Ghana:  Botched PDS Deal: MiDA On The Radar(article)

In March this year, the Power Distribution Services (PDS) assumed the responsibility of managing the retail, and distribution business of the Electricity Company of Ghana (ECG), following government’s decision to execute the second Millennium Challenge Compact with the U.S. government with the objective of, inter alia, increasing private sector investment and the productivity and profitability of micro, small, medium and large scale businesses.

Among the six projects within the second compact is the ECG Financial and Operational Turnaround Project (EFOT), which seeks to introduce a private sector participant in the management and operations of ECG, and key policy and institutional reforms that will provide more reliable and affordable power to Ghana’s businesses and households, through Millennium Challenge Corporation’s (MCC’s) US$498 million compact.

As a result the Millennium Development Authority (MiDA), the supervising agency of the MCC Compact, embarked upon a competitive procurement process which resulted in the selection of Manila Electric Co. (Meralco), a Filipino company and a group of Ghanaian investors to manage, operate and invest in ECG’s operations for 20 years, in the name of PDS as the Concessionaire.

Per the power compact transaction agreement, Meralco and its partners will hold 41 percent stake in ECG while the Ghanaian ownership is 51 percent. The consortium is comprised of Meralco, AEnergia SA, an Angolan company, and four Ghanaian companies, TG Energy solution Ghana Limited, Santa Baron Ventures Ghana, TBK Ghana Limited and GTS Engineering Ghana Limited.

It was expected that the PDS would invest over US$580 million in Ghana’s power sector within the next five years after receiving the Assets and Operations of the ECG on March 1^st 2019.

Expectations from MiDA

In the ECG Financial and Operational Turnaround Project (EFOT), MiDA is involved as the Accountable Agency (AE) for the implementation of the Compact; to oversee, manage and implement the programs under the Millennium Challenge Compact for poverty reduction through economic growth as set out in each agreement between the GoG and the MCC acting for and on behalf of the Government of the United State.

In this capacity, MiDA led in the process of identifying and selecting the best qualified private sector partner of ECG through competitive bidding; a process that introduced the PDS as the Concessionaire. It is also by a Monitoring and Evaluation (M&E) Plan, to determine whether the Projects are on track to achieve the intended results, and evaluate implementation strategies, provide lessons learned, determine cost effectiveness and estimate the impact of the Compact’s interventions.

In selecting the Concessionaire, MiDA as a Project Lead/Manager was expected to carefully evaluate all the documents, processes and assets submitted as part of the transaction, analyze issues and provides professional or expert opinion/advice to assist government (and other clients) in making decisions or in performing it tasks towards the implementation of the concession agreement.

As a Project Lead/Accountable Agency, it is acknowledged that MiDA may be exposed to a wide range of ethical dilemmas, such as accepting responsibility for a project’s success or failure, refusing to succumb to pressures to suppress facts or stating falsehoods and half-truths, treating all stakeholders as equal and protecting their respective interest, not “taking sides”, maintaining confidentiality and fairness, and insisting on maintaining the best approved processes.

It was also the expectation that MiDA would undertake adequate due diligence on documents, processes and assets et cetera, submitted as part of the transaction agreement. Dubrawsky (2010) defines “due diligence” as practices of an organization in identifying risks and implementing strategies to protect the assets of an entity. These assets can include data, equipment, employees, and other elements that are of value to an entity. Fay and Patterson (2018) refers to due diligence as the care a reasonable party exercises before entering into an agreement with another party. The objective of the inquiry, they argue, is to confirm all material facts regarding the agreement under consideration. This clearly suggest that due diligence by itself is a “condition precedent.”

PDS Suspension

On 30^th July 2019, the Power Distribution Services (PDS) Ghana Limited which had been selected to operate, invest and manage the business of ECG was suspended. According the Government of Ghana (GOG), which through the Ministry of Finance (MoF) and the ECG announced the suspension of the PDS/ECG concession agreement, its decision followed the detection of “fundamental and material breaches of PDS’s obligation in the provision of Payment Securities (Demand Guarantees) for the transaction which have been discovered upon further “due diligence.” The government insisted that the Demand Guarantees were key prerequisites for the lease of assets on 1^st March 2019 to secure the assets that were transferred to the Concessionaire.

The Minister of Energy Mr. Peter Amewu, indicated at the time that an officer who executed the Guarantees (Lease Payment Security and BSA Payment Security) from Al Koot, a commercial insurer and re-insurer, based in Qatar was not authorized and that the guarantees were forged. This according to Mr. Amewu, was detected following series of due diligence tests the guarantees were subjected to by the ECG. Mr. Kojo Oppong Nkrumah, the Minister of Information, also added that the company that issued the guarantee had indicated that the mandate to issue that guarantee was irregular.

As a result, a full scale-inquiry was launched by the government and the MiDA/MCC to unravel the extent of the breach, with the outcome informing government’s next line of action.

PDS Termination

On 18^th October 2019, the Millennium Challenge Corporation (MCC), the agency providing funding for Ghana’s Power Compact II, demanded of the President Akufo-Addo-administration to reinstate the suspended PDS) by October 30, 2019. The MCC asked GoG to formally announce the reinstatement of PDS concession right under the transaction arrangements, lift the suspension of Lease and Assignment Agreement, the Bulk Supply Agreement and the Government Support Agreement, and cause the Energy Commission to lift the suspension of PDS retail supplier license.”

But in a response letter dated 18^th October 2019 from the Ministry of Finance and directed at Sean Cairncross, the Chief Executive Officer of MCC, the Government of Ghana (GoG) stated its desire to cancel the agreement between the Electricity Company of Ghana (ECG) acting for the GoG and the PDS.

The letter stated that based on all the information gathered about the purported Demand Guarantees provided by PDS as security for the transfer, the GoG is concluding that there was no valid Payment Security, and that it is unable to consider that a valid and enforceable Payment Security was furnished by PDS in fulfilment of an essential Condition Precedent for the transfer of ECG’s asset to PDS. That Al Koot has clearly denounced and repudiated the instruments and expressed a clear intention not to be bound by any present or future obligation arising out of same. It is on the back of these facts that the government decides to cancel the deal with concerns about the lack of security for a transaction involving the commitment of funds of the American people as colossal as the amounts in question, as well as the general unethical and unprofessional conduct of PDS, the letter concludes.

From government’s response, the United States of America noted the termination decision with regret. The U.S. said based upon the conclusions of the independent forensic investigation, the U.S. position is that the transfer of operations, maintenance, and management of the Southern Distribution Network to the private concessionaire on March 1, 2019, was valid, and therefore the termination is unwarranted. As such, MCC by its letter confirmed that the $190 million funds granted to Ghana at the March 1 transfer to the 20-year concession from ECG to PDS are no longer available. Notwithstanding the withdrawal of the $190 million, the MCC stated that it would continue to implement the Tranche I fund of $308 million with MiDA.

This decision by the MCC couldn’t deter the GoG from proceeding to officially terminate the PDS deal, and handing back the management of the assets to the ECG.

MiDA on the Radar

At last the PDS deal has gone bad, coming at a great cost to Ghana. And judging from MiDA’s assigned role in the smooth implementation of the Compact, one is left to ask the following questions.

To what extent was due diligence carried out on documents, processes and assets submitted as part of the transaction agreement? To what extent did MiDA identify risks and implement strategies to protect the assets of the ECG? To what extent did MiDA confirm all material facts regarding the agreement under consideration?

According to Conrad, Feldman, and Misenar (2016), persons are deemed to have exercised due diligence, and as a result cannot be considered negligent, if they were prudent in their investigation of potential risks and threats. And that If a person or an entity were compromised in a manner that caused serious financial damage to their consumers, stockholders, or the public (clients); one of the ways in which the person or the entity would justify its actions or inactions is by showing that it exercised due diligence in investigating the risk to the client and acted sensibly and prudently in protecting against the risks being manifested.

Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security ©2019

The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media.