IMANI Special Report on the STX-Ghana Deal

Monday, July 05, 2010

housing estateSince the STX-Ghana deal took its sour turn towards controversy, many people have asked us, usually privately, what a pro-market organisation such as ours is doing “opposing” a business deal that seems to benefit the private sector more than the public sector.

Quite apart from the fact that such a question betrays a woeful lack of understanding of the “free market” it is also unfair to our actual position on the STX-Ghana matter.

The free market does not necessarily prioritise the benefits of private gain over the public interest. What its proponents seek to argue is that in economic matters where the allocation of resources is at stake the market tends to lead to superior outcomes for ALL concerned, public as well as private.

For the market to work properly,  however, it is important for the roles of the private and public sectors to be complimentary and properly appreciated by all parties. In the particular instance of the STX-Ghana deal what we have is a muddled mixture of value propositions in which neither the unique strengths of the public contribution nor that of the private sector are clear.

That is not to say that we are implacably opposed to the deal. Far from it. We believe that the underlying principle is sound. Capital is a major problem facing this nation as it strives to build the infrastructure to support entrepreneurship and in effect create the conditions for resource accumulation. We believe governments in this country should explore as wide a variety and as innovative a mix of capital-attracting ventures as possible to enable them to lay the groundwork for enterprise-driven development to take off in this country.

President Nkrumah’s dealings with the American company Kaiser followed this same logic. To the extent that there were flaws in that deal that would progressively lead to its spectacular unravelling a half-century or so later and a near-collapse of our aluminium industrialisation plans, through the abandonment of VALCO for instance, we have every reason not to assume that such public-private partnership deals can sort themselves out without the active examination of the actual merits of each specific contract by those mandated by our laws and norms to do so.

As things stand now, Parliament of Ghana does not have sufficient information before it to make the right and necessary determinations relevant to this STX-Ghana contract. Unless, of course, the documents that are in the public domain have so radically changed now that all the missing gaps have been filled. If the latter is the present situation then it behoves on our elected representatives to publicise the latest findings. It is their duty as legislators to respond to the public mood. They are paid with taxpayer funds to do a job, which consists in safeguarding the public interest. They must be attuned to the public mood and actively seek to engage all diverse opinions. It is not our duty as civil society to hound parliamentarians to listen to us. Their mode of dealing with the public should not be restricted to petition and formal correspondence. Civil society is not paid to engage with Parliament. Parliament, both in its political and technocratic forms, receives public compensation to proactively seek to better execute its constitutional mandate, and it can only do that by vigorously engaging all shades of opinion once a matter attracts strong public anxiety.

As things stand now, the conduct of the Parliament of Ghana has been the least commendable in this whole affair. It is Parliament that by its conduct and misconduct has betrayed the confidence of stakeholders across this country regarding its capacity to act diligently and steadfastly in the supreme interest of the people of Ghana. If Parliament would turn a new leaf and begin to engage in a full and comprehensive discussion about the contents of the various documents and statements before it, and do so through open and televised public hearings, many minds that are objective shall be laid to rest in the notion that our most capable and committed representatives are treating our delegated sovereignty with respect. Public interest may then be assured.

Our experience working in Ghana gives us cause to doubt that this shall happen. Therefore, in this further comment on the issue, we shall be aiming to provide a structured account of the different types of opposition facing the STX-Ghana deal. There has been a tendency to muddle up these different categories of unease with the resulting confusion over what kinds of remedy might suffice to salvage the deal.

We believe these categories can be grouped under three broad headings: A. Administrative Competence B. Value for Money and C. Financing Viability.

1. Administrative Competence

The Supplier’s Credit Facility document that was sent by the Ministry of Finance to Parliament was a depressing example of putting the cart before the horse. It summed the deal up as follows: “Ghana” wants to buy 200,000 houses through the mediation of a certain entity (STX Engineering & Construction Limited). Of these 200,000 houses, 90,000 would be directly purchased by the “Government of Ghana” for onward sale to members of the public. Since the whole deal is spread over 5 years, Government of Ghana wants to buy 30,000 of its commitment in the first year for the use of its security services.

The said entity would give Government of Ghana a well-priced loan to buy these 30,000 units, which, recall, Government of Ghana would sell on to its Security Services. But to secure this loan, said entity requires Government of Ghana to provide a sovereign guarantee to demonstrate that it shall indeed do all in its power to repay the borrowed monies even if it is unable to recoup the money from members of the Security Forces that end up buying the building units. Because Ghana is not as credit-worthy as some other sovereign governments that can more readily issue dollar-denominated debt to settle their undertakings, it was suggested that future earnings of some of Ghana’s more fungible commodities be used to bolster the word of Government of Ghana.

Since Government of Ghana’s (GoG) take from gold, which accounts for nearly 90% of all traditional commodities traded by this country, amounts to approximately $100 million per annum, it follows that for a deal of such substantial magnitude (more than $1.5 billion) Ghana’s yet to be pumped oil is best placed to act as “collateral”. This is particularly important since this entity that seeks to loan “Ghana” money is not already in partnership with a bank or other financial entity. It now seeks to enter into such a partnership. The speculative nature of such a transaction therefore requires that beyond the sovereign guarantee a “commodity swap” also be considered.

But that immediately raises the issue of “who” exactly this “entity” is, that requires us to guarantee that when it goes and borrow money for us to buy its products we shall pay.

According to the documents made available to Parliament that are in the public domain, this entity is owned by “Ghana and Korea”. It is a Ghana – Korea joint venture.

This is curious to say the least. It is far from clear what this means exactly. Does it mean that the entity is owned by Government of Ghana and the Government of Korea? Or by private interests in Ghana and private interests in Korea? How exactly is Ghana represented in this entity? How has said partnership been structured to achieve its stated objectives?

The importance of this point is such that in answering it we may find that we are dealing with a “third party” supplier credit facility. That is to say this entity (let us call it “Financier” for now) wants us to give it a guarantee backed by “commodities” – which by the way the Ministry, without further elaboration, says isn’t oil – to go and look for a loan for us (and for their trouble to be paid nearly 1% of what they borrow) so that we can buy products made by a third, albeit somewhat related, party – STX Korea.

The fact of the matter is that we are not privy to the documentation and other governing instruments that set up the Financier (STX Engineering and Construction Limited) here in Ghana. We are not therefore in a position to comment on the credit ratings of its members, especially because we do not know the exact lineage between the seller of these products we are buying – STX Korea - and the Financier – STX Engineering & Construction Ltd. Therefore we are not protected through an equitable sharing of risks between STX Korea (whose credentials have been used to drive this whole process) and the Government of Ghana which seems to be bearing risks on both the buying and financing side.

For parliament to have even considered evaluating the suppliers credit facility without having been apprised of the actual joint venture documents between the members of STX Engineering & Construction (including incorporation documents) in order to determine the proportion of risks on the financing side being borne by STX Korea is worrying indeed. To what extent is STX Korea shielding itself from risk by using the STX Engineering and Construction Limited vehicle? How exposed is government of Ghana in this risk-fencing vehicle? How assured are we that the terms of future transactions beyond the $1.5 billion shall accord with the strategic principles based upon which Ghana is ready to borrow and spend $1.5 billion (more than a one-third of the domestic budget) immediately in the hope that the remaining $8.5 billion shall be much more concessionary as is being speculated?

Furthermore, once the deal was broken down to these bare elementals until it became essentially a purchase order by the Government of Ghana, serious aspects of the procurement law came into play. Parliament ought to have sought clear legal advice on this aspect at least. Could government place an order for 30,000 houses without putting the ortder to tender? Note that this matter only arises because the bare bones of the deal now suggest not a joint venture but a direct purchasing order since GoG appears to be bearing all the financial risk.

Moreover, Parliament had no description of goods attached to this purchase order. A unit of housing isn’t a concept in abstraction. It is a tangible good. For parliament to approve of government borrowing it had to, of necessity, be assured that the goods are in “good order”. Why the unseemly haste? Where were the documents attesting to feasibility, addressing land tenure issues, containing actuarial and other studies regarding the suitability of the target market (security forces), etc.

What exactly was Parliament evaluating is the question that boggles the mind.

2. Value for Money

This is the aspect of the transaction that has been most discussed. We will be rehashing many of the salient points already made by the various professional bodies if we spend too much time on this matter.

It is baffling though the way GoG, especially the Ministries of Finance and Works & Housing, have chosen to treat the genuine concerns of civil society. From accusations of ignorance/obtuseness to motive-questioning dismissals, every response has been steeped in contempt.

But the joke is on GoG and not the other way round. The truth is that the average price of a unit in the portfolio is more than $50,000, and when land and other costs being borne by government are accounted for the costs rise to an average of between $55,000 and $60,000. The truth is that GoG has previously mentioned $10,000 as closer to the mark as far as its financial notion of affordable housing was concerned.

The fact that some houses will be cheaper than this amount and some will be more expensive should be a source of embarrassment to all those taking the deal as it currently stands seriously. We are negotiating to spend hundreds of millions of dollars and even at this late stage are still speculating over what may or may not be the actual facts on ground? If planning is at such an early stage, why the rush to secure parliamentary approval? Approval for what exactly?

What we do know is that more than half of the units in the portfolio shall be one-bedroom apartments. This is extremely worrying because it means that the average “price per room” is even higher than previously supposed. It in fact means that we are hovering to close to $40,000 per bed (recall that the 3- and 4-bed units in the portfolio are almost insignificant in quantity terms)! What is that on a per sq. meter basis?

The “per room” analysis could of course be enriched by taking into consideration all “kinds” of rooms, including kitchens and lavatories etc. But the plain fact is: we don’t know enough. We have no idea what package we are getting. That is why it is necessary for the cost per sq. meter variable to be disclosed. Even were we to use a laxer per-room analysis of costs and ignore per sq. meter factors, so that we treat each of the one -and two-bed units as consisting of 4 and five enclosures respectively (kitchen, living room, and lavatory inclusive, that is) we still approach a cost of AT LEAST $10,000 per room in this looser definition, regardless of location. $10,000 per room!

The argument, often made by supporters of the deal as it stands now, that we are not properly accounting for the communal infrastructure is another hollow one. What “communal infrastructure” exactly? Parts of the agreement place some of this burden on the government, suggesting that STX Korea would probably be more interested in the income generating infrastructure such as malls and billable amenities rather than the sunk-cost items. Even amenities like schools and hospitals can be profitably underwritten by third parties such that they become another source of revenue for the product seller – STX Korea. Fact is they should tell us exactly how these amenities are to be laid out so we can judge whether they are embedded in the cost burden to the taxpayers of Ghana. At this moment, it is more instructive to expect that these amenities are catered for separately in a manner further advantageous to STX and its affiliates than to the Ghanaian taxpayer.

All in all, the value for money dimension remains to be properly explained to the public.

3. Financing Viability

Here is the question: who made the determination that if we get $10 billion even on the most lenient of terms, we will want to splash it all on housing? Who made the determination that security service personnel should necessarily take precedence over doctors and nurses or teachers and farmers?

Were these determinations, notwithstanding who made them, driven by the financial imperatives? Where is the record of analysis then? Who said Ghana wants to triple its public debt to solve 10% to 15% of its housing problem as opposed to its health, education or agricultural headaches? And that it wants to do so in the next 5 years? Where is the cost-benefit analysis that says that returns from housing shall be superior to returns from roads, hospitals, railways, ports, venture capital, schools, irrigation dams, or sanitation systems?

When STX said it was interested in selling 200,000 houses, could we have said that since this is ultimately “our” money we want the builds spread over these categories of infrastructure based on this extensive analysis of our infrastructure needs?

This continuous parroting of the phrase that “others can find money and come and build other stuff” by senior government officials is worrying. Ghana cannot absorb all the debts it want, because debt has fiscal implications both in the medium and the long-term. We must rationalise and prioritise our expenditure. The key to rationalising expenditure is to determine the cost-benefit matrix as a requisite framework for accessing the financial viability of any deal. Can $10 billion spent on housing strengthen our capacity to generate more resources to meet our other needs than $10 billion spent on carriage infrastructure such as roads, irrigation canals, ports and railways? Who has done the analysis?

The fact that someone is ready to sell you products of theirs worth $10 billion does not mean that you must buy them without question.

Peradventure, this “specific $10 billion” is great for housing because of the specific terms. That is another way of putting the question (note that we are committed to buying all the 200,000 houses, but per the MOU are required to buy 90,000 upfront).

When this whole STX saga begun, hints were persistently dropped that the Korean government was going to cushion the entire expenditure with generous development financing. Unless we are talking about a complete grant that still does not alter the fundamental issue at stake: which is prioritisation and rationalisation of national expense. And even if the government of Korea out of the bounties of its heart decide to grant us, say, a $2 billion gift shouldn’t we be in the position to be able to say something about what we had rather spend it on?

But once again, speculation, speculation, speculation. Where is the official Korean Government policy statement regarding the interest of that good country in giving us billions of dollars for free? Is there anything before the Parliament of that country suggesting that the country intends to boost its TOTAL development assistance from approximately $900 million per annum today to an amount that will make even a $1 billion per annum grant to Ghana alone (not even the whole of Sub-Saharan Africa) feasible over the next five years, i.e. the life of the STX deal?

The claim by STX Engineering & Construction that a sovereign wealth fund in South Korea has expressed an interest in participating in the transaction doesn’t change the situation. Every fund would love to be part of this deal once the order has been secured. This is a sweet deal, with limited to no risk for the dealmaker on the provision side. What is important is that this is not free money.

What is even more puzzling regarding financing viability is the lack of any fund-raising strategy document before parliament seeing that no Bank guarantee was attached to the supplier’s credit facility instrument laid before the august body. How does STX Engineering & Construction Limited, which is by all indications only a few months old, seeking to raise $1.5 billion plus? Even if it aims to rely on the credit of its members – supposedly STX Korea and Government of Ghana – how does it aim to justify to financiers that Ghana has a mortgage market deep enough to absorb such a quantity of houses in such a short period of time? Where is the analysis? Where is the feasibility study? Where is the plan? Shouldn’t parliamentary approval be sought only after all this work has been done? After all, we’d rather Government didn’t have to exercise the guarantee after all, not so? We’d rather the entire project was commercially self-sustainable and a great revolving mechanism to deepen our real estate market, not so? Shouldn't we insist on a robust financial plan then?

Or is it a case of “try your luck, what’s there to lose”?

That suspicion leads us to side with those who say that with the kind of business plan that has been submitted Government is better off setting up a broader fund and doling out sovereign guarantees to all stakeholders in the construction industry through such a fund, and in a comprehensive manner that makes the STX deal but a subset of an overall fund-raising for the real estate sector strategy.

Because, with “try your luck” you never know who may hit the jackpot. After all, the agreement does not give any indication whatsoever that government has any interest in penalising under-subscription. Which means therefore that eventually secured funds do not have to be $1.5 billion, much less $10 billion, but rather any amount would do fine, at least per the current strategy as laid before parliament.

The notion therefore that this is a “capacity” matter is wholly flawed. STX Engineering & Construction has never raised a dime in its short life. The hit and miss approach adopted provides no especial reassurance that it shall be able to raise the money. It is in much the same boat as any other entity in Ghana that can interest any giant construction company to sell 200,000 of its products to the good people of this country. And it is easy to interest giant companies suffering expansion pangs about selling billions of dollars of their products at minimal risk. There is no ready-cooked financing on the table here. With an offer to sell on one hand, an offer to buy on the other hand, all "start-up hustlers" have the same chance in the game.

So the much trumpeted “capacity differential” between Ghanaian companies and STX Engineering & Construction is nebulous. Any Ghanaian who manages to convince Taysec, say, that it would be a good idea for Taysec to sell 200,000 houses risk-free should, under the standards set, be entitled to full government support and guarantee so it can go around looking for easy money, and, per the standards set, it doesn’t really matter what amount exactly it can raise. The offer by government to the real industry sector in this country to secure a financing commitment before coming to the table is thus discriminatory and should not be countenanced. Fair competition is the hallmark of the free market.


Far from being implacably opposed to the STX-Ghana deal, IMANI is in fact supportive of the general principle. We argue for greater transparency about the fiscal risks to Ghana. Once we have substantially mitigated the risks to the country, and duly acknowledged that this is a hit and miss deal, the principle should allow for the opening up of the scheme for all interested dealmakers to prosper from the same “benefits of the doubt” being showered on the proponents of the STX-Ghana deal.

Courtesy of IMANI Center for Policy & Education, an independent, non-partisan, policy advocacy organisation and, the pan-African platform for independent analysis.

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