By: Paa Kwasi Anamua Sakyi
The power sector is one of the core sectors in the global economy, supporting countries roadmaps of growth and development. The sector assumes more significance because electricity as a commodity, is an enabler to goods and services that enriches and extends lives. And so for a developing country such as Ghana, the need for a healthy and sustainable power sector is more vital to modernizing agriculture, increasing trade, empowering women, saving lives, improving transportation, expanding industries, and powering communications ― serving as building blocks for escaping poverty and enriching lives.
There has consistently been the need for investments in the power sector through different projects to ensure sustainable power supply to meet the growing demand for electricity. Aside the projects expanding electricity production to stimulate production in all the sectors which use power (forward linkages), it demands intermediate goods like fuel, machinery, and construction services et cetera (backward linkages).
Like for any other sector, procurement for goods and services remain one of the critical functions in the power sector, and across the generation, transmission, and distribution arms. The task of identifying and selecting suitable supplies and service providers becomes more critical as the sector undertakes reforms in response to regulatory uncertainty, unpredictable economy, environmental mandates, investment needs, and paradigm shifts. These forces translate into increased pressure for entities within the power sector to operate strategically, minimize risk, and achieve superior performance as they seek cost savings at all levels.
Hassanzadeh and Jafarian (2010) sees procurement best practices as a strategic function, working to improve organization’s profitability, reduce raw material prices and costs, and identifying better sources of supply. Madhavaram and Hurt (2008) concludes that the higher the degree of procurement best practices, the better it is for cost reductions, improvement in inventory, customer service, new product development, information and material flow, and financial performance.
The Ghanaian Experiences
The potential value of the procurement function must prompt utilities in Ghana’s power sector to move away from traditional methods of sourcing for supplies and service providers, which is often frost with opacity and political interference, of which have been a cause for concern in recent times. Many-a-times the country has resorted to sole sourcing (though allowed under certain conditions) and other obscured methods, as against other transparent procurement models and methods underpinning the selection of a group of contractors who are most suitable to execute a given project. Typical example of questionable procurements within the country’s power sector includes but not limited to independent power producers (IPPs) and power purchase agreements (PPAs), the proposed Mytlineos AMERI Plant take-over, and the recent botched Power Distribution Services (PDS) deal.
The manner in which independent power producers (IPPs) were engaged to shore up Ghana’s installed power capacity during the 2012-2016 power crises, is still under scrutiny. The amount and structure of power purchase agreements (PPAs) signed during this period is still blamed by section of Ghanaians as a contributor to the recent power sector debts. Figures put out by government suggest that the country pays the independent power producers (IPPs) US$500 million per annum for power they generate for the country including those not consumed under a “take-or-pay” (ToP) agreement. According to the Finance Minister, on average less than 40 percent of the contracted take-or-pay capacity is actually used, with the country paying over half a billion U.S. dollars annually for excess power generation capacity, contributing to the challenges in the energy sector, and posing financial risks to the economy as a whole.
The manner in which the Energy Ministry’s sought to engage a third party, Mytilineos International Trading Company to take over the operation of the AMERI power plant in July 2018 would have caused the country over US$1 billion for needless work. The lack of due diligence that characterizes the re-negotiated agreement between the Government of Ghana and the Africa & Middle East Resources Investment Group (AMERI Energy), would have overburden the Ghanaian with a high cost of electricity if the take-over was allowed to pass.
It gets quite frustrating that the country still grapples with procurement challenges, in spite of clear laws set to provide a system for ensuring transparent, efficient and economic public procurement, and to prevent fraud, corruption and other malpractices in public procurement.
Keeping to Rules
Objectivity, transparency and fairness are essential ingredients in procurement procedures, for a well-functioning free-market economy. Bidding as a tested mechanism that allows companies to compete for contracts, is supposed to achieve price reduction, prompt delivery and quality ― key factors factor for “value for money” (VFM) procurement. The bidding process according to Dimitri (2013) literally rewards both the “quality” of the proposal, and the “reasonableness” of quotes, presenting a winning case for both the tendering entity and the public.
Once the conditions of the competitions are set, both the entity issuing the bid and the bidders are required by law to keep to the rules to deliver what is expected to be a fair and transparent ranking approach. Notwithstanding, opportunistic behaviour may attempt to “game the system”, especially in much complexed services which are harder to rank (Soltys, 2014). The potential opposing interests makes it imperative for tendering activity to be guided by certain principles to avoid unfair competition. Apart from the manipulative settings of qualifications or inappropriate methods of evaluating the bids (Žujo and Car-Pušić, 2009), public tenders are on many instances confronted with difficulties such as conditionality imposed in agreement, and the involvement of unqualified candidates (Wittig and Jeng, 2010). These are some of the reasons why procurement agenda remain part of major sources of risk for key sectors of the economy, including the services and construction projects.
In public procurement, most contractors and public officials view the qualifying procedures they are obliged to follow as time consuming and wasteful. Meanwhile, the qualification, together with the evaluation criteria, largely influences the end result of the tender procedure and the success of the project as a whole, i.e. whether the customers gets the best value for their money (Hanák and Muchová, 2015). It is the view of Plantinga et al. (2014), that inappropriate handling of tenders may be the result of deliberate action or just a lack of experience on the part of the responsible personnel.
Hanák and Muchová (2015), argue that the overall success of the project is significantly affected, among other factors, by the technical, economical and professional capability of the contractor who is awarded the tender. For this reason, the tender procedure should pay due attention to the scope of required qualifications. And while the qualification criteria must be set so as to only allow the participation of properly qualified candidates, the criteria must at the same time facilitate the creation of sufficient competition in the tender.
Sticking to Competitive Tendering
Aside the need for an effective public sector procurement system in the power sector to influence both micro and macroeconomic efficiency, it is also necessary to follow procurement procedures that assure objectivity, fairness and transparency in the award of contracts. These are vital ingredients in escaping cause for allegation of corruption in the sector. Sound procurement practices will enhance respect for power sector institutions and government efficiency, while attracting additional foreign investments into the country’s power sector.
Competitive tendering is an approach that has been introduced on numerous markets, including the local bus markets in Europe in response to increasing costs. The adoption of this process has changed the structure and development of the local bus market in Europe, resulting in well documented effects in terms of reduced prices.
Although the Millennium Development Authority (MiDA), embarked upon a competitive procurement process to select 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, it waived a substantial number of the “conditions precedent”, committing them as “conditions subsequent.” The process created room for the PDS consortium to take over the assets of the ECG, failing to carry out adequate “due diligence” to identify risks and implement strategies to protect the assets of Electricity Company of Ghana (ECG) before signing the contract. The end result was a botched PDS-ECG deal, which has brought some form of damage to the country’s power sector.
Even as the government of Ghana (GoG) sought to cancel the PDS Concession deal, it proposed an adoption of a restricted tender process to fast-track some of the processes to replace PDS. This process for the first time was strongly contested by almost every Ghanaian because of the inherent risks. Restrictive tender is known to promote corruption and cronyism, kills transparency, leads to the high cost of services arrangement, does not provide value for money, and does not give wider alternatives to choose the best company to perform.
The creation and maintaining of a sufficiently competitive environment is still the most desirable, because it can be assumed that the prices achieved in the tender will decrease with the increase of the number of bids submitted in the tender. And choosing the right contractor increases the chance of reaching the goals of the project which, first of all, keep the schedule within the estimated costs, time frame and quality.
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.
