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Wed, Aug

STATESMAN OPINION: WHY PARLIAMENT MUST NOT RATIFY THE PROPOSED AMENDMENT TO THE AMERI POWER PLANT AGREEMENT ‒ AN INDEPENDENT VIEW

Business & Economy

The Ministry of Energy, under the pretext of reducing the cost of electricity to Ghanaians, has presented to Parliament for ratification a novation and amendment of the 2015 “build, operate, own, transfer” (BOOT) agreement with AMERI. This new agreement ostensibly delivers some $405 million of savings to Ghana over the new tenure of the agreement.

The Ministry of Energy, under the pretext of reducing the cost of electricity to Ghanaians, has presented to Parliament for ratification a novation and amendment of the 2015 “build, operate, own, transfer” (BOOT) agreement with AMERI. This new agreement ostensibly delivers some $405 million of savings to Ghana over the new tenure of the agreement.

It cannot be gainsaid that the Ministry’s objective of reducing the high cost of the project to bring financial relief to all citizens is fantastic. However, the document before Parliament today exacerbates the financial burden that the original BOOT AMERI agreement has placed on Ghanaians. Over the 15-year term of the new arrangement, the new company that is stepping into AMERI’s shoes will bag over $1.2 billion, compared to the $500m-plus that AMERI was being paid in five years. On a discounted basis, the new cost of the project is far higher than the old.

Under the new agreement, Ghana makes absolutely no savings, contrary to the impression created in the Minister’s memo to Parliament. Rather, the consumer ends up paying at least $370m more to the new company over the term of the new agreement.

Status of existing contract

The first year of the contract was fully paid for by the NDC government before it exited power. This translates to $102m, which is the full value of the required payments for the 230MW plant at an availability rating of 90 per cent.

The AMERI company presented an invoice to the tune of $151.66m to the NPP government, covering the period between February 2017 and June 2018. Out of this amount, $69m has been paid by the NPP government, leaving an outstanding balance of $82.66m. An invoice for $8.5m was submitted to the government by July 31 2018. This brought the total outstanding invoiced amount to $91.16m.

It is important to mention that the total settlement to date (under both NDC and NPP governments) is therefore roughly $171m. Under the $510m contract, government has about two and a half years left before it will own the 230MW plant, conditional on the payment of the outstanding $339m.

Agreed settlement terms

The government, in the proposed amendment, commits to pay $39m of the $91.16m outstanding for the executed part of the original AMERI contract, which will bring direct government payments to AMERI to $210m. Mytilineos International Trading Company Ltd, the new company the Ministry proposes to engage to manage the AMERI power plant, has pledged to settle part of the government’s outstanding indebtedness ‒ the sum of $52m ‒ with AMERI.

In exchange, the existing AMERI contract is novated to Mytilineos with amendments for a new tenure of 15 years.
This means that $300m is the liability assumed by Mytilineos in return for the 15-year deal.

For the 15-year deal Mytilineos will be paid at least $75m every year, a total of $1.12bn over the period. This translates into over $800m gains to the company in exchange for assumption of the government’s $300m outstanding liability under the existing AMERI agreement.

Why Parliament must not ratify the agreement

First, the AMERI plant is a low-efficiency, simple-cycle plant and therefore subordinate to its combined-cycle equivalents. Consequently, in an economic merit order dispatch regime with sufficient combined-cycle plant capacity, AMERI is not likely to be dispatched.

According to the Ghana Energy Supply Plan, the capacity utilisation of AMERI will plummet to less than 20 per cent after the year 2019. This implies that the plant will generate little to no electricity beyond 2019. At best, it may provide ancillary and back-up power to the national grid. Any decision to extend the term of the agreement beyond the current five years could potentially result in the government paying for capacity charges with no electricity generated. The total yearly capacity charges in the new agreement are in excess of $75m ($1.12bn over the 15-year term).

It should be noted that ultimately, the government makes absolutely no savings from the new agreement. Rather, over the term of the agreement, the consumer ends up paying an extra $370m or thereabouts to the new company, by way of capacity payments alone. It has been spotted that the Minister’s memo to Parliament failed to recognise in its economic analysis that, the capital recovery charge in the AMERI BOOT agreement drops to nil after year five. The memo wrongfully contemplates the $4.2698/kWh capital recovery charge in all 15 years in its analysis.

The Minister’s memo further, perhaps disingenuously, assigns two different fuel charges to the two agreements under comparison, in favour of the new agreement. It must be emphasised that fuel charges approved by the Public Utilities Regulatory Commission do not discriminate between the two contracting regimes (and the Ministry should know this). These two “errors” have resulted in the misleading impression that savings are being made under the new agreement.

The proposed agreement has bizzarely redesignated the nameplate capacity of the existing AMERI plant (from 230MW) to 250MW, without an actual physical capacity augmentation to the plant. In other words, the same AMERI equipment which was rated 230MW in the BOOT agreement is now rated 250MW under the new agreement. How is that possible? Since all the charges (capital recovery, fixed operations and maintenance or O&M, variable O&M and fuel) are a function of the nameplate capacity of the plant, this “increased” capacity has resulted in increased yearly payments to the new company by a factor of over 1.5. In effect, the new company will receive in excess of $6.7m annually, merely because, perhaps, the capacity of the existing AMERI equipment is erroneously quoted as 250MW under the new agreement.

It is extremely important to note that under the BOOT AMERI agreement, METKA undertook the entire financing, engineering, procurement and construction of the plant. In addition, it carries out the operations, maintenance and management of the plant. For executing the total scope of activities required to deliver the current AMERI plant capacity, METKA was being paid $72m annually for a five-year period under the BOOT agreement. This was not considered the best of deals at the time. This same METKA, now in a new guisechristened “Mytilineos International Trading Company”, is going to be paid $75m annually for 15 years, representing capacity charges alone for the same scope of service to Ghanaians. In addition, “new METKA”, will receive over $9.8m yearly in the form of variable O&M payments.

“New METKA” therefore receives $1.27bn over 15 years, as against $360m over five years (quoted from its deferred engineering, procurement and construction and O&M payment agreement with AMERI) for performing largely the same functions. The Minister’s memo to Parliament suggests that AMERI’s departure will bring huge savings on the discontinued monthly payments to them arising from the new arrangement.

Deducing the facts from the memo, AMERI would suffer a haircut of about $17m under the new arrangement. A report submitted by a committee established by the Ministry of Energy to look into the AMERI transaction last year concluded that under the original agreement AMERI was making $150m which it did not deserve for just playing a “middleman’s” role.

The committee recommended that the agreement be renegotiated or abrogated should AMERI be unamenable to negotiations. According to the Minister’s memo to Parliament, the government and the new company have agreed to pay AMERI $39m and $52m respectively as a buy-out package, in addition to payments already made to AMERI since the commencement of the original BOOT agreement. On a discounted basis, this translates into a haircut of approximately $17m on the $150m “middleman’s” commission originally due AMERI. How much of a saving is this $17m, vis-à-vis our hefty payment obligations in return to the new company?

Why should the new company agree to pay $52m to AMERI on behalf of the government of Ghana (as indicated in the Minister’s memo)? It is sound to conclude that the assumption of this payment liability is influencing the high cost of the new deal because the new company will have to cover the full cost of the outstanding contract with AMERI and the upfront payment of $52m to AMERI on behalf of Ghana.

This $17m saving comes at a prohibitive cost in the form of payments to METKA. Payments required to be made to METKA over the 15-year tenure outstrip this marginal saving on outright payments to AMERI. To ordinary Ghanaians, it is not a question of how much AMERI will save, given that any savings would be nullified by the ultimate payment to METKA. What is the point in making marginal savings on the one hand and paying a huge cost for those savings on the other hand? Indeed, the question is whether Ghana will pay less for the cost of the project.

Sadly, Ghana will be short-changed under this new arrangement. Obviously, Ghana is better off continuing with the original contract.

Finally, the government has already paid a significant chunk of the current price tag on the AMERI equipment. Out of $510m, AMERI has already confirmed receipt of $171m. Under the current proposal, the government will make a summary payment of $39m and an extra $8.5m as payment for the month of July. In total, AMERI would have received over $218m out of the $510m price tag on the equipment within a two-and-a-half-year duration. The new arrangement will require the government to pay an extra $1.1bn over an additional 15-year period.

In essence, Ghanaians are buying the same AMERI equipment at a ridiculous cost of $1.3bn, payable over a period of 17 and a half years.

Conclusion

The novation and amendment deal is bad. The critical question remains whether the discounted values of the total payments to be made by the people of Ghana to Mytilineos over the 15-year tenure warrant the extension.

The proposed amendment will cost the country several hundreds of millions more than the existing contract. The plant that was being sold for $510m (payable over five years) under the old agreement is now costing over $1.3bn (payable over 17.5 years) in the new regime.

There are absolutely no savings to the country. The justification in the Minister’s memo to Parliament is grossly inaccurate and seemingly disingenuous.

Recommendation

A better deal for Ghana will be, among other things, a downward negotiation of capacity payments in the original BOOT agreement while fixing the tenure at five years. If this cannot be achieved, the government should only extend the tenure if it results in total payments whose discounted values are not higher than those in the current BOOT agreement.

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