It is highly doubtful that, in the short term, Government of Ghana shall be able to satisfy the strict credit requirements of the China Development Bank in order to secure the entire $3 billion mentioned in the governmentï¿½s framework agreement with the state-owned Chinese bank.
We [IMANI-Ghana] suspect that the maximum facility available to Ghana shall not exceed $1 billion over the timeframe of 2012 ï¿½2013. And even this $1 billion shall not come on a silver platter.
In keeping with this opinion, which we shall back up with analysis in this report, we are worried that governmentï¿½s over-reliance on this facility to prosecute its 2013 economic program, especially in the infrastructure area, could lead to dislocations in the economy and frustrations on the part of its managers.
In his New Year address, the President of the Republic left all of us in no doubt about how central the $3 billion facility has become to the governmentï¿½s overall economic agenda. According to a Ghana News Agency report of the speech, President Mills ï¿½[was] therefore confident [that] governmentï¿½s infrastructural development will receive a boost this year following the approval of the 3 billion dollar Chinese loan. ï¿½
It is important to stress that the said $3 billion loan facility has NOT been approved by the authority that matters ï¿½ the board of the Chinese Development Bank (CDB).
What has been ï¿½approvedï¿½ is a ï¿½master framework agreement (MFA)ï¿½ suggesting in very loose language that CDB is interested in discussing whether and how it may be viable to invest $3 billion in Ghanaï¿½s oil and gas infrastructure.
Per Article 26 of the MFA:
ï¿½Except for the provision of Article 22, this Framework Agreement shall be deemed to be a letter of intent and understanding of the Parties and is not intended to create any legal relations or obligations on either Party.ï¿½
The only binding clause, Article 22, states that:
ï¿½The Parties agree that no Party shall disclose the content of this Framework Agreement or any other agreements or documents generated or communicated between the Parties pursuant to this Framework Agreement without the express written consent of the other Party except where such disclosure is required by the laws of PRC and/or Ghana. ï¿½
The agreement was nothing more than a non-binding memorandum of understanding to set the stage for discussions. The first serious product of those discussions is the subsidiary agreement now before Parliament. This agreement has not been made public, but it follows that Parliament will seek to scrutinise it carefully with a view to aligning all its key provisions with the national interest. We have no doubt in our mind that Parliament shall not be rushed into rubber-stamping any vague, poorly drafted, language in the agreement.
After the approval by Parliament of the supplementary agreement, which concerns a reported $1 billion for the development of gas infrastructure in the Western Region, the Board of the China Development Bank shall finalise a disbursement schedule and milestone management process with the Ministry of Finance. All this shall take at least a few months.
A notion is taking hold in Africa that Chinese money is ï¿½easyï¿½ money. A misconception has grown regarding the rigour of credit evaluation by Chinese financial institutions of opportunities in Africa, and this is leading to confusion and disappointment in many African countries when pledged monies ultimately delay by several years. A good case in point is the $2. 6 billion pledged by China Union to Liberia for the development of the Bong iron deposits. Nearly 3 years on and 2 amendments later, the Chinese partners are still scrutinising the terms of the deal, with very little actual cash having been seen in Liberia.
Let us bear in mind that Chinese financial institutions are adopting global standards of credit and risk evaluation and have therefore increasingly little propensity to pump money into half-baked or unready projects. Increasingly, their expectations of quality and rigour, and in particular profitability, are as high and as tough to meet as those of any financial institution anywhere on the globe.
In seeking to understand the likely pace of disbursement of the $1 billion currently under serious discussion and to assess the chances of any more money coming in from the loosely worded $3 billion non-committed ï¿½pledgeï¿½, we need to understand the CDBï¿½s own lending history and technique.
The CDB is reputed to be Chinaï¿½s 4th largest bank. Its board reports directly to Chinaï¿½s State Council, that countryï¿½s equivalent of our ï¿½cabinetï¿½.
The CDB concentrates overwhelmingly on domestic opportunities in China, spending huge amounts of money in Chinaï¿½s backwaters, away from the gleaming South-East, in search of profits within the context of the Chinese governmentï¿½s determined push to develop the poorer Western hinterlands and rural backyards of that country.
Of its more than $800 billion loan portfolio, only about 17. 5% are designated in foreign currency, suggesting a roughly equivalent proportion of foreign loans.
CDBï¿½s foreign currency-denominated loans are provided to foreign borrowers in the context of the bankï¿½s ï¿½go globalï¿½ strategy, a policy that blends Chinaï¿½s foreign policy interests with a risk diversification focus.
In the last few years, CDBï¿½s go-global strategy has seen an overwhelming amount of its foreign loans go into what have become known as ï¿½energy-backed loansï¿½. These loans achieve the combined effect of helping China secure reliable energy supplies and securing lucrative revenue streams for CDB in new markets at the same time.
Consider that over the past decade the bankï¿½s foreign loan portfolio has grown more than ten-fold, and that more than half of that has been accumulated just over the last four years by way of energy-backed loans to a handful of oil-rich countries. But what are ï¿½energy-backedï¿½ loans?
CDB has been providing multi-billion dollar facilities to energy-rich countries like Venezuela, Brazil, and Ecuador, among others, for medium-risk oil- and gas ï¿½ related infrastructure for a while now. These loans require the receiving countries through their governments and state-owned oil and gas companies to pay the principals and interests on these loans using proceeds from the sale of oil directly to preferred Chinese companies, especially China National Petroleum Corporation (CNPC) and Sinopec.
The proceeds from these oil and gas sales are kept in special accounts at the CDB so that the relevant percentage can be used to service the interest and principal due on the loan amount before any outstanding payments are made to the borrowing country.
Ghanaï¿½s decision to circumvent due process and award the gas infrastructure development contract to Sinopec should be interpreted against this background, and is probably in the knowledge that Sinopec will be able to influence the disbursement of the pledged loan to Ghana. As has been its practice in other instances, CDB may pay the monies owed Sinopec for pre-financing the project directly to Sinopec.
In fact, in some of the CDB energy-backed transactions we have studied, the entire pot of money never leaves the special account at the CDB, or a considerable proportion stays put in the account, and are disbursed directly to Chinese vendors and contractors working on the infrastructure project in the borrowing country.
In the case of Ghana, the agreement anticipates that 60% of the value of contracts involved in the gas project shall go to Chinese vendors. In practice, we anticipate close to 85% in view of the highly specialised nature of the project. It is therefore possible that the actual direct transfers to Ghana may total less than $150 million.
But the most important issue relates to the CDBï¿½s credit determination and risk management process which the bank perfected under its former chairman, Chen Yuan: the 12-grade asset classification system and the 5-point risk management strategy. We will not bore readers with the details, but suffice it to say that following this philosophy CDB has kept non-performing loans to less than 2% of its operating portfolio and considerably excelled the Peopleï¿½s Bank of Chinaï¿½s guidelines on these matters. CDB swears by this philosophy.
This is the spirit that informs and influences CDBï¿½s design of its energy-backed loans. We have spent some time trying to discern the pattern behind these loans. A basic statistical model yields a framework in which the size of the loans are tied to an aggregated set of factors related to the quantity of barrels of oil (per day) the borrowing country is ready to sell to Chinese oil trading companies, the anticipated cashflow from these and other resource sales to finance the credit amount being sought by the borrower country and its state-owned energy company, as well as the absolute size of the countryï¿½s energy resource endowment.
In very simple terms, below 100,000 barrels per day, a country receives about $50 million (adjusted) for each 1000 barrels per day it is able to pledge to serve partly as collateral and partly as "guaranteed supply to China" in exchange for the credit amount sought. It follows naturally that for highly endowed countries like Brazil and Russia seeking long term loans, with a term of maturity in the order of 20 years thereabouts, the ratio could be as favorable as 1,000 barrels per day for each $70 million unit of the total loan amount granted (i. e. adjusted upwards from the mean) in view of their very high actual or potential relevance to China's energy security objectives.
Notwithstanding this preamble, if a county is highly endowed but is in desperate need for short-term, relatively higher risk, credit (eg. Venezuela) it may find that the ratio at play is around a relatively unfavourable $30 million per 1,000 barrels per day. That is to say, CDB rarely sacrifices its credit prudence measures, neither for China's energy diplomacy nor for instant profit gratification.
In summary, Ghanaï¿½s ability or capacity to obtain funds from the China Development Bank, insofar as the current arrangement falls within the CDBï¿½s go-global energy-backed credit framework, is squarely dependent on the quantity of oil Ghana can deliver to Chinese buyers, and in particular how much of that quantity (described in terms of ï¿½barrels per day equivalentï¿½) resource flow is owned by the government of Ghana, which is the borrower. The anticipated cashflow from Ghana's oil sales abroad is not a perfect proxy for the quantity of oil Ghana can supply to Chinese buyers, though it is also important since it is related to the government's future liquidity risks. This capacity to supply must be demonstrated rigorously, and is likely, along with oil pricing, to be the main subject matter in any protracted negotiations.
In Ghanaï¿½s case, the very limited proven size of the absolute resource endowment (notwithstanding potential prospects) suggests a reduced capacity to use upstream enticements to supplement or complement the above-mentioned resource-flow and cashflow (i. e. as a way of reducing the emphasis on "total capacity to supply crude oil to Chinese buyers") .
The decision to award the gas infrastructure contract to Sinopec cannot therefore fully compensate for this lack of upstream and associated opportunities because such contractual goodies are already provided for in the agreement in the form of the requirement to award 60% of the value of all contracts to Chinese vendors. It is instructive to recall that the $3 billion package was first mooted during the Exxon-Kosmos crisis, and that it foundered for the simple reason that the opportunities for upstream investment are few and most are yet to mature.
Will government of Ghana enjoy sufficient intake from crude production (for onward supply to China) and cashflow from oil sales next year to release the considerable amounts of Chinese money it seems to require for its economic agenda next year and do so smoothly and on time? That is the question. Luckily we donï¿½t need to conjecture, we only need to look at the figures to answer the question.
Government of Ghana received about $450 million in actual total receipts in 2011. Perhaps unique amongst all commentators, IMANI had consistently described the $1 billion total receipts figure that has been widely bandied about as unrealistic. In the final event, the actual receipts were closer to the estimate we projected in our analysis prior to the commencement of oil production than any from any other quarter, including the IMF.
The amount received by government roughly corresponds to a share of oil production amounting to about 13,000 barrels per day (at the average price of $90 per barrel used in the official accounting). Under the law, about 30% of these receipts are required to be allocated to the reserve accounts (the so-called Heritage and Stabilisation Funds), leaving 8400 barrels per day as the governmentï¿½s due share of total production volume in Ghana.
Despite assurances in the 2012 budget and elsewhere, there are grave doubts about a significant boost in the production volume of the Jubilee field. Nor is there much chance of more corporate taxes being paid by the oil production companies (so-called Jubilee field partners) in 2012 compared to 2011. Seeing as the oil companies paid $0 in 2011 in corporate taxes and considering that their capital costs recovery dynamics will not change in 2012, there is little to justify a higher projection than 8,000 barrels as the share of production volume due to government of Ghana.
Let us even be generous and allow a significant rise in production at the Jubilee field. Let us say by 50%. The share of crude oil production due government shall still not exceed 12,500 barrels per day.
For ease of analysis, we have left out the portion of total receipts by the state which must be transferred to the GNPC to enable the latter meet, among others, its participating interest obligations (more than 30% of total proceeds in 2011). The implication is however that the total number of barrels of oil per day due government is significantly lower than 12,000 barrels of oil per day. To make our subsequent points, this level of rigour is sufficient.
Per the CDB credit determination technique in place for energy-backed loans that we have discussed above, this means that should Ghana be treated between the extremes of Venezuela and Brazil, we could be entitled to a loan amount of about $40 million per each 1000 barrels government pledges to deliver to Chinese buyers.
From the preceding analysis, it follows that at our current level of oil production and government entitlement, we do not, ordinarily, qualify for more than $500 million from a resource-based credit-worthiness perspective, per the CDB approach. In fact, of all the countries that have benefitted from this CDB energy-backed product, Ghana is by far the smallest producer of oil and its available government-allocated oil-tied collateral is the lowest and weakest.
Note that we are not saying for a fact that Government of Ghana shall pledge or sell its entire intake of crude oil production to Chinese buyers. Rather we are saying that this is the maximum quantity of crude government can rigorously demonstrate in negotiations with the CDB as likely to be available for supply to Chinese buyers, an important criterion in determining the size of credit a borrower country may qualify for in the CDB energy-backed credit framework. Nor have we commented on the implications of servicing the loan on Ghana's macroeconomic health or the legality of using the government's share of oil proceeds to service loans for infrastructure outside the areas designated in the applicable law. We are currently concerned solely with Ghana's credit-worthiness in the eyes of the lender in question for the size of loans the administration appears to require for its infrastructure program within the context of a peculiar credit-assessment method in use by the CDB in particular.
Per the credit-assessment method afore-described, any amount of money loaned to Ghana beyond $500 million is a windfall due directly to a relaxation of standards on the part of the CDB. It is only fair to assume that any such relaxation of standards would be accompanied by significant hand-wringing by CDBï¿½s credit officers over such matters as pricing for the oil and delivery schedules and logistics. In effect, CDB is already being quite generous from a ï¿½borrowerï¿½s capacity to payï¿½ point of view by pledging a $billion in short-term disbursements. To expect $3 billion in 2012 is to stretch credulity.
It is true that the energy-backed loans technique discussed above does not take into account the fact that a government may choose to service its loan obligations by dedicating a larger percentage of actual oil income, and even supplement this amount with income from other sources, than its cashflow in barrels-per-day equivalent may suggest, but the CDB knows the pressures on the average emerging country government as well as any of us, and its technique, discernible from the statistical model we have discussed in this report, emphasises, as we have discussed already, total capacity to supply actual, unencumbered, oil to China and not just cashflows from the oil resource from multiple sources.
What does all this mean? Quite simple, really. Government should not neglect to optimise all its other revenue sources in a frenzied pursuit of the CDB loan. We are saddened by the continued slow disbursement of already committed money that has led to many infrastructure projects languishing in various stages of abandonment all over the country.
We believe the delusion about easy overseas money is partly to account for the underperformance of several contracts on the domestic scene where funds have already been secured and committed. This is a subject to which we shall return in due course.
For now, all we will say to the ruling Administration is: do not put all our eggs in the CDB loan basket.
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