The Government of Ghana (GoG) has signaled its intention to return to the privatization of Ghana’s power distribution utility company (ECG). There are currently no details as to how this will be done. For several reasons, however, any mention of the privatization of ECG immediately triggers public interest. This is not just because of the opposition to the process expressed by the Public Utility Workers Union (PUWU) of the Trades Union Congress (TUC) but also because of other antecedent issues including the recent Power Distribution Services (PDS) scandal (which happened during the last incarnation of ECG privatization). Accordingly, whatever approach the Government uses, the issues that it will face will be numerous extending beyond the electricity sub-sector. [In an earlier paper my colleague, Ferdinand D. Adadzi wrote on some of the legal issues that arise in the context of Ghana’s PPP Act, Act 1039].

This Op-Ed is not meant to debate whether ECG should be privatized or not. It assumes the privatization will go ahead. It only seeks to draw attention to some of the multiple issues that must be well examined in advance of the start of the exercise. Among other things, the goal of this Op-Ed is to help focus public discussions away from the usual political divide. It is the hope of the author that the issues mentioned in this Op-Ed, will help steer the public debate past the usual political lines of “for” and “against”.

Unintended Impact of Problem Solving

Obviously, the proposed privatization of ECG is meant to solve some perennial problems including but not limited to the high level of indebtedness.

The author holds the view that, in any attempt to find a solution to a problem, it is important to ensure that the solution itself does not trigger more problems. Particularly, in the case of ECG, there are chances that the privatization will impact other national and strategic goals during or after the privatization. Whilst this Op-Ed is not intended to provide a detailed analysis or solutions, it is meant to get the public and policy makers to bring most, if not all critical issues into the equation, ahead of concluding on the approach to privatization.  Hopefully, this will also help reduce the politicization of an otherwise technical and strategic exercise.

1. Accrued Liabilities and Matters Arising

It is anticipated that for the privatization to be attractive to the private sector, GoG will absorb the accrued debt of ECG as private sector operators are not likely to be interested in assuming responsibility for prior liabilities. The critical question, therefore, becomes – how will the debt be ring-fenced and retired by GoG over a defined period? Further, since ECG’s debt will continue to accrue interest after the privatization, will there be a freezing strategy on the debt to ensure it does not worsen GoG debt profile?

Whilst absorbing the liability, how will the Government take account of previous loans to ECG (GoG on-lending) – will it capitalize any yet to be amortized on-lending?

2. The Potential Ripple Effect of Electricity Tariff

Like any public utility, the distribution of electricity has immense social and economic impact with its inescapable ripple effect. For example, higher tariffs impact livelihoods, add to the cost of doing business and trigger inflation. The privatization strategy must, therefore, come with a multifaceted tariff strategy within which the private sector proponents may operate. Without a clear Government tariff strategy, the natural disposition of the private sector will be to minimize cost, recoup investment quickly and maximize profit. Such tariff strategy would be necessary to inform how the tariff regulator makes decisions on requests for future tariff increases.

3. Consequential Questions to be Addressed in Respect of the Tariff Strategy

There will be several consequential questions that must be addressed pursuant to whatever tariff strategy is adopted.  These include the following:

(a) Lifeline Consumers

The PURC rate setting guidelines categorizes lifeline, medium and high consumers. Will Government give subsidies to “lifeline consumers” (in order to prevent the obvious social impact of commercial tariffs on lifeline consumers) and if so, will this be treated by the operator as a Public Service Obligation (PSO) in which case the PSO will lead to a potential recourse to the public purse? Or will the private sector make “lifeline concessions” and price it into a cross-subsidization tariff structure? Either approach will potentially have both economic and political impact.

(b)  Industry Versus Household Tariff

It is reported that about 40% of consumption is household and about 45% are special load consumption of high consuming industries. Will there be discriminatory tariff for strategic industries which have multiplier job creation potential?  Will the tariff strategy specifically require a higher tariff to domestic consumers as against selected industries? Will the GoG require beneficiaries of such lower tariff to demonstrate that it has translated into jobs and taxes accruing to the GoG?

(c) Direct Tariff Negotiations With Bulk Buyers

How will the policy on direct tariff negotiations of a private-sector-led ECG be regulated to prevent undermining bulk suppliers such as VRA?  What will be the threshold Energy Commission will set on what constitutes bulk consumption in order to deliberately drive the growth of both light and heavy industries?

This is particularly important since the bulk consumers are in the “deregulated market” of the power sector. Even within the current regime, there have been allegations of instances where ECG, for commercial reasons, has allegedly negotiated tariffs (below that of generation companies in the deregulated market) which created challenges for some big manufacturers as whether to buy from ECG (in the regulated market) or directly from generation companies (e.g. VRA) in the deregulated market.  The question is – to what extent can the private sector led ECG negotiate directly with bulk buyers and to what extent can the tariff regulator prevent ECG from undercutting bulk tariff agreed prior in time with generation companies?

4. A History of Knee Jerk “Absorption of Tariff”

Ghana has had a long history of policy makers who, after allowing utility prices to rise, are faced with the reality of public complaint especially from lower income earners (who constitute the bulk of the voter population and indirectly influence public policy formulation). In panic response, they announce knee jerk policies often designed to “absorb the increases in tariffs”. Such absorption  subsequently leads to higher public debt. The consequential macroeconomic instability falls back on businesses who are called upon to pay more taxes in order to stabilize the adverse macro-economic impact. Will there be a strategy to avoid a recurrence?

5. Potential Impact on Water Supply

There is a direct link between the availability of power supply to water pumping stations and regularity of water supply to water consumers. It is often alleged that Ghana Water Company (GWCL) is frequently in arrears of its payment obligations to ECG. How will the inter-company (ECG-GWCL) relationship be handled in order to ensure that the invoicing and debt collection strategies of a private sector led ECG, does not lead to disconnection of power supply to water pumping stations.  The social impact of such a scenario is obvious and needs no further elaboration.

6. A Debt-Ridden Company or Potential Cash Cow?

ECG is definitely a debt-ridden company now, but it is also a potential cash cow (otherwise, no private business will show interest).  How will the privatization strategy achieve a balance between any requirement for GoG’s debt absorption (or write off) with benefits from the future profits that will accrue to ECG.

7. Equity Structure

Will GoG retain equity in the privatized ECG and if so, will all or part of GoG’s equity be on “carried interest” basis? If not, what happens if government is required to make capital contributions to equity?  Will the Ghanaian tax payer have to cough up money towards future capital calls and what mechanisms will be put in place to ensure that there is reasonable return on capital to both the private sector and GoG sides of the enterprise?

8. Continuing Contracts and Transfer Pricing

As a going concern, ECG will have continuing contracts including the obligation to purchase fuel and other inputs. Allegedly, these are lucrative contracts as reported in the media. How are these contracts to be treated after the privatization to ensure transfer pricing is minimized in order to secure dividends accruing to the GoG side of equity holders.

9. The Take or Pay Obligation in ECG Power Purchase Agreements (PPAs)

How will GoG handle the take or pay obligation clauses in PPAs with Independent Power Producers (IPPs)?  Will they be passed on to the private sector to re-negotiate and whose responsibility will it be to continue buying fuel for the IPPs?  Will there be a recourse to the GoG even after the private sector takes over?

10. Waterfall Mechanism/Energy Sector Levy Act (ESLA)

As in the case of the Tema Oil Refinery (TOR) levy, which was imposed years ago, the waterfall mechanism/ESLA did not achieve the goals they were set up for.  How will these previous solutions be married into the privatization process and what carry on effect will it have?