Concerns Raised by Danquah Institute to the Parliament of Ghana over the $1.5bn Supplier's Credit Facility and the Total $10bn STX Housing Project

The Government of Ghana has reached an agreement with STX of Korea for the construction of 200,000 houses. We have analyzed this project and have serious concerns about its integrity. In our estimation the Koreans stand to make between $200 million to $300 million profit from the 30,000 housing construction project for the security agencies. Since it is linked to an agreement with Government to off-take an additional 60,000 housing units from STX, we do not see Government having the capacity to satisfy the totality of that agreement.

The risk associated with that anticipated failure is that the promise of STX to construct 200,000 units is intrinsically linked to an accompanying off-take agreement with Government. Thus in the end, STX is likely to make an unconscionable profit from the $1.5 billion agreement before Parliament now and after that leave Ghana with the legitimate excuse that Government has reneged on its agreement to off-take 90,000 in total.

We are therefore calling on Parliament not to give its approval to this agreement until and unless it has been satisfied on all of three fundamental fronts:
•    STX providing enough information to justify the cost of the project;
•    STX providing enough evidence to support its commitment to the entire 200,000-unit project; and
•    That an alternative package that is more beneficial to Ghana cannot be found.

The Agreement:
•    STX to build 200,000 houses at $50,000 each. Total cost is $10 billion
•    Government of Ghana has committed to an off-take agreement for 90,000 units at an estimated total cost of $4.5 billion
•    First 30,000 units to be constructed at a cost of $1.525, 443,468 (including an insurance premium).

Terms
•    Interest Rate         2%
•    Grace Period         5 Years (does not apply to interest)
•    Repayment         15 years
•    Maturity        20 years
•    Management Fee    0.50%
•    Arrangement Fee    0.75%
•    Grant Element        36.93%
•    STX is exempt from tax for all imports of materials and machinery
•    STX is exempt from paying VAT on goods and services in Ghana
•    STX’s expatriate employees will be exempt from income tax
•    Government of Ghana to provide land and all permits
•    Additionally, Government of Ghana is responsible for STX costs and expenses in executing the project under the “Financing Documents” (including legal, accounting, travel expenses, and other out of pocket expenses) and any VAT on those expenses.
•    STX has option to convert debt into oil on execution of the contract (????)

CONTENTIOUS ISSUES
A.    PREMATURE APPROVAL OF THIS CREDIT FACILITY
The Supplier's Credit Facility of $1.5 billion for 30,000 housing units for the security agencies was presented to Parliament when the  STX housing project was technically still at its PRE-DEVELOPMENT PHASE - the period during which the sponsors of the project (STX and Government of Ghana)  were still evaluating its technical feasibility and, presumably, financial viability.
What is curious about this $4.5 billion housing deal is that, like the larger deal, it states what the total cost is but it does not tell us the unit cost per building. Last month, we were told by both STX (in its press release of June 16, Daily Graphic P.70) and KNUST (interview with Citi FM) that no architectural designs have been made on the housing project. So how did STX (and Government, presumably) conclude on the relative proportionate figures of $10 billion for 200,000 units, $4.5 billion for 90,000 units or $1.5 billion for 30,000, which put the average cost per unit at $50,000 by ordinary calculation? It is ludicrous how STX can present an agreement to Parliament at a total cost of $1.5 billion for the construction of 30,000 housing units when no designs have been done for the project and supported by no quantities.

•    STX is yet to provide to Parliament the details of cost per unit. In the absence of which, at an average cost of $50,000 per unit, the STX project is a very, very expensive deal for such a mass construction project. By breaking the project down you see how over-priced it is for a country where you can pick up a 3-bedroom bungalow for $45,000 in a gated, serviced community. Half of the 30,000 units - 15,240 specifically - comprise of one bedroom apartments; 9,356 two-bedroom apartments; 5,217 three-bedroom apartments; plus 122 three-bedroom and 65 four-bedroom bungalows for senior officers. According to the NDC Deputy Minister of Works, Water and Housing, Dr. Hannah Bissiw, the NPP had already squandered 70 million cedis on the 5000 housing units it started and the government needed between 15-30 million more to complete the whole project. The question is, if 5000 houses cost the nation an estimated 100 million, why should 30,000 cost us 1.5 billion?

•    This agreement is supposed to be an EPC Agreement yet the details of the EPC Agreement are yet to be negotiated. Our contention is that it would be premature for Parliament to grant approval to this facility without the accompanying EPC Agreement which would help to determine whether the deal serves the interest of Ghana.

•    The Off-Take agreement states that STX will "Directly or indirectly use local resources of Ghana for at least thirty percent (30%) of the resources for the Housing Project and train the locally-hired labour force so that they can be equipped with necessary technical and professional skills."It is our contention that this provision is too vague and non-committal considering the discretional powers that an EPC agreement gives to the contractor. Though Government is paying for it, Government has no control over the money; it goes straight to the provider of the turn key contract, as STX is in this case. So we should be sure of the details of what we are buying.

B.    STX’S SOURCE OF FUNDING,FINANCIAL AND WORKING CAPACITY
The transaction is a supplier’s credit agreement. However, there is no indication in the agreement what the source of funding is.

•    Who is providing the $1.5 billion supplier's credit facility? STX Ghana is merely an on-lender to the borrower - the Government of Ghana? The provider of the funding should be part of the agreement with the Government of Ghana and should undertake to do so.

•    It is difficult to accept the claim that due diligence have been conducted on this facility without any clarity on the ultimate source of funds for this project? For Parliament to approve this deal is as good as offering a Sovereign Guarantee to STX with which it can go shopping for funds.

•    How could STX state with confidence, the terms of the credit facility when the source of funding was still not certain?

•    If it is the Government of the Republic of Korea, as it is now the claim of STX, then has the Parliament of Ghana been provided with enough evidence to support this claim?

•    If the source of funding is the Korean Government then what accounts for this unusually high percentage rate of Arrangement Fee (0.75% of the total sum of the facility)?

•    Also, it is unusual for credit agreements to contain a double entry of fees - in this case (i) 0.75% Arrangement Fee plus (ii) 0.50% Management Fee. What accounts for the   Management Fee, which pushes the two fees to a total of $20 million?

•    Who is ultimately providing the $10 billion dollars? STX has provided no evidence to show that it is committed to investing in Ghana. Everything shows that it is depending on the advance payment from Government for the 45% off-take share of the 200,000 housing units.

•    The $1.5 billion Supplier's Credit Facility, which is backed by a Government of Ghana Sovereign Guarantee, should be seen as effectively an advance payment to STX from the Government of Ghana.

•    It is our contention that in considering whether or not to give approval to this $1.5 billion facility, Parliament should not isolate this 30,000 housing units project from the total number of 200,000 as contained in the Off-Taker Agreement and  Memorandum of Understanding signed by Government and STX on December 9, 2009 and March 4, 2010, respectively.

•    In defending the deal, Government has made it clear that it entered into the off-take agreement with STX as a necessary incentive to STX to undertake the construction of the anticipated 200,000 units in 5 years to tackle significantly the huge housing deficit in Ghana. This, therefore, makes it the responsibility of the Parliament of Ghana to first convince itself of the viability of the entire 200,000-unit housing project and approve of it, per Article 181 of the Constitution.

•    Available records indicate that STX is facing a major liquidity crisis and does not have the balance sheet for this level of exposure. According to data from the Financial Supervisory Commission of the Republic of Korea, the debt-ratio of STX Group soared to 202.44% last year. Korea ratings, the credit agency, have warned that “STX is facing a serious liquidity risk”, citing signs over order cancellations, a delayed capital collection from its European affiliate and “the burden of additional investment in its shipyard in China.” The credit agency said of STX, It’s cash balance may deteriorate upon further situations.”

•    We will urge Parliament to invite STX to the House to explain before the joint committee its roll-out plan for the 200,000 housing units and how it intends to fund the entire project.

•    Related to this, is the question of the capacity of STX to construct 200,000 housing units within five years. There is nothing in its less than four-year track record of housing construction as a business to remotely suggest that it has the capacity to undertake such an ambitious project.

•    Contrary to its public boast, there is no evidence of the 'cities around the globe" that STX claims to have built. Yes, it has won a contract to construct a $68 million Eco-Site Project in Abu Dhabi. It has undertaken a residential development project at Rawdhat, Abu Dhabi. Its biggest completed housing project so far appears to be the $180 million staff accommodation complex in Abu Dhabi, which includes a 56-suite hotel.

•    All in all, STX has won a total number of 32,544 housing units contracts across the globe and it is estimated that more than 20,000 of that number is yet to be either constructed or completed. This means it has less than 10,000 housing units to its name. The Ghana housing project is by some significant margin more than what it has been able to achieve so far - it is more than 18 times the number of completed housing units that STX Engineering & Construction has to its name.

C.    VALUE FOR MONEY CONCERNS
•    STX has been able to tell the Executive arm of Government that $4.5 billion is what it will cost Government for the 90,000-unit off-take agreement to which Government has signed.

•    It has been able to tell Parliament that the 30,000 housing units for the security agencies will cost Government $1.5 billion to finance.

•    However, what it has not been able to tell anybody is the unit cost per house.
Various expects have said that the average cost of $50,000 per house is inordinately high considering that the Government of Ghana is providing the land, permits, tax exemptions for imported materials and machinery, corporate tax exemptions, and paying for the costs and expenses of STX. With these incentives it is clear that these houses, with onsite infrastructure and social amenities, can be constructed for a fraction of the cost, as argued by GREDA, for example.  

Taking the agreement at face value, there are a number of concerns:
•    Once all these exemptions and incentives are taken into account, the effective interest rate for the loan will be much higher than the 2% quoted. What is the price of the land? The taxes forgone? The expenses paid etc? These are estimates that we believe the Finance Committee of Parliament should have some idea of before being able to conclude whether or not this would constitute a good deal for Ghana.

•    There is no transparency in the area of reimbursable expenses. The agreement merely states that STX will be reimbursed for all costs and expenses including legal, accounting, travel expenses and other out of pocket expenses and any VAT on those expenses within 10 days of demand.   
•    Though, the agreement sent to Parliament made no mention of specific amenities to be provided as part of the 30,000-unit project, claims to that effect are being made. Yet, details are scanty. For instance, it may not make sense to provide schools, clinics, etc for a 400-unit barracks project in Cape Coast, which may be situated next to an existing school. You cannot build schools and clinics without factoring into the project the additional budgetary calls on Government for providing personnel and logistics to run such social amenities. The same way you cannot enter into a contract to provide offsite infrastructure without estimating the cost to the Consolidated Fund.

•    If Government provided the State Housing Company or any reputable Ghanaian real estate company free land, no litigation, all permits, cover their expenses (within 10 days of demand), and no import duty or corporation tax they would definitely build you an estate of three bedroom houses for less than $50,000. GREDA has come out to say that it can undertake the project for less than half the cost of what STX is quoting, plus onsite infrastructure and amenities.

D.    DEBT SUSTAINABILITY IMPLICATIONS
In considering this $1.5 billion, Parliament should see it as part of a greater $4.5 billion off-take agreement that the Government of the Republic of Ghana has signed with STX Engineering & Construction Ghana Ltd.

•    The five year moratorium offered on the fractional $1.5 billion deal would mean very little to Ghana's ability to service the loan. This is because it is not a self-amortizing project which one can say will start yielding income after five years. They are effectively barracks for the security agencies and are not intended to be sold to the occupants.

•    How much would the servicing of that facility do to constrain Government's capacity to undertake other budgetary responsibilities such as paying the salaries of security personnel and other public sector workers?

•    Would going for a cheaper, value-for-money option not free government purse to undertake other budgetary duties as well?

•    Ghana’s total public debt stock stood at US$9,202.94 million (61.7 percent of GDP) at the end of December 2009 up from US$7,918.1 million (54.6 percent of GDP) at the end of December 2008 and breaching the prudent ceiling for the total debt stock of 60.0 percent of GDP set in the 2007 budget.   

•    An Additional debt $4.5  billion for the Government off-take of 90,000 houses will increase the debt stock to a whopping 91.8% of GDP edging Ghana towards pre-HIPC levels with an additional burden of servicing the debt.

•    The annual debt service on this STX ($4.5 billion) loan (interest and principal) after 5 years will be over $400 million p.a. This means that in nominal terms the Ghana’s debt service on this single transaction will be close to Ghana’s total debt service ($560 million) at the time it became HIPC.

•    The total package will make Ghana’s debt burden unsustainable to the extreme. This does not make sense considering that this investment does not enhance the capacity of Government to service the debt. Furthermore it does not leave the government any room to undertake more productive investment in other sectors like roads, water, railways, ICT and energy which will be necessary to drive growth.

E.    OTHER IMPLICATIONS OF THE DEAL
•    The loan is designed as initially unsecured, but following execution STX has the option of converting the loan into a commodity (oil) swap. This is the first explicit mortgage of Ghana’s oil resources before a single drop of oil is produced. The off-take of 90,000 units implies the equivalent of $4.5 billion of Ghana’s oil revenues committed to STX.  Even if that option is deleted from the agreement it still leaves the question how Government intends to service the loan.

•    The agreement signed by the Government of Ghana with STX therefore violates the negative pledge clause embedded in Ghana’s other loan agreements with the IMF, World Bank, and holders of the sovereign bond. A negative pledge is a provision in a bond or loan agreement that prohibits the issuer or borrower from doing something (like pledging assets as security) that would give an advantage to holders of other bonds.

•    The Management and Arrangement fees for a $4.5 billion facility will amount to $60 million, really too high while the grant element at 36% is too low considering all the incentives.

F.    WHO CAN AFFORD IT?
•    The 110, 00 additional housing project is supposed to be an affordable housing scheme for low income workers who will be provided mortgages by the Home Finance Company (HFC). There is nothing to suggest that HFC can afford to provide anything near the requisite financing for this project. Records show that HFC has since its inception provided mortgages totaling less than 10% of the total STX housing project.

•    Parliament should demand from STX details of how much they intend to sell the different categories of housing units they intend to build for the local market.

•    Parliament should call the management of HFC to tell the joint committee how they intend to provide mortgage financing for the STX housing project as provided in the Off-Take Agreement

•    How many workers will be able to afford mortgages for $50,000 homes in Ghana? Assuming HFC financing terms for 15 year mortgages at 12% (dollar), and no depreciation of the currency, this will imply a monthly mortgage payment of some GH¢1,300.00 ( ¢13.0 million old cedis).  How many civil servants, teachers or nurses earn ¢13.0 million a month let alone afford a mortgage payment of this amount?

ALTERNATIVE SOLUTION
Housing is a major problem in Ghana and needs to be addressed urgently. It however has to be done in a financially prudent manner. The domestic/external private sector will be in a position to provide housing if the sector is given some of the same incentives provided to STX with no need to swap oil or burden the budget. The solution is a private-sector led one, probably with SHC playing a lead role in partnership with others -  local and even foreign.

The central bank of Korea's interest rate is 2.00%, an all-time low which makes loans from Korea cheaper but not necessarily cheaper than what is currently available from the money market elsewhere. At the moment, Ghana is servicing its sovereign bond issue of $750 million at a 6% p.a. interest rate. The multiplying cost of this STX deal to the Ghanaian economy may end being more expensive than raising money from the capital market to help Ghanaian companies to provide the 30,000 homes for the security agencies.

Also, Government may not need to contract a one single large sum for this project. It can approach such a project in tranches of, say, $200 million and still end up achieving the same ends.

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