Posted: Monday 4th August 2014 at 14:36 pm

IMANI Report: Electricity privatization Conundrum- ECG is NOT forsale


Ghana has concluded agreements with the Millennium Challenge Corporation (MCA) for a $500m investment in Ghana’s energy sector. Specifically in the electricity sector, intense private participation is a requirement for drawing down the funds. Unfortunately given Ghana’s history of badly managed privatization deals, some rightly, are speculating the deal is an outright sale of ECG.

This report is a complete evaluation of the agreement and the entire process which when aptly executed will revamp the electricity sector and help alleviate the challenges confronting the country in its energy sector. It provides in brevity the conditions in the MCA in relation to the second phase of the compact agreement and the expectations for disbursement of funds.

Brief description of the MCA
The Millennium Challenge Corporation is an innovative and independent U.S. foreign aid agency that is helping lead the fight against global poverty. It has been created by the United States Congress and is distinct in the delivery of its objectives, by focusing on good policies, country ownership and consistent attainment of results. Typically, beneficiary countries of the MCC are selected through a competitive process, followed by a country-led solutions and country-led implementation. The MCC provides large-scale grants to fund these country-led solutions. The two primary types of MCC grants are the compacts and threshold programs. Compacts are five year grants, and threshold programs are smaller grants awarded to countries that miss the eligibility criteria narrowly but are firmly committed to improving their policy performance[1]. Thus the Millennium Challenge Compact (MCC) is between the United States of America, acting through the Millennium Challenge Corporation (MCC); a United States government corporation and the Republic of Ghana; acting through its Government. Ghana first executed a first Compact which was implemented between February 2007 and February 2012 (5 years). Ghana was subsequently named eligible for a second compact, after a successful execution of contractual agreements under the first compact. Notable amongst the projects in compact one is the George Walker Bush Highway (H1N1 Highway), an extension of the Tema motorway.

Objectives and Projects under the Second MCA[2]

The goal of this Compact is to reduce poverty through economic growth in Ghana. MCC’s assistance will be provided in a manner that strengthens good governance, economic freedom, and investments in the people of Ghana.

The objectives of the Program include:
Increase private sector investment and the productivity and profitability of micro, small, medium and large scale businesses;

Increase employment opportunities for men and women; and

Raise earning potential from self-employment and improved social outcomes for men and women.

The Program consists of six Projects:
The ECG Financial and Operational Turnaround Project

This project consists of five activities to be executed with the results geared towards the reduction in implicit subsidies (created by losses, underpricing and under billing), ensure ECG is commercially viable, ensure ECG recovers its costs and invests in maintenance and expansion without requiring regular financial support from the government. The five activities to be undertaken are private sector participation activity, modernizing utility operations activity, reduction in commercial losses and improvement of revenue collection rates activity, technical loss reduction activity, and outage reduction activity.

The NEDCo Financial and Operational Turnaround Project

Given the operational similarities between ECG and NEDCo, albeit ECG for southern Ghana, and NEDCo for northern Ghana, the financial and operational turnaround of NEDCo is in a similar fashion as that of ECG above.

The Regulatory Strengthening and Capacity Building Project

This project consists of two activities, the first of which is capacity building of the sector’s performance monitoring capabilities to ensure better accountability and reporting. Beneficiaries of this project are the Ministry of Energy and Petroleum (MoEP), the National Development Planning Commission (NDPC), the Public Utilities Regulatory Commission (PURC) and Energy Commission (EC). The second activity under this project is the tariff review and regulation activity, focused on the process of rate determination and the structure of tariffs. The beneficiaries of the project are PURC and the EC.

The Access Project
The objective of the Access project is to improve access to reliable electricity among micro, small and medium enterprises in selected markets and economic enclaves in urban and peri-urban areas in the ECG and NEDCo Target Regions. Public lighting will be provided in markets and Economic Enclaves and barriers to obtaining legal connections will be minimized. The Millennium Development Authority (MiDA) is the authority to decide the determinants which Markets and Enclaves will be the beneficiaries. This prevents the subversion of the project to the whims and caprices of politicians and the government.

The Power Generation Sector Improvement Project

The Power Generation Sector Improvement Project will support measures with the aim of opening up the power sector and making it lucrative to private investment in order to reach the Government’s goals to have adequate installed generation capacity to meet demand. Ghana’s power generation sub-sector and gas sector are undergoing transformation, as new indigenous gas supplies come on line and more independent power producer (“IPP’) competition is encouraged. The project activities address challenges of inadequate and unreliable gas supply, lack of a gas sector master plan and credible offtaker, uncoordinated capital expansion, as well as an unclear IPP framework. These currently are activities being pursued by government to boost up the power generation to ensure stability in supply to dealing with demand side challenges.

The Energy Efficiency and Demand Side Management Project

A comprehensive electricity utilization and constraints analysis indicates that in Ghana the demand for electricity is outstripping supply, which creates a gap in power availability and also undermines the reliability of the entire power generation and supply system. Energy efficiency and demand side management policies and investments represent a cost-effective means to bridge this gap, serving, in effect, as sources of supply. The implementation of these policies will require policy reforms which will be costly to implement and funds will be available from the second compact for this task

Altogether, these Projects respond to the constraints evinced in Ghana’s energy sector which adversely impacts economic growth by aiming to improve the reliability and quality of electrical power in Ghana.

Purported ‘Sale’ of ECG / NEDCo
In order to strengthen the governance and management of these state-owned companies (ECG / NEDCo), the second Compact is explicit on the need to bring in a/an acceptable partner(s) through a form of private sector participation (PSP).  This provision within the compact agreement has been erroneously interpreted by some sections of the media and public as an attempt by government to sell ECG. However, a critical study of the entire PSP section in the second Compact reveals otherwise. Already, there is private participation within the distribution sector, via outsourcing of collections, pre-payment metering points as well as subcontracting of operational and maintenance works. This private sector participation will be improved, particularly in operational areas where lacks the requisite competences, for which reason it incurs operational losses to third parties. Thus, the goal of the second Compact is NOT an outright sale of ECG, but rather for ECG to outsource its competently deficient operations to the private sector.

At present, ECG and NEDCo own the existing distribution infrastructure however obsolete. As such it will be financially imprudent for any private investor to deploy capital into duplicative infrastructure. Hence the only feasible approach presently for private sector participation in the Distribution sector will be through outsourcing / subcontracting arrangements. There is no doubt that private sector participation will lead to greater efficiency in the Distribution sector, with consumers being the ultimate beneficiaries.

Second Compact is ‘Timely’
The second Compact is a timely, propitious offer which is aligned with the government’s efforts to increase power generation to 5,000MW by 2016. Essentially, the second Compact seeks to address the principal challenges that are encountered within the value chain of Ghana’s power sector. This will invariably pave the way to end the country’s perennial power crisis. The Distribution sector has been bedeviled with chronic commercial and technical losses averaging 22% over the past decade. These losses essentially mean that almost 22% of the total power generated cannot be accounted for in Ghana. The Distribution sector attributes the technical losses to inadequate equipment capacity and obsolete cables. Commercial losses are due to illegal connections, metering problems, billing and collection challenges.  Private participation in this part of the value chain could only mean an improvement.

Low tariff pricing coupled with unsound commercial practices within the Distribution sector make capital accumulation and deployment for equipment upgrade and expansion impossible. These developments make the sector highly unattractive for private investors. However, as a condition for drawing down funds from the second Compact, the government is required to continue the quarterly tariff adjustments to ensure realistic tariff pricing. Government previously had been interfering in the setting of tariff prices by the Public Utilities Regulatory Commission. Infrastructure and foundational investments in the Distribution sector will also be undertaken under the second Compact. These investments will create an attractive regulatory and operational environment for private sector participation.

Conclusion
Considering the ‘airtight’ execution of the first compact of the Millennium Challenge Corporation, the benefits of which cannot be disputed on any empirical grounds, coupled with factors such as monitoring of disbursements and management of the project by MiDA and other authorities, we can confidently trust the execution of the second compact to live to its contractual obligations which do not include a sale of ECG and/or NEDCo.

The 2010 Wholesale Power Reliability Assessment[3] report estimated that Ghana loses between 2 to 6% of GDP annually not including a number of indirect costs of lost economic output due to insufficient wholesale power supply. The economic costs of inadequate power supply cannot be underestimated. As the country seeks to expand its industrial base in order to transform its fortunes, the reliable supply of electricity will be the crucial factor and catalyst to lift many out of poverty, which is in alignment with the objectives of the second Compact. Private sector participation will be key going forward as is already the case for some of the aforementioned activities.

Indeed when mention is made of constant and uninterrupted affordable power supply, we compare ourselves to jurisdictions such as the US, UK, and some other developed countries in Scandinavia. The fact is that, for most of these jurisdictions, there are clear regulations which support the participation and conduct of the private sector after the needed incentive in pricing and returns are guaranteed.

The effective implementation of the second Compact will ensure that Ghanaians of all income levels are provided with adequate power supply at affordable prices through capital injection that will drive efficiency gains, economies of scale,  and availability of cheaper feedstock (such as liquefied natural gas). Ghanaians within the private sector should position themselves strategically to grab the opportunities that will abound during the implementation of the second Compact. The Ministry of Energy is currently working on a local content policy for the power sector to provide the framework for active participation of Ghanaians. The onus is on Ghanaian investors to build the requisite financial and operational capabilities to fully participate in the power sector.

IMANI Center for Policy & Education is a research-based, advocacy, organisation based in Accra Ghana.

Notes:
[1] http://www.mcc.gov/pages/about
[2] Extracted from MILLENNIUM CHALLENGE COMPACT BETWEEN THE UNITED STATES OF AMERICA ACTING THROUGH THE MILLENNIUM CHALLENGE CORPORATION

AND THE REPUBLIC OF GHANA ACTING THROUGH ITS GOVERNMENT Final Draft 7/0l/2014

[3] Power Systems and Energy Consulting (PESC) report available at:

http://www.gridcogh.com/site/downloads/27a623e256c7d94a7dce43d5ef82d3e3GridCoReportFinal.pdf

IMANI Center for Policy & Education is a research-based, advocacy, organisation based in Accra Ghana.

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