A former Chief Executive Officer of Ghana’s National Oil Company (GNPC) Mr Alex Mould is incensed by the country’s government’s plans to re-negotiate all ‘take-or-pay’ power purchase agreements signed under the previous regime to take-and-pay.
The former government official, in a Facebook post on Tuesday, July 30, 2019, described the decision, which was contained in a mid-year budget review presented by the country’s Finance Minister Ken Ofori-Atta, in parliament, as irresponsible, arguing that the move would scare away prospective investors.
“The irresponsible statement by the Finance Minister to renegotiate all take-or-pay power agreements to take-and-pay will scare away prospective investors, not only in the power sector but even more in the development of any future gas Exploration and Production field.
“If investors agree to take-and-pay agreements, government will have to provide even greater security support packages to make the financing of the development of these gas fields intended for Gas2Power possible,” he explained.
“An analogy is where a caterer agrees with a company to provide meals for 200 staff, based on the demand forecast at the time.
“She then gears up, enters into debt to buy equipment to provide 200 meals a day; only to find out later that the company decides unilaterally, or for some other reason, to reduce the meals to 150 people, there will be consequences for everyone involved…the off-taker, the supplier, the supplier’s banks etc. How does the caterer pay for the debt with reduced revenue and reduced margins?” he posited.
Below is the full post
The irresponsible statement by the Finance minister to renegotiate all take-or-pay power agreements to take-and-pay will scare away prospective investors not only in the power sector but even more in the development of any future gas Exploration and Production field;
If investors agree to take-and-pay agreements government will have to provide even greater security support packages to make the financing of the development of these gas fields intended for Gas2Power possible
The finance minister has been ill advised and it shows his teams lack of experience in financing infrastructure projects;
An analogy is where a caterer agrees with a company to provide meals for 200 staff based on the demand forecast at the time.
She then gears up, enters into debt to buys equipment to provide 200 meals a day ; only to find out later that the company decides unilaterally, or for some other reason, to reduce the meals to 150 people
There will be consequences for everyone involved – the off taker, the supplier, the supplier’s banks etc.
How does the caterer pay for the debt with reduced revenue and reduced margins?
It’s a joke; they cannot do it for new IPPs; no new projects will achieve Financial Investment Decision (FID); perhaps they can do it for old IPP plants that have fully amortized their initial costs.
If this is done unilaterally, or without Agreement with the stakeholders in the IPP financing, this may actually cause the breach of financial covenants between the IPP and its financial institutions; this could actually result in default, and potentially judgement debt against the state
The World Bank provided up to $700m in Guarantees – it’s largest ever financial guarantee to a project – to back a take-or-pay E&P Gas field development and also the financing of 4 take-or-pay power plants in Ghana; lets see if they can go renegotiate with the World Bank – that’s where they need to start so we see how serious they are;
The financial institutions that financed these plants will not agree to a renegotiation unless Govt provides more support or guarantees in the form, possibly, of StandBy Letters of Credit to provide comfort of default from the already bankrupt power sector;
A take-or-Pay contract will have lower tariffs than a take-and-pay contract!
Lastly it was disingenuous of the finance minister to deceive the public with the amount of dependable (24/7) sustainable power generation capacity which is more in the neighbourhood of 3,500mW rather than the 4,593MW
The issue I raise here is with the Minister’s statement that has to do with him saying that he will renegotiate “ALL” IPP PPAs to make them take-and-pay from take-or-pay
It is possible to renegotiate those old IPPs that have most likely paid down all their initial capex but quite impossible to do that for relatively new IPPs, and impossible to do that for new IPPs
We should also not confuse the Put-Call Option Agreements, PCOA, with take-or-pay Agreements.
PCOA replaces the Government Support and Consent Agreements that basically mitigates the political and country risk when a default occurs due to Gov’t interference ie country specific – since Gov’t controls PURC, and the whole power value chain, gov’t interference is a huge risk for the investors and their financial institutions
The take-or-pay on the other hand is more related to off takers payments for power received – ensuring debt service payment of the capital expenditure financed by the investors financial institution; it is a project financing requirement in the power sector (and in most infrastructure project).
Pls note that both Bui and Sunon Asogli, both signed by the NPP gov’t where take-or-pay Agreements
If the IPP has paid off its initial capex then there is the need to renegotiate
The IPP needed a take-or-pay Agreement in order to secure the original capex financing
If we send a message out to the power sector investor community that we would no longer be entering into take or pay agreements, as explicitly stated by the Finance Minister, it would be impossible for them to reach Financial Investment decision, nor raise the funding from the project finance banks