Examining Ghana's Power Sector Reforms Through the PDS Agreement
The government of Ghana (GoG) and the Millennium Challenge Corporation (MCC) of the United States signed the second compact of the Millennium Challenge Compact (The Power Compact) in 2014 to improve the efficiency of Ghana’s power sector to support economic growth and reduce poverty. Under the terms of the Compact, the Government of Ghana, through its implementing agency, Millennium Development Authority (MiDA), was to be granted US$498.2 million. The program was to implement, among five other projects, the Electricity Company of Ghana (ECG) Financial and Operational Turnaround Project through a Private Sector Participation (PSP) agreement.
MiDA was set up to manage and implement poverty reduction programs in Ghana, including the ECG Financial and Operational Turnaround Project, as part of an agreement between the Ghanaian government and the Millennium Challenge Corporation, acting on behalf of the US government.
With advice from the International Finance Corporation (the transaction advisors), the government chose a concession under the various PSP options, which eventually led to the selection of Manila Electric Company (MERALCO) as the concessionaire to manage the assets of ECG. As per the terms of the Request for Proposals (RfP), the new company had to meet a minimum 51 percent local content requirement. Consequently, MERALCO, after winning the bid, partnered three local companies and an Angolan company to form a consortium known as Power Distribution Services (PDS) Ghana to enter into an agreement with Ghana.
Prior to the transfer of ECG’s assets, PDS was required by the Transaction Agreements – Lease and Assignment Agreement (LAA) and Bulk Supply Agreement (BSA) – to satisfy 45 Conditions Precedent. Critical among these conditions was the provision of a Demand Guarantee or Letter of Credit issued by a qualified bank. PDS, however, could not produce the required demand guarantees and proposed an alternative in the form of insurance guarantees. The government approved this on the advice of MiDA and the transaction advisors (IFC and Hunton).
The said guarantees were produced two days to the transfer date, making it difficult for due diligence and verification by ECG, the main party to the LAA and the BSA. On the assurance of MiDA, the government admitted the guarantees subject to subsequent verification by ECG. Further investigations by ECG and the government show that the guarantees could not have been accessed by ECG if the need arose because of inherent misrepresentation and the capacity of the reinsurer to absorb the liabilities.
The arrangement was suspended after PDS had operated for only three months and was thereafter terminated by the government of Ghana on October 18, 2019.
As Ghana grapples with reconsidering private sector participation in its power sector and addressing calls for investigations into the PDS agreement, ACEP’s publication from January 2020, titled ‘An Assessment of the Implementation Challenges of the Power Compact,’ offers a comprehensive analysis. It delves into the events and challenges that led to the short-lived operation of PDS and the concession agreement, highlighting the significant role of MiDA, the decision-making body, as a significant part of the problem.
