What “due diligence” seeks to cure: PDS in focus

Up until 30th July 2019 when it was suspended, the Power Distribution Services (PDS) Ghana had been responsible for the operation, investment and management business of the Electricity Company of Ghana (ECG), following government’s decision to execute the second Millennium Challenge Compact (MCC) with the United States.

According the Government of Ghana (GOG), which through the Ministry of Finance (MoF) and the ECG announced the suspension of the PDS/ECG concession agreement, its decision follows the detection of “fundamental and material breaches of PDS’s obligation in the provision of Payment Securities (Demand Guarantees) for the transaction which have been discovered upon further “due diligence.” According to government, the Demand Guarantees were key prerequisites for the lease of assets on 1st March 2019 to secure the assets that were transferred to the Concessionaire.

Following the suspension, one institution that have been criticized the most for failing to ensure the project meets its intended objectives, is the Millennium Development Authority (MiDA), the supervising agency of the MCC Compact, that embarked upon a competitive procurement process, resulting in the selection of 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.

MiDA as a GoG organization established by an Act of Parliament (Act 702, 709 & 897 as amended), and serving as the Accountable Entity (AE) for the implementation of the Compact, have been faulted for gross negligence in the award of the concession agreement. That it skewed the procedures to create room for the PDS consortium to win the bid even though they did not meet certain key criterion, such as having the necessary balance sheet to manage an investment as huge as the ECG. That it did a shoddy work by rushing to meet the deadline of the second MCC Compact, and failing to carry out “due diligence” before signing the contract — instead of now trying to do the due diligent after the fact. It has equally been accused of connivance in its duty as lead advisor, and waiving a substantial number of the “conditions precedent” and committing them as “conditions subsequent.

However, MiDA maintains it followed due diligence throughout the handing-over process, and that they did not massage the process.

MiDA’s Role

Government, just like any other client may require a special unit, such as a consulting/advisory or a “management and implementing” body to complete tasks that its internal staff or functionaries cannot perform due to, for instance, a lack of expertise, existing commitments, regulation and policies, or a need for an unbiased opinion.

In the case of the ECG Financial and Operational Turnaround Project (EFOT), which seeks to introduce a private sector participant in the management and operations of ECG, the involvement of MiDA as the Accountable Agency (AE) for the implementation of the Compact, is to oversee, manage and implement the programs under the MCC for poverty reduction through economic growth as set out in each agreement between the GoG and the Millennium Challenge Corporation acting for and on behalf of the Government of the United State.

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In this capacity, MiDA was supposed to lead in the process of identifying and selecting the best qualified private sector partner of ECG, through competitive bidding; a process that may have introduced PDS (all things being equal) as the Concessionaire. It is also by a Monitoring and Evaluation (M&E) Plan, to determine whether the Projects are on track to achieve their intended results, and evaluate implementation strategies, provide lessons learned, determine cost effectiveness and estimate the impact of Compact interventions.

Being the Project Lead/Manager, MiDA holds the responsibility to carefully evaluate all the documents, processes and assets submitted as part of the transaction, analyze issues and provides professional or expert opinion/advice to assist government (and other clients) in making decisions or in performing it tasks towards the implementation of the concession agreement.

Ethical Considerations

As a Project Lead clothed with the responsibility and authority to oversee, manage and implement the programs under the MCC, MiDA may be exposed to a wide range of ethical dilemmas, such as accepting responsibility for a project’s success or failure, refusing to succumb to pressures to suppress facts or stating falsehoods and half-truths, treating all stakeholders as equal and protecting their respective interest, not “taking sides”, maintaining confidentiality and fairness, and insisting on maintaining the best approved processes.

Catambay (2017) submits that “many ethical issues are encountered in project management, and the bigger the project, the more opportunities arise for persons or entities to compromise their ethics.” For instance, Project Leads and other stakeholders in an effort to bring the project in on time and on budget may turn a blind eye to questionable activities. The results of taking such compromised positions are often disastrous — blown budgets, legal trouble and even criminal charges are all too common in today’s business environment.

A Project Lead/Manager true to his or her profession has to be capable of making the “right” choices when ethical lines have to be crossed, rather than simply plump for the most “convenient” or non-controversial option (Shouche, 2008). Meaning, they must be capable of carrying out their duty ethically and responsibly; and deliver services with integrity and high professional standards to avoid unnecessary costs, and reputational damages.

Due Diligence

One question that remain to be answered by MiDA is “when, and to what extent was due diligence carried out on documents, processes and assets submitted as part of the transaction agreement.”

Dubrawsky (2010) defines “due diligence” as practices of an organization in identifying risks and implementing strategies to protect the assets of an entity. These assets can include data, equipment, employees, and other elements that are of value to an entity. Fay and Patterson (2018) refers to due diligence as the care a reasonable party exercises before entering into an agreement with another party. The objective of the inquiry, they argue, is to confirm all material facts regarding the agreement under consideration. This clearly suggest that due diligence by itself is a “condition precedent.”

However, Wimmer (2015) concedes that all too often the level of due diligence that should have been undertaken before, are carried out after problems surfaces. 

As an expensive and exhausting process aimed at reviewing records and facilities, due diligence is by its nature highly intrusive, and places considerable demands on managers’ time and attention throughout the negotiation phase. The process requires the creation of comprehensive check-lists aimed at assisting managers learn about a company’s assets, liabilities, contracts, benefits, and potential problems; across the physical, financial and legal spectrum (DePamphilis, 2011).

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Thibodeau (2010) suggest that businesses are required by law to establish and maintain due diligence. Meaning, it is non-negotiable for every business, since it focuses on legal concepts to shield claims of negligence, as prospective relationships are evaluated with respect to the potential for adverse consequences.

In banking for instance, due diligence review is one of the many instruments put in place to manage risk. It relates to the background work like investigation, analysis, and verification done by a prudent entrepreneur, owner executive, or lender when making a decision. In trade deals, the seller and buyer will want to check out the other party’s bona fides. The seller wants assurance that the buyer has the financial wherewithal to finance the purchase, and the buyer wants assurance that the seller’s property is worth the price (Mareddy, 2017; Fay and Patterson, 2018).

One can therefore easily conclude that the concept of due diligence is closely related to “due care” which seeks to set a minimum necessary standard of care to be employed by persons/entities in consistently scrutinizing their own processes, practices and assignments to ensure that they are always meeting or exceeding the requirements for protection of assets and stakeholders interests. It is essentially a way of preventing unnecessary harm to parties in an agreement, with the general motive hinged on avoiding financial, social, legal, or environmental liabilities, and reputational risk; aside those that are clearly defined in an investment proposal.

According to Conrad, Feldman, and Misenar (2016), persons are deemed to have exercised due diligence, and as a result cannot be considered negligent, if they were prudent in their investigation of potential risks and threats. And that If a person or an entity were compromised in a manner that caused serious financial damage to their consumers, stockholders, or the public (clients); one of the ways in which the person or the entity would justify its actions or inactions is by showing that it exercised due diligence in investigating the risk to the client and acted sensibly and prudently in protecting against the risks being manifested.

It is the view of Moberly (2014) that, any business transaction due diligence team that fail to see or produces dismissive assessments of a target’s assets, which remain key in achieving an expected result, has truly failed to live up to the expectations in their responsibilities to provide decision makers with the highest quality insight.

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.

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