, to my knowledge, is the single costliest, unpatriotic deal that any democratic Ghanaian government has appended a signature to since that obnoxious 1960 constitution. There is an agreement before Parliament, apparently recalled by Cabinet, for a loan of $1.5 billion for Government to give to STX to build 30,000 housing units for security agencies, including 15,240 one-bedroom flats and 9,356 two-bedroom flats. STX Engineering & Construction Ghana Limited, the recently established vehicle for this project, is curiously mentioned as the lender, when it is really the lender-on. STX Corporation, the parent conglomerate, has notable liquidity issues but can certainly raise money on an off-take agreement backed by a sovereign guarantee and oil, as the agreement with the Ghanaian Government offers. Yet, STX has so far only managed to supply to the Finance Committee of Parliament woefully inconclusive evidence on sources of funding. They prefer to tell a pliant Ghanaian media that STX has the capacity to fund the project but continue to fall short in presenting to Parliament evidence to support the claim. Let me refer, with some liberty of literal genorousity, to the first two paragraphs of a cover story - 'GHANA: THE SAGA OF A KOREAN LOAN' - in the June edition of the increasingly popular and authoritative Africawatch magazine: "Next month the President of South Korea, Lee Myung-bak, will visit Ghana as part of an investment-promotion tour of Africa. He is coming to bat for South Korean companies pure and simple! South Korea, which relies on exports, suffered a US$8 billion current account deficit in 2008. The pressure has since been on the President Myung-bak to reverse this trend, and the visit to his Ghanaian counterpart, John Evans Atta Mills, is supposed to be the flotilla leader of Myung-bak's charm-offensive journey to Africa.

This is because since the 68-year-old Korean leader took office on 25 February 2008, Ghana has presented his country the single largest deal ever -- in fact, at US$10 billion, it is the single largest investment deal won by any foreign company from any developing country anywhere since the global financial crisis of 2008. The Korean government has pledged to that "do its utmost to help Korean builders clinch constant orders, by supporting their foreign penetration, human resources development, and international networking." And, the new multi-billion-dollar with Ghana could not have come at a better time."

Inn Ghana's President John EA Mills and Vice President John D Mahama, the Koreans appear to have willing collaborators in this venture to build a better Korea. In the eyes of many Ghanaians, including some civil society groups, President Mills and his deputy are giving Ghana away to the Koreans, and in the process, mortgaging Ghana's oil even before any policy document is laid before Parliament on how to manage Ghana's emerging oil revenues. It is a deal that,in the view of one governance expert, "stinks" and must not be touched with a ten-foot barge pole.

Linked to this $10 billion give away construction deal in Ghana is a determined effort on the part of South Korea to have a significant stake in Ghana's newfound wealth -- oil. The deals are coming in fast. In December 2009, STX and the Ghanaian government signed a contract on a joint venture to build 200,000 residential units across all 10 major regional capitals of Ghana. In March this year, Ghana's Vice President, John Dramani Mahama, visited South Korea to complete agreement formalities on the housing project and sign another MOU on an infrastructure establishment project with STX, which focuses more on Ghana's oil industry. Ghana is scheduled to produce first oil this December. The Koreans have shown interest in Ghana's sole oil refinery, the Tema Oil Refinery (TOR), the workers of which continue to agitate over what they see as a deliberate scheme on the part of senior government officials to deny it of profitable crude lifting business as an excuse to prepare it for a sell-off. TOR's acting Managing Director, Dr Kwame Ampofo, an NDC bigwig who apparently sided with the workers on this issue, was sacked promptly by President Mills in May. The March MOU with STX, mentioned that STX will lift crude oil for TOR. But, first things first. Let us focus on the housing deal which is before Parliament. What is curious about this $4.5 billion housing deal is that, like the larger deal, it states what the total cost is but it does not tell us the unit cost per building. Thankfully, just this week we have been told by both STX and KNUST that no architectural designs have been made on the housing project. So how then, you may ask, did they conclude on the relative proportionate figures of $10 billion for 200,000 units, $4.5 billion for 90,000 units or %1.5 billion for 30,000, which put the average cost per unit at $50,000 by ordinary calculation? It is simply scandalous! In fact there are no designs, no plans, no bill of quantity to support the amount Government is being charged by the Koreans for the provision of 90,000 housing units, 30,000 of which there is a mad rush to have our legislature approved. Perhaps in time to crown President Myung-bak's state visit to Accra. STX, the Korean company that has formed a subsidiary in Ghana, creates the impression it is going to invest $10 billion in Ghana to help us beat our large housing deficit. The Daily Graphic of Wednesday, June 16 carried a press release from STX at page 70. In there, STX boasted of its conglomerate, including STX Engine, which is currently under investigation in Korea for inflating contract prices. The press release reads: "Having achieved significant success in building new cities around the globe, STX has entered into a public-private partnership agreement with the Republic of Ghana to build 200,000 housing units to boost government's housing supply in Ghana. Within the context of this agreement, the Republic of Korea through the STX will provide a development financing package of $10 billion to the Republic of Ghana. The implementation of this national housing project is planned within a five-year period, starting from 2010 to 2015. The broad mission of the STX 200,000 Housing Project is to provide adequate housing that is safe, decent, secure, accessible and affordable to a wide range of Ghanaians; and also help Ghana to achieve its broad macroeconomic development objective of reaching middle-income status." Words most beautiful. So where are the 'cities around the globe" that STX claims to have built? Is it the $68 million Eco-Site Project in Abu Dhabi, where STX is in the process of constructing villas on reclaimed lands? Or the other residential development project at Rawdhat, Abu Dhabi? Or, could it be the $180 million staff accommodation complex in Abu Dhabi, which includes a 56-suite hotel, which is also under construction in Abu Dhabi? In their calculated bid to win bipartisan support, STX took opposition Parliamentarians led by the Minority Leader, the Ranking Member of the Finance Committee and the Ranking Member for Water, Works and Housing to Abu Dhabi for them to come back and vouch for the construction 'capacity' of STX. STX, in fact, started winning actual housing construction contracts after registering the housing side of the construction arm of the business in 2006. In 2007, STX won a total of 299 housing units contract. It was in 2008 that it won a major contract to build a town in Bachegou, China, called the STX Dalian Housing project. That involves 27,900 housing units. It has been given 8 years to complete that project. That can be said to be a new city project under construction. Now, a company that has 8 years to build a nearly 28,000 housing units project tells us that we should accept on face value that it has the capacity to deliver 200,000 housing units in 5 years in Ghana, including sites that it expects Government to extend infrastructure, such as electricity, water, roads and sewage systems to for the first time. All in all, STX has won 32,544 housing units contracts across the globe and it is estimated that more than 20,000 of that number is yet to be constructed or completed. Which means it has less than 10,000 housing units to its name. So where are those new cities that the press release speak of as being successfully built and impliedly completed? It is also very disingenuous for STX to create the impression that the Republic of Korea will provide a 'development financing package' for the 200,000 Ghana project - playing with words to fabricate an impression that the Koreans are coming to build a better Ghana with their own money. Yet, the truth is closer home. The whole $10 billion project depends on a $4.5 billion off-take agreement with Government of Ghana taking off. It would not be surprising for the Koreans to pack it in and leave after the $1.5 billion project, with the excuse that Government failed in its contractual obligation to find the extra $3 billion for the remaining 60,000 housing units of the 90,000 agreement. Again, when STX was asked by Parliament to provide evidence of source of funding for the $1.5 billion credit facility it could only provide a non-committal Woori Bank Letter of Intent which states boldly, "This letter is not intended to amount to an offer or a legally binding commitment." So, if there are no details on the cost of the loan how could STX present an agreement to Parliament complete with management fee, arrangement fee (totalling $12.5 million to be deducted upfront) and interest rate? Hmmmm. So what really is an off-take agreement? An offtake agreement guarantees that a buyer (in this case government) purchases future goods produced by the supply company (STX). Sellers use offtake agreements to ensure that they have a buyer for future goods produced through their operations. Prices are agreed upon at the time of the contract, ensuring that sellers cannot offer a lower price in the future. Buyers use the agreement as a hedge against future prices in case of a future supply shortage. But, without details of the cost of construction it will be very foolhardy of Government to defend this deal and for Parliament to approve of it. There are local entrepreneurs who took the Kufuor government on its challenge of Independent power producers and took multi-million dollar loans to acquire power plants. In the absence of a binding off-take agreement the NDC government unilaterally cancelled the deals as too expensive. Many times suppliers in the energy industry use offtake agreements to ensure that their investment in power plants will earn profit. As STX is demonstrating, companies with offtake agreements are usually able to find outside financing to build their production facilities, allowing them to retain cash for normal operating uses.

The Koreans must not tell us that they are Santa Clausian in their chimney-drop on Ghana. Let me just refer readers to a report in the Korean Times after Albert Abongo, the then Minister for Water Resources, Works and Housing travelled to Seoul on December 9, 2009 to sign that controversial off-take agreement. STX Group Chairman Kang Duk-Soo had this to say: "We are delighted at winning the order at a time when major shipbuilding players and even some bigger local builders are struggling to find fresh business momentum amid the industries' deeper downturn." Seeing it as a good move to help the STX Group's cashflow, the report, available on continued: "Analysts and STX officials say the latest deal will help the group strengthen its cash-flow structure despite some skeptical views over the Ghanaian government's pledges. 'The deal will eventually help the group secure further liquidity. But that will only be materialized if the project goes ahead smoothly,'Lee Jae-won, an analyst at TongYang Securities, said. 'Many variables still remain to better forecast the deal's effects,' according to the analyst."The report quoted a Korean government official, "As far as I know, the Ghanaian government may give gold and oil as some part of the payment for the project, while STX Group will offer technological support to help the African country boost the competitiveness of shipbuilding-related industries," a government official said, asking not to be identified.

The Korean Times stated, "As of the end of the first half of this year, the cash-equivalent assets owned by STX Group came to 3.3 trillion won, while its total debt reached 7.7 trillion won. Of the total debt, 1.8 trillion won was short-term whose maturity is less than 2 years, data from the nation's financial authorities said."

Quoting a credit analyst at a Korean brokerage, the report said, "It is still premature to say how the deal will impact on the group's cash-flow. But the deal will help," citing the bleak climate in the global shipbuilding industry. That is why I keep saying this deal is for a Better Korea more than a Better Ghana.

Ghanaians should know that Government has also agreed with STX to construct for the state an additional "300 units [to] be built on the Build Lease Operate basis to house members of the Parliament, Ministers and State Protocol Department and visiting VVIPS thereof." Does this make sense when we are selling the ones built for VVIPs by the previous Government? And, at what cost?

STX is desperate to tell us that it has local content. But, it has nothing more than an MOU with KNUST and it is yet to move beyond that to get KNUST to do any drawings. Prof Samuel Afrane, Dean of the Faculty of Planning and Land Economy, KNUST, made this known when he said earlier this week that "We have worked on the kind of framework which defines what the project will allow and what it will not allow, and this project framework has been completed and sent to [STX]. The second assignment is for the provision of planning, architectural and engineering consultancy services. At that level, we are dealing with architectural designs, planning layouts and engineering services, as well as quantity surveying and construction supervision."

The press release from STX, signed by its CEO, intended to show local content, actually ended up exposing STX as having no construction plan yet having a plan to take Ghana's billions. It reads: "STX Engineering & Construction Ghana Limited has signed contract with the College of Architecture and Planning (CAP) of the Kwame Nkrumah University of Science and Technology (KNUST) to be the main consultant of the project... The University's role as the main consultant to the project is in two-folds: the first phase involves the development of Project Implementation Framework (PIF)... The second phase of the KNUST engagement on the project shall be the provision of Planning, Architectural and Engineering Consultancy Services. The key areas of the services to be provided under this phase include: Architectural Designs (including concepts, sketch designs, working drawings and design management); Engineering Services (including Structural, Mechanical, Electrical, Geotechnical, Transportation, Water and Sanitation, etc.); Quantity Surveying Services (including pre-contract planning, tendering, etc..."

What this means is that no actual work has been so far done for STX to present to Parliament for approval a Suppliers' Credit Facility of $1.5 billion for 30,000 housing units for our police officers and others. The thing with suppliers' credit is that even though Government is paying for it, Government has no control over the money, it goes straight to the provider of the turn key contract, as STX is in this case.

STX is taking us for a ride in its patriotic quest to build a better Korea. It must be having a laugh but we should not allow it to laugh all the way to the bank at our national expense. The author is the Executive Director of the Danquah Institute, a policy think tank in Osu,