Business
Ghana: Chinese loan challenges IMF
Accounting for the gas
Officials from the IMF and World Bank will press for maximum transparency and accountability on the gas project. Both parliament and an independent Public Interest and Accountability Committee are pushing for greater oversight on the management of oil revenues. The Bank is encouraging the government to publish its Public Investment Plan and Medium Term Expenditure Framework, which estimate that some US$24 billion of investment will be needed over the next four years to meet Ghana’s development goals and calculates that much of that will be on commercial terms.
The proposed US$700 million. loan is part of a US$3 billion ‘Master Facility Agreement’ that Ghana secured from the China Development Bank (CDB). It was approved in principle by NDC members of parliament on 26 August. The opposition New Patriotic Party abstained from the vote, arguing the government had not produced enough detail about the projects that the loan is meant to finance. The argument over how to account for the US$3 billion Chinese loan has become a campaign issue a year ahead of Ghana’s national elections in December 2012. Finance Minister Duffuor says the time pressures on the gas project are based on well-founded technical rather than political reasons. But it will be important for the government to show some benefits on the ground in the Western region, which hosts most of the oil and gas production.
IMF and the World Bank economists have been studying the terms of the US$3 billion loan after officials from Ghana’s Ministry of Finance asked them to assess the implications of the credit. In November, an internal Bank document seen by Africa-Asia Confidential reported that ‘the joint IMF-World Bank Debt Sustainability Analysis, based on critically conservative assumptions, concludes that Ghana’s economy could accommodate the CDB loan without aggravating risks of external debt distress but requires prudent fiscal policy.’ Although the loan would be partly repaid with oil exports, these would be at the prevailing market prices, according to the Bank assessment, and therefore would not be an extra cost on the loan.
The Bank report says the gas infrastructure project deserves the ‘highest and most urgent attention’. It adds that the gas, ‘which comes as a by-product to the extraction of oil, is currently mostly being re-injected to avoid flaring in large quantities. However, the capacity to reinject gas will be exhausted in about two years after which time oil production might have to be curtailed or flaring begun.’ The Bank analysts point to the opportunity cost should Ghana fail to process the gas and use it for local electricity generation. They conclude the justification for the gas project, whose full cost is some US$1 billion., is sound but describe the timetable for its completion as ‘optimistic’. The acting Chief Executive for the newly formed Ghana National Gas Company, George Sipa-Adjah Yankey, says Ghana should have a pipeline and functioning gas processing plant at Domunli with links to the nearby Aboadze thermal power station by December 2012.
Financial returns, the Bank argues, would be much greater if the project included a plant for liquefied petroleum gas (LPG) production. This would generate income that would alone ‘cover 80 percent, in net present value terms, of the financial costs (interest and principal) to be incurred on the entire US$3 billion amount of the MFA loan agreement.’ An independent consultant’s report sent to government, and seen by AAC, reckoned the value of LPG produced at Jubilee was about US$200 million a year. More seriously still, the cost of the Takoradi/ Aboadze power station using oil (which it currently does) instead of gas piped from Jubilee is estimated at US$350 million a year. This option will provoke substantive discussions, which will have to be taken into account as the government starts to negotiate gas supply agreements with the international oil companies operating in Jubilee. They want to know the price at which they can sell the gas, an increasingly important question with substantial new oil and gas finds in the area.
The start-up of the gas processing project is a top priority for the government. It is located near Takoradi, the capital of Western region, which will see one of the most closely fought contests in next year’s elections. The government has already had to scale back some ambitions for the gas project. The plan was to run a gas pipeline from Jubilee to Bonyere and build a processing plant and a 200 MW-power station, around which a cluster of local industries would develop. An onshore pipeline was then to be laid from Bonyere to the 550 MW-Aboadze thermal power station, which will be converted to use gas as well as fuel oil.
Time pressures now mean the pipeline will run straight from Jubilee to a processing plant at Domunli, next to the Aboadze power station. The development plans at Bonyere will have to wait. Changing economics may dictate that only a power station, and not another gas processing plant, is built there. That will greatly disappoint the chiefs of the Western Region, who have been pressurising the government to maximise the job creation and industrialisation impact of the gas development plan.
