[This short briefing note summarises IMANI’s preliminary findings from an analysis of potential sovereign debt restructuring in Ghana.]

The government of Ghana is confronted with a series of Hobson’s choices regarding its current debt stock.

  1. Should it restructure the debt or persist in the hope that the signaling effect and maximum inflows of a potential 3-year $3 billion IMF deal will make it possible to push the debt can farther than the road?
  2. Should it restructure only the domestic debt (debt owed to Ghanaians who have bought government securities such as treasury bills) or only the external debt (debt owed to foreigners who have bought Ghana’s Eurobonds and given out various loans for various projects? Or both?
  3. Should it try to bring all creditors together in a single decision-making forum (such as a “creditor committee”) or attempt to engage them in informal consultative conferences and surveys?
  4. Should it attempt to address the debt issues purely through contractual negotiations or should it complement negotiations with legislative support (make laws to ease its way)?

These questions present some of the most formidable analytical challenges the Ghanaian government has ever faced. IMANI’s analysts wonder if the government recognises this fact, if it has the leadership to mobilise the nation behind the choices it makes and whether it has the temperament to manage inevitable dissent, especially from the official political opposition and the country’s highly vocal civil society movement.

Context: IMF Engagement

The speculations about a potential debt restructuring by the government of Ghana arose in the context of the commencement of formal negotiations this week between the government and the IMF on a possible bailout package through the so-called “extended credit facility” (ECF). (Side note: the government’s attempts to solicit views and inputs into this whole effort have been perfunctory at best in line with a general disinterest in building national consensus on critical issues).

The IMF’s policy when designing a bailout for a country that has serious debt challenges can be summed as follows:

In short, if a country has what the IMF believes is an unsustainable debt burden, the IMF cannot cut a deal unless the country presents a credible plan of how it will make the debt sustainable. One common way of making debt sustainable is by working with creditors to restructure the debt.

In determining whether a country has unsustainable debt, the IMF evaluates, first, the country’s capacity to carry debt and then the trajectory of revenues and repayments to see if in the medium-term the country will face debt distress or is already in distress.

Here is how the IMF assesses whether either condition has been met during the so-called Sovereign Risk & Debt Sustainability Analysis:

Because these are standardised terms, and countries differ greatly in their circumstances, the IMF does not slavishly follow its rubric of determining if because a country faces a high risk of distress or is already in distress it should or should not be given a deal. Its staff, who negotiate deals with countries, and its board, which approves any deal before it can come into effect, exercise judgement in coming to final conclusions. Here’s how they put it:
So is Ghana’s Debt Sustainable?

As indicated above, the starting point for deciding if a country can continue servicing its debts without defaulting in the medium term or triggering economic collapse is to look at the country’s capacity to carry debt. In the IMF world, this is done through the Country Policy & Institutional Assessment (CPIA) which is led by the World Bank. If the results are stellar, the country is classed as having high capacity. If it is good but not stellar, the country is said to have “medium” capacity. “Low” is the obvious bottom rating.

Ghana is currently rated as having “medium capacity”. What that means is that the thresholds and benchmarks used to assess when a country’s debt is too much are looser for Ghana than for countries rated low. Ghana used to be ranked second across Africa. This is how it fared in 2012:

It declined to 7 in 2019 and slid to 8 in 2020.

It is instructive to note in this regard that it is not only Civil Society Organisations (CSOs) who have complained about a fall in the quality of Ghana’s institutions and its policymaking process. It is quite something to see Uganda now beat Ghana on policy and institutional quality. That notwithstanding, Ghana is considerably above the regional average, hence its medium rating.

Also, Ghana is not classified among resource-rich countries in a counter-intuitive assessment which suggests a more diversified economy.

The mechanics of how the CPIA feed into the final debt sustainability numbers can be seen in this IMF chart here:

Once, debt carrying capacity based on institutional and policy strength has been accounted for, it is time to look at the actual flows of money for debt servicing: in and out. And to try and estimate the liquidity and solvency factors impacting the debt sustainability trajectory.

An analyst doing this first checks the debt ratio using this IMF equation:

Next, one tries to assess the time effect of repayment obligations using another IMF equation:

When such analysis was last performed for Ghana, the IMF said the situation was quite dire BUT Ghana’s debt was still sustainable given some caveats.

The judgement on sustainability was based on comparing certain important ratios of Ghana’s debt to certain macroeconomic measures of its economy and assessing divergence:

What’s the IMF’s Record in Judging Ghana’s Debt Sustainability?

In 2015, when Ghana entered into its previous IMF program, the IMF judged the country’s debt to be sustainable based on projections of how the debt will accumulate and Ghana’s capacity to service. As it turned out, the IMF was far too optimistic.

In June 2021, it was less sanguine about the situation, but by ignoring, at the prompting of the government, the impact of energy sector liabilities, Cocobod’s deteriorating financial circumstances (which ultimately devolves to the government) and various arrears and contingencies, it produced a baseline scenario of how the country’s debt will evolve and changes to that scenario in the event of certain shocks, such as inability to borrow from the capital markets (i.e. “loss of market access”)It w. That baseline scenario, as already mentioned, presented Ghana’s debt as sustainable but on a very borderline basis.

It was clear even then that the market, on the other hand, had already started, way back in 2019, to negatively revise its opinion on the riskiness of Ghana’s debt. Investors were asking for more discounts when buying Ghana’s debt (so “spreads” on the debt were rising).

What is the situation today?

First, let us look at the thresholds for the ratios preferred by the IMF in determining if a country can continue servicing their debts without causing damage to the economy. Here:

Ghana’s actual and projected numbers from 2019 to 2022 are as below:

In 2022, the IMF expected the total external debt to the total GDP to be 40.9%. The maximum threshold as readers can see above is 40%. Ghana’s total external debt today is $31 billion (adding recent borrowings). Due to depreciation of the Cedi, the GDP, despite a massive administrative adjustment by the government, has fallen to $58 billion, as per the latest budgetary numbers from the government for 2022:

Consequently, instead of 40.9%, the ratio is now 53%.

Bank of Ghana exports data for 2021 and data so far for 2022 can be cross-analysed to generate a figure for 2022 of $14.5 billion taking into account relatively higher oil numbers, due to rising prices (significantly lower than the government’s midyear projection though) and lower numbers for gold and cocoa due to production challenges.

Instead of the projected 128%, the number rises to an alarming 221%.

Debt service to Revenue is currently estimated at 60%. This is because revenue projection for 2022 is currently GHS 80 billion whilst interest payment alone (i.e. without accounting for amortisation) is at 41.36 billion.

The 60% figure is well in excess of the projected 32% and massively in breach of the 18% threshold in the IMF’s debt sustainability framework (DSA). Debt service to export is about 32%, which is more than double the projected 14.8% or the 15% DSA threshold.

Ghana’s debt is thus technically unsustainable based on the IMF’s standard yardsticks. However, the IMF has the discretion to look at country specific factors, such as the fact that external debt servicing is less than 10% of export revenue, and various capacity for adjustment related factors when making the ultimate decision as to whether a credible plan is underway to restore sustainability.

When the IMF chooses to overlook its usual constraints regarding lending to countries with unsustainable or near unsustainable lending, it turns to its “exceptional access” policies, such as the “lending into arrears” rules, which permits it to lend to even countries that may already be in default on some of their debt.

Countering against such a lenient view of this situation is the fact that the IMF was explicit in its last assessment that sustainability is hinged on continuing market access, which currently Ghana has lost.

On top of all this, Ghana is number 5 on the list of countries that have nearly maxed out their total quota for IMF support, even under the new COVID-triggered loosening of quota limits. In fact, should the IMF approve the $3 billion request, Ghana will shoot to the top of the table bar none (i.e. even outflanking Ethiopia).

Which brings us squarely to the issue of whether, in the absence of market access ahead of a Fund program, “fiscal consolidation” (cutting government expenditure whilst lifting revenue) alone would be enough to achieve sustainability without debt structuring. Here is what the IMF said in the 2021 Ghana Debt Sustainability Analysis report.

Assuming the IMF concludes that without debt treatment, Ghana’s debt is not sustainable? In those circumstances despite eligibility for “exceptional access”, some “debt treatment” (i.e. restructuring) may still be required.

In such circumstances the issue we started with then assumes outsized proportion: should Ghana accept debt restructuring as a condition for an IMF program?

The 3-part Choice: Domestic, External or Both

Analysts who specialise in debt restructuring looking purely at the indicators would suggest that Ghana ought to restructure both domestic and external debt.

This is because Ghana meets three of the four conditions IMF analysts usually set for that determination:

As can be seen from the chart above, only the bank credit to private sector condition is not met by Ghana.

There is of course a considerable burden in conducting a simultaneous domestic and external debt restructuring process. And, of course, there is only so much capacity in the Finance Ministry and the Presidency.

In the case of an external restructuring, Ghana has to contend with very different creditor categories with vastly different power dynamics and reputational consequences:

Source: Papaioannou et al (2012)

Benu Schneider simplifies what is possible as far as external debt is concerned as follows:

In short:

  • Debt to the IMF, World Bank, AfDB and other multilaterals cannot be restructured in Ghana’s current situation. They typically require official multilateral initiatives like HIPC.
  • Debt owed to countries like the US, the UK, Germany, China and other “bilateral partners” require a dedicated program which will require the convening of the donors to determine the terms of engagement. This will take many months. Luckily, Ghana does not owe a lot of money to China so it is unlikely that such a convening would take the two years that it took Zambia but it definitely not be done in a couple of months.
  • It is very unlikely that Ghana will try to default on its various Letters of Credit (LCs), bank-guaranteed supplier credit and conventional bank loans as that would impact severely on a wide range of infrastructure projects and resurrect dumsor (the country’s perennial power crises), posing an existential threat to the stability of the government. At any rate, cutting a London Club deal will take not less than one year as well.
  • The country’s Eurobond portfolio is thus where a lot of the emphasis shall be placed in any external debt restructuring. Ghana had about $13.1 billion of Eurobonds outstanding at face value at the end of 2021. By the end of this quarter, it should reduce to about $12.4 billion.

Besides constituting nearly half of the stock of Ghana’s external debt, eurobond issuances are also Ghana’s costliest external debt, increasing the temptation for restructuring. According to analysts, nearly $7.5 billion of the principal must be cleared by 2032 ($1.5 billion of which is due in just 3 years). Of the 16 or so outstanding bonds, 14 have collective action clauses that makes it easier to convene “creditor committees” to negotiate an en masse agreement.

Yet, the Eurobond debt service burden is still only about 12% of total revenues and thus, per our earlier estimates in this note, just 20% of the overall public debt service burden. In fact, Ghana’s total external debt service burden is about 25% of the entire annual debt service burden. In these circumstances, some analysts contend that viewed only from the point of view of the liquidity factor (instead of both liquidity and solvency considerations), the domestic debt, because it constitutes 75% of the annual debt payment burden, ought to be tackled with greater urgency.

Restructuring Domestic Debt Alone

When considering the restructuring of domestic debt, a government usually only has three broad strategies as follows:

  • Shaving off some of the principal amount (“face value reduction” or “haircut”).
  • Changing the tenor or maturity of the debt, which is to say deferring payments.
  • Lowering the initial interest rate of the debt instruments.

These types of restructuring activities in relation to domestic debt happen more often than many people suppose. According to the Florence-based European University Institute’s Aitor Erce, domestic debt restructurings nowadays exceed external restructurings in number.

African countries have now overtaken Latin American countries in their preference for domestic debt restructurings.

That said, Ghana has historically not favoured domestic debt restructuring, mostly because until recently domestic debt was not the principal driver of high debt service costs.
Episodes of debt restructuring in Ghana

The only two instances of domestic debt restructuring in Ghana, in 1979 and 1982, primarily featured demonetization rather than principal haircuts or interest rate reduction.

Will it be easier to restructure the domestic debt instead of the external one?

According to Aitor, domestic debt restructuring tend to be quicker. 42% of domestic debt restructurings happen in less than 6 months; only 13% of external ones do.

However, for various reasons, affected investors tend to lose more money during domestic restructurings:

Though “simpler” than external variants, domestic debt restructuring can still get complex if sophisticated investors are involved in the negotiations. Take the Greek debt crisis in the aftermath of the 2008-2009 international financial meltdown for instance. 86% of all Greek debt was issued under Greek law, making the process a predominantly domestic restructuring one.

The Greek government exchanged existing debt for new ones with markedly lower returns but it also added various enhancements to try and dampen investor resistance.

Because Greece was a member of the European Union, it could also fall on the European Financial Stability Facility to design the debt exchange mechanism resulting in a secondary offer to investors: the EFSF Note:

Unfortunately, regional mechanisms for debt crisis responses are virtually non-existent in Africa, so each country bears its own woes.

Greece also came up with a creative third offering that linked the likelihood of affected investors getting paid to the country’s economic performance as measured by EUROSTAT, the pan-European statistics body. The so-called “GDP warrants” introduced additional game-theoretic elements into the whole debt restructuring affair:

Should Ghana decide to go the debt restructuring route, would such creative measures be viewed as credible by investors? Would investors trust statistics from the local authorities for use in designing such contingent triggers, including statistical parameters such as “GDP growth”?

Factors to consider in any Domestic Debt Restructuring Exercise

In addition to the “speed advantage” of domestic debt restructuring (especially given the government’s apparent need for haste) and domestic debt’s 75% contribution to debt service costs, the fact, as illustrated by the Greek case, that local law is more amenable to government desires also favours a domestic debt restructuring exercise at present.

Should the government be inclined to include domestic debt in any planned debt restructuring exercise, it would be minded to consider the following points very carefully.

First, a decision has to be made if only listed debt (essentially bonds and treasury bills) shall be considered or other government liabilities like loans and contractor arrears will also be touched. Because listed debt is easier to track and is more standardised, most analysts assume that it is the only part of the debt that will be restructured.

If so, then attention has to be paid to the different categories of creditors. Below, the “client type” term refers to the current classification of domestic listed debt creditors.

Data from Ghana Fixed Income Market

Of somewhat less importance is the definition of “government debt” itself. Different parts of the government can incur debt, sometimes with varying character:

In Ghanaian context of debt, the “central government” is the most dominant player. However, there are important exposures stemming from state owned enterprises (SOEs) and guarantees.

From the Ghana Fixed Income Market (GFIM) data posted above, it can be seen that exposure to central government debt is concentrated among two main broad classes of creditors: commercial banks and financial sector actors (like insurance and pension operators).

•Stripping out about GHS 9 billion of Bank of Ghana and Cocobod securities, the commercial banks hold about GHS 65 billion (~$6.5 billion) of the ~GHS 190 billion ($19 billion) domestic debt (– ~34%). But total exposure to public & quasi-fiscal debt may be significantly more as Banks are sometimes ultimate backstoppers for other debts owed to the private sector (such as “contractors”) by the government .

•Institutional Investors and Businesses hold ~26%

•Individuals & Households hold ~13%

•Foreign Investors hold ~12.3%

•Pension Funds hold ~7%

•Insurance, Rural Banks & Others hold ~7.7%

It is important to remember that the government of Ghana has also borrowed through special purpose vehicles like the Daakye Trust and ESLA PLC, which are, by law, commercial entities in their own right. ESLA and Daakye can be sued on their own account and some sovereign rights may not apply to them.

Whilst households and individuals hold just about 13% of government debt, they are also the most politically significant group. They are the ones most likely to bring class action suits against the government and mount political agitation to stop the process as they are not as exposed to government pressure to the same extent as the banks, institutional funds and treasury departments of large companies.

Businesses that operate “floats” of various kinds, such as those in the fintech, telecoms, gambling/lotteries and related areas have traditionally used government securities to hedge against inflation and will likely resort to the courts to injunct the process except for the large companies whose political economy exposure in Ghana reduces their incentive to oppose government plans.

All in all, it is estimated that more than 1.4 million people are directly exposed to government securities judging by the number of depositary accounts in the country. This is a numerically significant political force.

The Special Case of the Banks

Because the commercial banks hold one-third of Ghana government’s debt, and in view of the ongoing financial sector cleanup, their situation deserves special mention.

Some banks are of course more exposed than others. Whilst most private banks were cutting their holdings of government debt securities, GCB (a bank with significant government shareholding), for instance, has been doubling down, adding roughly 500 million between 2021 and 2022.

Agricultural Development Bank (ADB), also a state majority owned bank, on the other hand, has cut its holdings by almost 25%.

Some private banks like Zenith have followed GCB’s lead by increasing their holdings.

Across the industry as a whole, however, the fact remains that income from government securities has been rising even as income from the “normal” operational activities of lending and trading drops. Some analysis suggest that income from government securities has outstripped interest income and now hovers around the 50% mark. Interest income on the other hand seems to be trending towards the 30% industry-wide average mark.

With government securities constituting nearly 30% of assets, and exceeding 45% of income (due to the high concentration of “investment” funds in government securities among Ghanaian banks), any process that cuts face value (“haircuts”) will hit the risk-weighting of banks’ capital. Similarly, any process that touches coupons/interest rate will hit the bottom-line (profit after tax) of banks massively.

Banks with a capital adequacy ratio below 17% may well become technically insolvent if a haircut of 25% or more takes place.

Instructively, technical solvency indicators for Ghanaian banks has been dropping due to risk adjustment of the value of assets despite many financial institutions being cavalier about marking their government securities to market after massive price drops on the secondary market. To the extent that some banks will require government financial assistance to weather any storms triggered by domestic debt restructuring, the total savings my be significantly less than assumed on face value. In fact, in some restructurings the overall stock of public debt actually grows even if debt service pressures are alleviated.

On the positive side, Ghanaian banks have the second or third highest (depending on risk adjustment) return on assets in the world and thus a good number of them may be able to withstand a significant hit to profitability.

Because some banks and financial institutions are already experiencing significant liquidity, capital and solvency challeges, IMANI strongly advises that prior to any restructuring activities in the local market, a fresh asset quality review be conducted.

Non-Bank Actors

Other financial sector actors will likewise be heavily impacted.

Because regulatory guidance strongly favours investment in government debt securities, many investment funds in Ghana have stocked up heavily on treasury bills and government bonds.

About 25% of insurance industry assets is in government securities. The corresponding number is about 30% for pension funds.

Foreign Investors in Domestic Debt Market

Whilst foreign investor participation in Ghana’s debt markets has dropped from nearly 40% just a few years ago to just a little over 12% today, that number is still significant in absolute terms.

Ghana Fixed Income Market Data

Nearly $2 billion equivalent of foreign investor money is still invested in treasury bills, government bonds and notes.

Some of those debt instruments, amounting to about $800 million, are actually denominated in dollars.

These investors represent the highest level of litigation risk for any attempted domestic debt restructuring. Their interest in suing to prevent any harm to their portfolios is very elevated and government’s political economy leverage is lowest where they are concerned.

Risks to Debt Restructuring

To summarise, the greatest danger to a successful domestic debt restructuring on the technical front is litigation.

Worldwide, that risk has substantially risen for all types of restructuring, domestic or external.

At the domestic level, however, the fact that government debt securities like bonds and bills are governed by local law makes the Greek approach feasible. Greece introduced laws in parliament with retrospective effect thereby overcoming the absence or insufficiency of “collective action clauses” that would have permitted the government from changing the terms of the debt it had borrowed.

We see the government’s inability to build political consensus as the biggest challenge ahead constraining any attempt to resort to using Parliament to speed up the process of renegotiating the terms of its domestic debt. We do not believe that the government’s promise of an “industry-led” process is credible since apart from the banks (who hold only one-third of the debt) such a model would not be viable for the rest of the fragmented private sector.

IMANI’s assessment is that new legislation would be required to smoothly undertake any domestic debt restructuring but the political costs are very high.

The official political opposition will make much of any attempt to penalise Ghanaian investors to the perceived advantage of international investors if the government tries to circumvent litigation risk by ignoring external debt holders and non-resident holders of domestic debt.

The Opposition will however be torn between the political gains from the fallout of a botched restructuring and the prospect of obstructing any restructuring at all and thereby sharing the blame for undermining the IMF program (should debt treatment become a condition for a program).

Economic costs of Debt Restructuring
Source: Benu Schneider

Should the Opposition take a principled policy stance that both the domestic and external debt be restructured, they will find grounding in research that shows that restructuring both external and domestic debt leads to the deepest economic recovery for affected countries after a steep initial hit.

The government will find cold comfort in the same analysis that suggests that recovery terms for doing only domestic debt restructuring are better than for doing only external debt restructuring.

Can Restructuring be Done Right?

The IMF provides a substantial framework for doing domestic debt restructuring with flair:

IMANI’s position is that any restructuring affair in Ghana will face considerable scepticism because of a lack of trust in the ongoing fiscal consolidation program as a whole.

Only 34% of targets in the country’s last strategic public financial management (PFM) process (up to 2018) were met despite the formal inclusion of all key domestic and international public actors.

Performance in budget execution for both debt and expenditure dropped rather than rose significantly over the period.

88% of central government transactions in financial statements of the country’s financial controller in a large sample reviewed by public auditors were found to have bypassed the central accounting system, the GIFMIS.

Fiscal slippages continue unabated.

When the Eurobond door was shut in the face of the government, it did not implement proper austerity. It simply increased domestic borrowing by 480% to finance mostly recurrent expenditure. Cost of borrowing, a key factor in the IMF’s 2021 debt sustainability prognosis for Ghana, is rising alarmingly.

Cost management in government business is abysmal. IMANI is currently investigating the continued accumulation of energy sector liabilities, which some analysts claim may hit $12 billion in years to come, effectively increasing the public debt by more than 20%.

IMANI’s analysts were frightened to discover that the national oil company, GNPC, which a few months earlier had tried to pressure the pricing regulator, the PURC, to increase the price of gas it sells to the utilities based on a claimed average cost to it of $7.9 per MMBTU (a unit of measure), had quietly done a deal to sell gas for just $1.72 to a company called Genser. The potential losses to the country are on the order of $1.5 billion over the life of the contract.

In short, there is a widespread scepticism about the government’s commitment to fiscal consolidation. Seeing that the IMF in previous programs has been complicit in the government’s rosy forward-looking forecasts and failures to hit fiscal reform targets, the overall credibility of any adjustment program, including any debt restructuring, is very much on the line here.

Should a domestic debt structuring lead to a broken fixed income market, no IMF financial injection will make a difference. The government borrows more than GHS 12 billion ($1.2 billion) a month from the local fixed income market, a good chunk of which goes into rolling over existing debt.

Ghana Fixed Income Market Data

No IMF program can inject even $100 million a month directly. Nor will any situation that triggers a local financial sector crisis be viewed favourably by international investors. Which means there is a very real risk of damaging both local sources of financing for the national budget and external perception of recovery, and with the latter any chance of restoring the country’s access to the Eurobond market.

The Hobson starkness of the choices facing the government is as follows: restructuring external debt will prolong the shutout from the Eurobond market forcing the overreliance on the domestic debt markets that has seen borrowing costs surge through the roof. Such a scenario will compound inflation and exchange rate depreciation and deepen the fiscal hole. Restructuring the domestic debt may shut the government out from the local market if investors simply fail to subscribe to any new government issuances. Not restructuring either or resorting to cosmetic measures could undermine any IMF-backed adjustment effort.

In the above context, it is important to remember that weak restructuring effort will likely just delay another debt crisis. Globally, it takes on average two restructurings to stabilise a debt crisis in the medium term. Some countries become “serial defaulters” in the process. As the IMF’s Tamon Asonuma shows, almost 41 countries have earned that ignominious title.

The government faces daunting choices. Leadership would be crucial in building confidence and preventing debt recidivism. Like all burdens, this one too will become lighter if it is shared collectively by those it affects, the people of Ghana. No time is better than now for the government to show its mettle in dispelling mounting scepticism and cynicism about its commitment and capability to get the debt crisis response right.

Failure will have consequences too dire to contemplate.

In a previous essay, we announced a joint investigation by IMANI Africa and the Africa Center for Energy Policy (ACEP), two Accra-based policy think tanks, into a case of possible fiscal recklessness on the part of Ghana’s national oil company, the GNPC.

In our initial analysis, we explained how potential losses of up to $100 million per year could build up for Ghana if the GNPC’s current arrangement with Genser Energy Holdings, a US-based Ghanaian-owned energy company, persists under current conditions. Frequent readers of this site must be aware of our longstanding disquiet about how GNPC’s lack of technical prudence frequently courts financial disaster for Ghana. This inquiry follows faithfully in that tradition.

We intend to explore in a bit more depth the circumstances giving rise to the latest GNPC financial debacle. This essay will thus touch on both the antecedents of the original 16-year contract signed between GNPC and Genser in 2020 and more recent developments to paint a holistic picture of the fiscal risks to the country.

The whole mysterious saga can be traced to an agreement on 20th April 2018 between Ghana Gas, the state-owned gas distribution company (which for a short period, before the advent of the current administration in 2017, was a subsidiary of the GNPC), and Genser in which Genser committed to pay a reasonable price for gas to power embedded/off-grid power plants it leases to various large mines and consumers in the cement and ceramics industries.

Extract from April 2018 Ghana Gas – Genser Agreement

Subject to various regulatory decisions and notices, Genser had committed to pay between $6.50 and $7.29 for each unit (mmBTU) of gas received from Ghana Gas as per the so-called WACOG, a regulated price set by the government of Ghana through an industry regulator (PURC).

Around the same period, it was frantically engaging various liquefied petroleum gas (LPG traders) to supply imported fuel for its plants. The logistics of trucking imported propane and LPG from the port being cumbersome and the costs being benchmarked to world prices, Genser’s ideal situation was a more stable domestic source of gas that it could transmit more conveniently, reliably and cheaply via pipelines. Besides, it faced cashflow constraints that made it difficult dealing with the strict European traders it was then buying from.

Having secured a fair deal with Ghana Gas, Genser began to feel that the price paid by the rest of the power industry wouldn’t work for its modular and embedded generation business model. Consequently, it attempted to influence an industry regulator, the Energy Commission, to grant it a waiver of the regulated price so it could cut a deal for a lower price but the Energy Commission wouldn’t budge.

Extract from 17th February 2019 correspondence between the Energy Commission & Ghana Gas

Specifically, the Energy Commission did not regard Genser as “strategic” for which reason it would deserve a special discount and therefore ruled out any arrangement in which Genser would pay a lower price than the state-set amount (WACOG) it had already agreed to in its contract with Ghana Gas.

But what Ghana Gas had no appetite for, GNPC, as usual, couldn’t wait to gobble. As already discussed in the previous essay, GNPC agreed to price gas for Genser at just $2.79/mmBTU (i.e. at a whopping ~60% discount).

To provide political cover for this scheme, the Chief Executive of GNPC wrote to the Ministry of Energy on 10th August 2020 informing the Deputy Minister about this decision and asking for “ratification”.

Extract from 10th August correspondence between GNPC and the Ministry of Energy

Somehow, the documented history we have narrated above disappears from the record and a contrived basis is invented to suggest that somehow the proposed $2.79/mmBTU price is a better deal than what the GNGC had signed with Genser.

It is also suggested that because Genser has agreed to provide free passage to GNPC gas to other, third party, customers through its pipelines, some kind of barter arrangement is involved.

Extract from 10th August correspondence between GNPC and the Ministry of Energy

Consistent with the GNPC’s less than candid approach, the Chief Executive fails to disclose that the use of the Genser pipelines are not actually free because a “gas compression service charge” applies.

Extract from Ghana Gas – Genser Gas Sale Agreement

More to the point, even if the GNPC wanted to give a rebate to Genser for use of the latter’s pipeline, there are established costs for pipeline transmission in Ghana that would provide a sense of how much it could have knocked off the WACOG or market price of gas for Genser. GNPC provided no such analysis.

The following year, it decided instead to double up. Its Chief Executive wrote again to the Ministry to justify a revision to the contract for an even greater reduction of its gas sale price for Genser.

Extract from 12th April 2021 correspondence between GNPC and the Ministry of Energy

Note once again that the massive near- 40% discount is justified on the basis of pipelines to be built in the future for projects yet to be actually realised. Suffice it to say that no such pipeline to Kumasi was built by December 2021.

At this point, through the ingenuity of GNPC, the maximum price negotiated by Genser with Ghana Gas had been discounted by a whopping 77%. Genser stood to pay $1.72 if it built a pipeline to reach customers in the interior whether or not GNPC found the money to build the new power enclave in that part of the country and for which it claimed it needed all this future pipeline capacity (suffice it to say that GNPC has not been able to build the enclave).

Recall also that this was the period when economies worldwide were recovering from COVID-19 and prices in the most actively traded European hub (TTF) had surged past $10/mmBTU.

Source: Cedigaz (2021)

Genser, frantically raising funds to service debts and stave off harrassing Senior (Debt) Agents, needed the rosiest deals it could find and GNPC was always at hand to oblige. So, $1.72 it was.

The GNPC would also tell various people in policy circles that the source of the gas it was selling to Genser was exclusively Jubilee and TEN. Jubilee and TEN gas are very cheap because Ghana, until later this year, only pays for their processing and distribution costs, but not the gathering and feedstock.

Yet the agreement it had originally signed and the newly amended one would both contain clear “service delivery point” provisions establishing the source of the gas, at least partly, to be from the Sanzule (ORF) facility which is connected to the Sankofa Hub where, according to the same GNPC, gas costs $8.72/mmBTU.

Extract from GNPC – Genser Revised Agreement (2021)
Extract from the GNPC – Genser Agreement (2020)
Extract from GNPC – Genser Revised Agreement (2021)

At the same time that it was busily dispensing discounts like candy, GNPC was also busily harassing the PURC (a price regulator in the energy industry) for increments in tariffs due, among other factors, to the growing costs of aggregating gas. With TEN facilities contributing just 2% of the gas GNPC collects and Jubilee offering 28%, Sankofa was now responsible for a full half of all gas throughput. Yet, Sankofa gas was also the costliest for GNPC, at a mighty $8.72/mmBTU. Whilst Jubilee may cost GNPC $2.3 to obtain, a concession from the oil producers whereby Ghana got the gas feedstock itself for free, the concessionary pricing regime was on course to end in about a year and half from the time the 16-year agreement was agreed.

So, at worst, GNPC was willing to take gas at $8.72 from Sankofa and sell to Genser at $1.72. At best, we can use the industry practice, as GNPC itself does, and look at its average cost of sourcing gas, which it says is $7.9 in 2022 and set to rise to $9.37 in 2026, when the contract with Genser would still have ten more years to go.

GNPC’s calculations of its costs of sourcing gas.

When the Ministry of Energy was notified of the decision by GNPC as enshrined in the initial contract (2020) to grant those massive discounts to Genser, it was neither alarmed nor deterred by any of this.

The Minister waited for about seven months, during which period the contract was of course in force, and then sent the following gems of ministerial guidance.

Extracts from 10th March 2021 directive from the Ministry of Energy to the GNPC

Any surprise then that just four months later, GNPC will revise the contract and hand over another delicious 40% discount for yet more phantom pipeline promises?

Extract from the July 2021 Revised Gas Sale Agreement
between GNPC and Genser

Clearly emboldened by ministerial laxity, GNPC was now literally giving the gas away. The price of the commodity itself would be pegged at just $0.57 should Genser succeed in closing its fundraiser and build a pipeline for GNPC’s future use in distribution schemes that were then unfunded and very much on the drawing board.

The Ministry’s actions were, and it is easy to guess, in contravention of all settled policy. Just around the same time that GNPC was negotiating with Genser, the country’s highest decision making body in economic matters, chaired by no mean personage than the Vice President, had taken a decision about gas pricing. A decision the then Energy Minister in March 2020 had communicated to the GNPC.

Extract from 13th March 2020 Directive from the Minister of Energy

The essence of the decision was simply that gas aggregators (like GNPC) should endeavour to recover their full costs. Full cost recovery and financial exposure mitigation are obvious commonsensical principles dating from Ghana’s first Natural Gas Pricing Policy from 2012. It had been further reinforced in the apparently discarded Gas Master Plan and continues to inform price regulation by the PURC today.

Extract from Ghana’s Natural Gas Pricing Policy
Extract from the Gas Masterplan of Ghana

More recent reviewers of Ghana’s national gas policy have reinforced the simple point that in the absence of thoroughly compelling reasons there should be no deviation from the WACOG, as a reflection of average cost recovery across the power sector, in terms such as the following:

It is worth reminding readers that the WACOG, though set below the cost that GNPC says it pays to get the gas it sells, is definitely not $2.79. Or, God forbid, $1.72.

Recent WACOG Rates

So, even if GNPC does not want to charge its own estimate of a fair price at $7.9/mmBTU, is there any reason why the $5.9/mmBTU WACOG minus any pro-rata transmission charges owing to the presence of Genser’s own pipelines in the mix shouldn’t apply? What exceptional reasons really?

On the point of Genser being somewhat unique in having its own pipelines, it’s worth recalling GNPC’s own numbers of the cost contribution of pipeline transmission to the price buildup.

GNPC Service Charge Schedule (2022)

In essence, one cannot justify a rebate for pipeline transmission higher than half of $0.919 if one wishes to account for Genser picking up the gas midway from their offshore source at the agreed “delivery points”.

Globally, until distances exceed 1,500km (total network length in Ghana is less than this), it is very hard to justify pipeline transmission tariffs exceeding one dollar per mmBTU for natural gas transportation.

Source: Sandi Lansetti (2016)

In similar light, GNPC’s use of Genser’s pipeline construction and its potential use of same in separate contexts as the basis for discounts is highly suspect given the typically low contribution transportation makes to natural gas project capitalisation.

Source: Fadl H. Saadi, Nathan S. Lewis & Eric W. McFarland (2018)

So, once again, what other exceptional reasons then? Let’s even suppose that the Energy Commission was wrong, and Genser, even though so far it basically just sells power to primary extractors like mines with a sprinkling of cement and ceramics players and is thus far from a massive value addition enabler, deserves to be regarded as a “strategic actor” as the GNPC insists it is. One would still have to look, before going anywhere near subsidies, at whether domestic prices of gas are in fact too high for competitively priced power to be produced.

Luckily, there are well settled methodologies for doing this, such as the use of netback price & value analysis. Done properly, netback analysis can approximate industry willingness to pay and provide robust estimates of gas pricing needed to accommodate breakeven points in the capital investment analysis of various industries. When Ghana last concluded such an exercise, it found that $9 to $12 per mmBTU was a reasonable price range for those industries for which gas-to-power generation makes economic sense.

Netback Analysis for Ghana’s Gas Masterplan

To cut to the chase, is Ghana’s $5.9 WACOG rate exorbitant? So much so that it must be tempered by subsidies? Is it a “strategic industries killer”? Global comparative analysis does not suggest so. Indonesia, a fast-growing gas market that could offer benchmarks for Ghana in various ways has a $6 WACOG-like price threshold. There too, key industries cluster around the $9 to $12 per mmBTU sweetspot pricing range.

Netback and Regulated Price for Gas per industry in the Indonesian context.
Source: Muharam & Purwanto (2021)

At the time Ghana Gas offered the $6.5 – $7.29 per MMBTU range, the global picture for gas pricing was pretty aligned with the regulatory view in Ghana.

Comparative Analysis of Natural Gas pricing in the GNPC – Genser original agreement timeframe

The other question is whether based on the prevailing sentiment during the contract negotiation, a belief that relatively cheaper Jubilee gas could be used for strategic purposes to promote the emergence of a diversified energy conglomerate of Ghanaian origin could have justified that humongous 77% discount. Even that concession, wild as it is, removed from the reality of gas either coming primarily from the expensive Sankofa Hub or at best being commingled and thus costed at the GNPC’s own weighted level, still does not condone the pricing agreed upon in both 2020 and 2021.

Analysis for Review of Ghana’s
Gas Pricing Policy

The policy position among the country’s experts was clearly that Jubilee gas ought not to be included in pricing indices. And that even if it was, gas prices would not fall below the $4.5/mmBTU range. Taking cue from the logic in the now, apparently abandoned, Gas Masterplan, prudence ought to remain the policy anchor.

Recommendations for Strategic Sectors’
gas subsidy formulation

It is amply clear from the foregoing that GNPC’s decision to discount the price of its gas to Genser from the $7.9/mmBTU it says it costs on average to produce the commodity, and to deviate from even the regulatory price benchmark of $5.9 (2022) – $6.08 (2020) per mmBTU is suspect. Its further decision to offer the gas to Genser at a prospective amount of $1.72 for 16 years can therefore not be justified at any level on the evidence currently available.

Until GNPC presents compelling arguments to vindicate itself, we must consider the contract as constituting a massive financial loss as follows.

Fair Price of Commodity – $7.9

  • Rebate for Buyer Transportation – $0.5
  • Strategic Option Rebate for Third Party Delivery via Genser Pipeline – $1

Prudent Net Sales Price – $6.4

Choosing to sell the gas at $1.72/mmBTU to Genser therefore generates a loss of $4.68/mmBTU.

The contract envisages delivery of ~329 million mmBTU over its 16 year lifetime.

Extract from Revised GNPC – Genser Agreement (2021)

The total potential financial loss to Ghana is thus $1.539 BILLION.

Of course this number is an approximation of approximations. But all the trends point to elevated prices for natural gas in the medium-term justifying the projection into the future of these round numbers. It is a very sensible call to estimate losses around this general figure should the contract as currently crafted persist without very sound, genuine, strategic reasons.

The point must be stressed that no one is accusing Genser of wrongdoing. At worst, it is guilty of “excessively effective” lobbying and shrewd negotiation. But it is a private business seeking to maximise the welfare of its corporate backers who are taking risks worth ~$500 million so one can understand. Our focus is thus principally on the role of GNPC, which has a bounden ficuciary duty to prevent Ghana from losing such fantastical sums whether out of sheer incompetence or recklessness.

This essay is part of an active, ongoing, investigation by ACEP and IMANI. Readers with information are strongly encouraged to reach out.

On 27th July 2022, the newswires flashed an announcement by Genser Energy Holdings, a Ghanaian-founded energy company headquartered in the United States (Washington DC) and backed by the powerful Oppenheimer family of South Africa and several other funds and banks.

The announcement concerned the successful closing of two loan facilities totaling $425 million to support Genser’s refinancing of its 2019 and other debts; expansion of its petroleum pipelines (the only privately owned facilities of their kind in Ghana) and port facilities (for its propane and other natural gas liquids – NGLs – trade); and the funding of a greenfield gas processing facility to compete with the current state-owned monopoly at Atuabo.

From its origins in 2007 as a small off-grid energy supplier, Genser is now set for the big leagues. Its first deal in 2007 with Golden Star Resources to supply a 36MW power plant for the miner’s Bogoso site could hardly have predicted the emergence of a sophisticated diversified energy holdings conglomerate as Genser seems now determined to become.

Until “dumsor” struck, and at the height of that excruciating power crisis, Genser found its mojo. It entered into a 5-year power plant leasing and maintenance deal with Unilever to power the latter’s Tema factory. Paving the way for even bigger prospects: three significant deals with major gold producers, Kinross and Goldfields.

It is Genser’s powerplants serving Goldfields in Tarkwa and Damang that, however, have fuelled the massive infrastructure financing deals announced with such flourish in 2019 and July of this year. The country’s gold mines consume more power than the whole of Ghana’s northern sector (equivalent to ~15% of the power distributed by ECG). By positioning itself as the offgrid power supplier of choice to the big gold mines, Genser is paving the path to industry dominance.

Even juicier opportunities lie ahead: the Ghanaian government seems likely to outsource gas transportation for the new power enclave in the Kumasi area it intends to develop around the Ameri plant to Genser. In the course of researching this post, we saw how instrumental letters or support issued by the government attesting to these future deals were in helping the company close its latest funding round.

Whilst there is no denying the growth in Genser’s operations in its 15 years of existence, it is starting to look under further scrutiny that its expansive ambitions of the last few years have sadly been bankrolled at Ghana’s expense.

Careful work by analysts at the Africa Center for Energy Policy (ACEP) and IMANI has revealed that Genser’s operating profits may be heavily dependent on a sweetheart, unpublicised, deal it has signed with the Ghana National Petroleum Corporation (GNPC) whereby it pays a fixed rate of just $2.79 per mmBTU (a unit of energy measurement) for the natural gas it receives from the National Oil Company. There is some evidence to suggest that the GNPC sweetheart deal came after attempts to woo Ghana Gas, the national gas company, by Genser had been less than successful.

Extract from the contract between Genser and GNPC

Genser’s negotiated gas rate with GNPC is completely mindboggling in a country where the energy regulators assume an average cost of gas of $6.08 per mmBTU when setting tariffs for electricity pricing. In fact, actual gas pricing on the market for various power plant operators (or the government, depending on circumstances) is often higher than this. In 2019, for instance, it averaged $6.91 per mmBTU, and total costs of gas to the industry as a whole amounted to more than $455 million.

Gas prices for power generation in Ghana in 2019. Source: Energy Commission of Ghana

In 2020 and 2021, Ghana bought gas at $6.14 per mmBTU and $7.24 mmBTU on average from private producers in its offshore basin and from Nigeria, respectively, to fuel thermal plants. In fact, from the agreement between GNPC and Genser, it is clear that GNPC gets the gas from the J.A. Kufuor Floating, Production, Storage & Offloading (FPSO) facility in the Sankofa Hub, beaches the gas at the Sanzule facility and then handover at a designated delivery point for Genser to transmit through its own pipelines to Damang and Tarkwa to fuel power plants for the gold mines in that enclave.

From the chart below, it can be inferred that this is gas sold to Ghana at $6.14 per mmBTU (down from an earlier rate of $9.59 per mmBTU) and then on-sold to Genser at $2.79 per mmBTU. What is worse, tariff analysis data has suggests an optimal gas selling price of $9.42 per mmBTU if GNPC’s gas trading operation is to be sustainable. A prospect further threatened by the national oil company’s professed strategy of importing liquefied natural gas (LNG) into Ghana from overseas at a cost some analysts contend will hit $11+ per mmBTU at delivery point.

In simple terms, for every unit of gas sold to Genser, a potential loss of $3.35 per mmBTU is recordable. For 2022, the potential loss to Ghana and inferred windfall for Genser is more than $52 million (assuming fully delivered volumes). By 2025, going by natural gas pricing forecasts, the total loss could easily hit $100 million a year.

Extract from GNPC – Genser contract

Genser’s recent good fortune is even starker when viewed in light of its challenging operational history.

From early 2018 to mid 2019, Genser and commodities trader Vitol had an arrangement in which the former was to supply the latter with between 4.7 million and 6.25 million gallons of propane (one of the two main gases found in liquefied petroleum gas – LPG) delivered to a floating facility docked at Takoradi (or roundtripped in a ship-to-ship transfer maneuvre between Lome, Togo, and Takoradi). The price of the propane in 2018 was roughly $0.9 per gallon on average after accounting for the premium charged on OPIS Mont Belvieu pricing (so, for example, Genser owed Vitol $4.24 million for a delivery of ~4.7 million gallons of propane made in February 2019).

Using standard heat conversion factors, one can benchmark this propane pricing to the pricing of the natural gas being sold by GNPC to Genser (natural gas, by the way, is composed mainly of the lighter methane with a bit of ethane). That conversion yields $10.26 per mmBTU. One may, arguably, choose to account for higher propane combustion efficiency so as to reduce the amount to roughly $4.5. The other costs of handling and transportation (including the trucking, floating storage and bunkering costs) have not been fully captured. It is safe to say that just before Genser signed the groundbreaking, never publicised, deal with GNPC, allowing it to switch from LPG to LNG/natural gas, it was paying the likes of Vitol significantly more than $5 per mmBTU equivalent for the feedstock gas it needed to power its plants.

Had it continued to rely on these contracts, then at today’s propane and butane prices, premiums and handling inclusive, its fuel costs from imports would exceed $7 per mmBTU equivalent (applying the same conversion factors). Its serious cashflow problems would have continued to precipitate repeated payment delays, liquidation damages from customers like Goldfields, and eventually the same type of defaults that had to be remedied in an English court of law in July of this year with settlements and costs exceeding $20 million for breach of supply contracts.

But, as we have seen above, Genser managed to convince GNPC to enter a sweetheart deal of ~$2.79 per MMBTU, thereby completely transforming its fortunes. By virtue of its sweetheart agreement with GNPC, it is poised to consume more of Ghana’s precious gas than 9 of the 13 main thermal power plants operating in the country, only slightly behind TICO in 2022, and set to overtake TAPCO in mid-2023. The volume of gas supply committed by GNPC to Genser in the mindboggling contract for the 2025 timeframe will be nearly half the total consumption of VRA powerplants in 2020.

Gas allocation to power plants in Ghana 2020/2021 timeframe. Source: Energy Commission of Ghana

Whilst entrepreneurship of the calibre of Genser is always to be celebrated, the success of private business cannot be at the expense of public good. Every company that pays $2.79 for a critical input that its competitors get for $6.08 will do wonders in the market. More to the point, fiduciaries of public interest like GNPC cannot throw out every hint of commercial prudence to advance the private wellbeing of their corporate favourites.

Purely from a public policy point of view, GNPC ought to have looked carefully at the export price parity numbers to determine a starting point for its deal with Genser. It was amply clear at the time of sealing the deal that natural gas prices were going through a cyclical downturn and that historical trends called for the use of Henry Hub spot benchmarks (applying discounts and premiums as appropriate).

Natural gas spot price cycles. Source: Platts

A flexible and market-sensitive pricing regime with appropriate caps, floors, discounts and premiums would have ensured that now that natural gas pricing on the international markets is inching towards $9 per mmBTU, a Ghanaian state-owned company wouldn’t be selling the commodity at $2.79. That spot gas prices were low at the time of concluding the deal is absolutely no basis for not having introduced some kind of market-aligning mechanism into the pricing formula.

No doubt, GNPC will counter with the argument that amendment to the pricing annexure is within their purview and may even have been considered. But the evidence is glaring that Genser’s obscene margins on these trades started to emerge just a few months after the contract was signed and that it has made a total bonanza on the gig. Because of the ridiculous pricing concessions, it can afford to undercut any competitor in its segment of the market, show fantastic future earning potential, and thus attract large investments to further seal its dominance in the private pipeline, gas port logistics, and modular off-grid market niches.

Whilst Genser has a few cement companies in its customer list, it is overwhelmingly a power producer for the primary extractive sector, which many economists argue strenuously undercontributes to government revenues in Ghana. It seems thus very unlikely that even a formal government policy to use highly subsidised gas for strategic purposes would have countenanced the $2.79 per mmBTU sweetheart deal.

The good fortune of the shrewd operators at Genser, interpreted in the light of that unconscionable contract, seems less the outcome of entrepreneurial brilliance and more the byproduct of exceptional incompetence and serious national betrayal on the part of the ever bumbling GNPC.

ACEP and IMANI have only just commenced their investigation into this seeming debacle. Stay tuned.