Africa Centre for Energy Policy (ACEP) has in a press release dated September 10, 2019, described as disappointing the manner in which the private sector participation aspect of the ECG Financial and Operational Turnaround Project was carried out.
This follows revelations contained in the FTI report which got leaked on social media on September 3, 2019 despite FTI’s strict rules on it’s publication to the effect that it was only meant for the consumption of MiDA.
It will be recalled that on 30th July 2019, the Ministry of Energy released a press statement on the suspension of the PDS concession agreement citing issues of fundamental and material breaches on the obligation of PDS to offer demand guarantees. Following the suspension, the government of Ghana and the Millennium Development Authority (MiDA) commissioned parallel investigations with varied approaches; while the government set up a committee from its stock to investigate the validity of the demand guarantees issued by PDS, MiDA outsourced FTI Consulting to carry out a forensic audit into the demand guarantees submitted by PDS to understand the facts relating to the issuing of the guarantees and the subsequent retraction by Al Koot.
According to ACEP, the investigations that were carried out by MiDA and government affirm that significant flaws were occasioned in the procurement of PDS as the concessionaire which included PDS’ financial incapacity, political interference in MiDA’s corporate governance practices, persistent ignoring of caution from ECG on the procedure adopted, as well as the validity of the entire agreement.
ACEP therefore calls on the government to halt the concession, and says ‘it will be surprising to see PDS given the nod to continue with the concession’.
Find below, the full report.
ACEP’S UPDATE ON PDS’ CONCESSION CHALLENGES
On 30th July 2019, the Ministry of Energy released a press statement on the suspension of the PDS concession agreement citing issues of fundamental and material breaches on the obligation of PDS to offer demand guarantees. Following the suspension, the government of Ghana and the Millennium Development Authority (MiDA) commissioned parallel investigations with varied approaches; while the government set up a committee from its stock to investigate the validity of the demand guarantees issued by PDS, MiDA outsourced FTI Consulting to carry out a forensic audit into the demand guarantees submitted by PDS to understand the facts relating to the issuing of the guarantees and the subsequent retraction by Al Koot.
While the government team concludes emphatically that there were no valid demand guarantees from Al Koot Insurance, FTI concludes that they did not have any information to suggest that PDS, Cal Bank, Donewell and/or personnel from MiDA had committed or conspired to commit fraud or other malfeasance in relation to the demand guarantees. The report however raises a number of questions about how the demand guarantees were procured. ACEP has taken time to digest the two reports and can conclude that both reports represent the first episode of theatrical play to identify the fundamental breaches of national interest. There is nothing conclusive in both reports to suggest that the only individual who could have possibly gone wrong is the representative of Al Koot who led the execution of the demand guarantees.
The FTI report was issued with strict rules on publication to the effect that it was only for the consumption of MiDA on the 3rd of September 2019. By midday 5th of September the document was widely available on social media. The leakage of the document, which is still not on the website of MiDA could have come from FTI or MiDA. ACEP will leave the public to conclude on the likely source of the document. However, we can conclude on the basis of the analysis from FTI that they could not deliver on the mandate given to it by MiDA, which they allude to subtly, and also attempt to hide the failures of MiDA and the transaction advisors.
This is not to say that the report is not entirely useful. The report is useful to the extent that it raises further questions and confirms ACEP’s position that the exchange of bank guarantee for insurance guarantee was not in the interest of the people of Ghana, but those who kept their eyes on transaction deadlines to hand ECG over to PDS at all costs even if it meant bending the interest of the Ghanaian public.
We will proceed to deal with some of the confirmations and claims that provide new lead for further investigation.
1. The Financial Incapacity of PDS
The financial weakness of the PDS consortium to take over the assets of ECG could not have been unknown to MiDA and government if it was a priority during the bidding process, Parliamentary ratification, and negotiation of the agreement. As highlighted by the FTI report and previously by government and MiDA, PDS could not raise the Payment Securities in the form of either a demand guarantee or a letter of credit issued by a qualified bank. In spite of this glaring exhibition of weak financial muscle, the Advisors endorsed the variation for the demand guarantees instead of insisting on it.
One of the Conditions Precedent (CP) was for PURC to publish the new tariff in line with the tariff methodology developed as part of the MCC Compact II. From the FTI report and MiDA’s press statement, the PURC’s delay in announcing the tariff has been endorsed by the financial advisors (IFC and Hunton) as a relevant excuse for PDS’ inability to raise the required bank guarantees. This endorsement is surprising and presents the situation as though the CP on the tariff was hierarchically more important than the payment guarantee. The CPs were to be met by the parties before the transfer date. PDS was not to watch government meet its CPs before they met theirs. Beyond that, two important points are worthy of note;
a. The guarantees could have been raised if PDS had the financial credibility with its banker. MiDA in its press statement issued on August8, 2019, stated on page 4 that due diligence was done on Meralco and found that it had a market capitalization of $7.4 billion in 2017. Incidentally Meralco is both the technical lead and financial lead on the transaction. This raises fundamental questions;
i. Why could Meralco not leverage on its resources to produce the demand guarantees?
ii. Where was Meralco when the local companies were the ones paying premium for both advisory services and insurance guarantees (which of course is now deemed fraudulent by government)? iii. Is Meralco a front in the PDS consortium, for which reason they are quiet in all the conversation on the guarantees?
b. In the absence of the revised tariff by PURC, the Minister of Finance issued a CP4 Letter Agreement which sought to provide guarantee cashflow of one-twelfth of revenues received by PDS before anybody is paid along the value chain. If this guaranteed cashflow could not enable PDS to procure demand guarantees, then the consortium carried fundamental risks that the advisors have been unwilling to admit that it was a deal breaker.
It is intriguing from the foregoing conversation on the financial capacity of PDS to note that thus far, the financial burden of raising the guarantees seem to be borne by only the 51 percent interest held Ghanaians as shown in the FTI report. What then is the role of the financial lead Meralco and the 19 percent shareholder AEnergia SA?
2. Did FTI exonerate IFC and Hunton Andrews Kurth (“Hunton”) from blame?
They tried. In section 3 of the FTI report, the consultants copiously reproduced parts of a supposed presentation made by IFC and Hunton to an informal MiDA board meeting to present key actions and risks before the transfer date. The financial consultants are quoted to have indicated the risk associated with the insurance guarantees and in particular the PDS as follows, “We are not confident that the insurance companies have analysed PDS’s credit and understand the risk they are assuming”. It stands to reason that if there were credit risks that made it difficult for PDS to raise guarantees as indicated by IFC and co, the remedies proposed in section 3.1 of the FTI report, should have been a secondary to advice to fix the credit risk of PDS which also had implication on their ability to invest. Therefore, ACEP is of the opinion that merely highlighting the risk with insurance guarantee did not eliminate the major risk associated with the financial incapacity of PDS. It can be concluded that the primary advice that the IFC, Hunton and MiDA could have given was that there was too much risk with PDS and the structure of their finances which make them financially incapable of taking over the assets of ECG.
3. FTI calls on the Vice President to answer
The report highlights that the decision on the change of Payment Securities from bank guarantees to insurance guarantees occurred at an informal meeting. It must be noted that the said meeting did not have the quorum required for such a decision to be made even in principle. FTI also cites an email that suggests that the decision to accept insurance guarantee was an instruction from the Vice President without reference to advice from the financial advisors and MiDA on such decisions. FTI does not cite any trace of MiDA’s advice in respect of the change from bank guarantees to insurance guarantees. It appears at this point that during that critical moment where the insurance guarantees had to be substituted with the bank guarantee, the decisions were not taken by the board, but rather the Office of the Vice President with invitation to representatives from the MiDA board, ECG board, Ministries of Energy and Finance as well as the Chief of Staff.
This position calls on the Office of the Vice President to explain the circumstances that led to him taking the decision that is painted as unilateral and political rather than strict corporate governance decisions on the part of MiDA board with the advice of the financial advisors.
4. ECG’s concerns ignored
It is quite evident that ECG had raised concerns over the procedure to change the bank guarantee to an insurance guarantee. Even with the change, ECG had raised concerns about a change in the counterparties to the demand guarantees. Subsequently, the company had written to the Ministry of Finance and MiDA raising concerns that:
a. “The payment securities had been signed on behalf of Al Koot by Al Nouri, a manager in the reinsurance department; and
b. A confirmation should be obtained that Al Koot was in compliance with laws and regulations in relation to the large exposure that the company had undertaken towards ECG.”
If MiDA and the transaction advisors had addressed these important concerns appropriately they would have uncovered that:
a. Al Koot did not have the level of capitalisation to absorb the risk. As can be seen from the Ministry’s engagement with Al Koot, the company’s total capitalisation was about 50 percent below the risk guaranteed. This would have given meaning to the cut-through clause which the financial advisors are purported to have asked MiDA to ensure were captured in the demand guarantees.
b. Al Nouri did not have the authority to bind Al Koot in such a scale of transaction. c. Approval from the Central Bank of Qatar was required in compliance with underwriting practices of Al Koot.
It is even surprising to note that no effort was made by MiDA to interface with Al Koot directly to verify the authenticity of the payment guarantee despite the insistence of ECG. ECG is said to have been provided with scanned copies. This leaves the question as to why MiDA held on to the original copies of the demand guarantees and did not carry out the required due diligence.
5. Are the guarantees valid?
The FTI report itself raises concerns about the validity of the demand guarantee. It indicates that based on their review of Al Koot’s Delegation of Authority, Al Nouri, the officer who signed the guarantee on behalf of Al Koot, does not have the authority to bind the company in relation to the demand guarantee without the Board’s approval.
The report concluded that there was no indication that this approval was given. The report also cites a case and examines previous relationship between JoAustralia and Al Koot, and communications between JoAustralia and Al Koot to reconnoiter the possibility of holding Al Koot responsible. While this can be explored in court of law to verify its application to the specific case cited, and weigh the testimony of JoAustralia, it clearly appears that the testimony of JoAustralia palpably contradicts the testimony of Al Koot from their engagement with the government delegation. This indicate that had ECG called on the guarantee at any point it would have been subjected to a torturous litigation in an attempt to activate the guarantee. ACEP is of the opinion that the guarantee was only a paper insurance which could not be actioned within the framework of the Lease and Assignment Agreement (LAA) and the Bulk Supply Agreement (BSA) which requires prompt payments for defaults by PDS for the following reasons:
a. Al Koot’s authorities have denied any contact between ECG, MiDA, Cal Bank and the insurance parties on the demand guarantees prior to their execution. ACEP is of the view that this could have been avoided if the parties sought to at least use technology to verify the persons they were dealing with in Al Koot. The faces of the senior executives are published on the websites of Al Koot which could have been verified with a video conference call.
b. On the assumption that Al Nouri legitimately represented Al Koot, JoAustralia reveals that Al Koot only fronted for a 10 percent fee on the premium and retroceded 100 percent of its risk to other reinsurance companies. This means, that there is no risk that sits on the books of Al Koot as far as demand guarantees are concerned.
c. Thus far, only one Ghanaian insurance company, Best Assurance, is cited as having received 15 percent of the retroceded risk amounting to about $52.5 million. This raises a range of new issues as to the capacity of the local insurance company to have absorbed the amount of risk.
i. Is the NIC aware of this retrocession as it clearly exceeds the capitalization of the insurance company?
ii. Why did the insurance company not take their interest as part of the locally ceded risk but rather received the risk through JoAustralia back to Ghana?
d. The holders of about 80 percent of the risk were not disclosed by JoAustralia.
e. JoAustralia makes a lot of claims in their engagement with FTI after they attempted to engage Al Koot to the extent that Al Koot still bares the Risk earlier retroceded. However, FTI makes no further attempt to crosscheck that with Al Koot.
ACEP is highly disappointed with the manner in which the private sector participation aspect of the ECG Financial and Operational Turnaround Project has been carried out. The investigations that were carried out by MiDA and government affirms that significant flaws were occasioned in the procurement of PDS as the concessionaire. It is evident that PDS does not have the financial muscle to invest as required by the LAA and the BSA.
From the FTI report, the investigative team could not establish the relevant facts needed for them to have established the validity of the guarantees. It appears that they lacked the needed authority to even properly engage with Al Koot for them to have been cooperative. They made efforts to prove that MiDA and the financial advisors did nothing wrong but did not show evidence of advice they gave on the financial capacity of PDS. Rather, they emphasized delay in tariff announcement and portfolio PPA as main reasons for PDS’ inability to secure the demand guarantee.
From the review of all the events, ACEP can conclude that Cal Bank, Donewell and MiDA did not make any serious effort to verify the authenticity of the demand guarantee. These parties cannot pretend not to know that for a guarantee of $350 million, the engagement with the top hierarchy of Al Koot was necessary. This could have been achieved through video conferencing to authenticate the published faces on Al Koot’s website. It is therefore surprising that FTI could not inquire through its investigation why the parties did not see it fit to engage the top hierarchy of Al Koot.
Whiles ACEP awaits conclusion on government’s review of the circumstances, it will be surprising to see PDS given the nod to continue with the concession.