PRESS STATEMENT
RE: “GOVERNMENT OF GHANA TO COMMENCE COLLABORATIVE CONSULTATION PROCESS WITH IPPs AND GAS PRODUCERS”.
The Press Release, by the Ministry of Finance on the 26th August 2019, on the subject “Government of Ghana to commence collaborative consultation process with IPPs and Gas Producers” refers.
The Press Release, which was signed by the Chief Director of the Ministry of Finance, stated among others, that:
“The Government of Ghana hosted Independent Power Producers and Gas Producers at a meeting with the Ministry of Finance and the Ministry of Energy. The meeting addressed Governments approach to reforming the current take or pay structure and excess supply that undermine the energy sector and pose serious financial risks to the economy”.
The CIPDiB is concerned about the statement which seems to suggest that the current take or pay structure is what is undermining the energy sector and poses serious financial risks to the economy.
It is important to clarify and better explain the context in which “take-or-pay” agreements have been entered into in Ghana (and indeed across the world) in order to correct the seeming wrong impression created through various statements with respect to existing Take-or-Pay Agreements and present in the Chamber’s humble opinion, a way forward to help address the challenges in the sector.
The Context for Take-or-Pay Contracts
1) The Power Purchase Agreements (with Take-or-Pay terms) were carefully negotiated and entered into in good faith over many years with international advisors on all sides of the transaction, including for Government (Ministry of Finance, Ministry of Energy, Attorney General and ECG). The nature of the obligations assumed by GoG (Ministry of Finance, Ministry of Energy, Attorney General and ECG) is consistent with best practice not only in Africa but also in many other jurisdictions around the world.
2) The form of PPA / GCSA applied on the IPPs we are aware of are reasonable and fair and do not create any unusual or unfair terms as being suggested by GoG. As a result of the PPA agreement GoG has entered into with the IPPs, several complicated, delicate investment decisions and financial obligations have in turn been entered into and created with third party lenders and others based on the commitments given by the GoG/ ECG in those PPAs.
3) A “take or pay” contract is very typical in an economy where the Government and the state owned offtaker want to ensure that there is reliable power for the growth of the economy and where the cost of power would, without the risk of demand for the power being assumed by the host Government / offtaker, be unduly expensive.
4) The alternative is for all the power plants in Ghana to be what is termed “merchant plants” so if there is no demand in the country for power, and then nothing would be paid to the IPP. Although such a structure may be applied in a handful of economies where there is full awareness and confidence as to the demand for electricity almost on an hourly basis, to get the private sector to take that risk in Ghana would have led, and would still lead, to the power price offered being unaffordable to the sector and the country.
5) The same sort of “take or pay” PPA is in place in many IPPs across Africa including in Nigeria, Cote d’Ivoire, South Africa, Kenya, Tanzania, Uganda, Zambia and across Asia / South America as well. The nature of a “take or pay” arrangement is not, in itself, at all wrong. What always needs to be considered is which power projects are entered into by a state owned offtaker on such a take or pay basis, what the tariff is for the project and how risks in the project are allocated.
CIPDiB Going Forward
1) We welcome the approach by the Government for a collaborative consultation process to address the challenges in the energy sector (which are not the making of IPPs and Gas Producers). We remain committed to assist all parties in creating a framework for the power sector which allows the continuation of private sector involvement in the delivery of electricity to Ghana at least cost. The growth of the country, we believe, depends on it. It is not right for Government to demonize what a “take or pay” contract is, nor portray the other side to those contracts as bad people or bad companies.
2) The investors and lenders in the private sector involved in delivering the existing IPPs continue to and want to see the growth of Ghana as a country. It may be considered by some that the “right thing” is to blame a “take-or-pay” contract or blame the private sector who are the other side to those contracts – but that would be wrong and be a mistake. That will, at best, waste time and lead to an erosion of confidence in Ghana but at worst could lead to termination of the contracts with a vast termination sum being required to be paid by Ghana. What GoG should now do is to act reasonably and, yes, voice its concerns with certain issues and payment terms, but also listen – to the other side, to advisors, to supporting agencies – to ensure that the resulting path chosen is considered properly in a measured way.
3) Whilst sympathetic to Government concerns about the energy sector and the macroeconomic stability of the country, a unilateral recalibration of the PPAs by GoG/ECG is not the way to address these concerns and would in our opinion be tantamount to a breach and/or repudiation of those agreements. In addition place IPPs in breach of their obligations to third parties and ultimately affect Ghana’s credibility internationally as an investment destination.
Thank you.