Why an ESLA-backed energy bond must not be “pure” public debt

Seth Tekper, former Minister of Finance under President John Mahama's administration

An issue under current discussion is whether Ghana should add the ESLA-backed Energy Bond it is about to issue to public debt, instead of remaining on VRA’s Balance Sheet—as assigned to a special purpose vehicle (SPV) called ESLA Plc.

ESLA means Energy Sector Levy Act, 2015 (Act 899). Ghana has issued an ESLA Bond Prospectus and roadshows are underway for investors, at home and abroad.

We understand that the IMF takes a public debt view for the 5th ECF Programme Review. Our view is that, even if this multilateral view prevails, Ghana should keep-to-plan and not classify such bonds or loans as public debt in the Public Accounts sent to Parliament—provided we continue to take certain concrete steps under the new debt management policy.

As noted later, we have precedent as guide and good reason to argue forcefully against this retrogressive step since the Bond is backed by a special sovereign levy.

In other instances, in our medium-term plan for debt sustainability, we are using our oil revenues to establish appropriate financial market structures and instruments.

An example is the use of the Sinking Fund to partially take off the 2007 Sovereign Bond. A better option, as happened with the first 2016 ESLA loan, is to assist Ghana to consolidate the verifiable steps being taken to classify such a bond or loan as a “contingent liability” that crystalizes upon default.

If the value of the ESLA Bond does not exceed revenue estimates from the levy—and current debt service flows that add to escrows—the levy is an implicit guarantee by taxpayers and power consumers. Hence, if the Bond is made a pure public debt, it adds an explicit (sovereign) guarantee dimension that leads to its over-securitization or extreme state undertaking.

In technical terms, it is “double counting” since, even if the Bond value exceeds the ESLA and other proceeds, in computing our Debt Sustainability Analysis (DSA), the multilaterals must add only the proportionate excess bond value to public debt, until a default occurs, if any.

Basically, we are engaged in a VRA (and other SOE) debt restructuring exercise, noting that VRA and GRIDCo used to borrow on their own balance sheets.

Why we had to enact ESLA

The Government took the ESLA Bill to Parliament to (a) raise funds to pay energy-sector SOEs debt, notably for VRA; (b) minimize the non-performing loan (NPL) impact of such debt on domestic and foreign banks as well as suppliers; and (c) improve the Balance Sheet of the SOEs to make them play their envisaged future roles in an oil-and-gas era.

These roles include stable power supply and, mainly, meeting their financial obligations to banks, suppliers, and independent power producers (IPPs) under the World Bank Partial Risk Guarantee (PRG).

We must stress that the PRG is also an alternative to a sovereign guarantee and a “contingent liability” that is backed by our IDA resources.

Hence, the guarantee will be recalled when the SOEs fail to collect the bills for power consumed to pay for gas supplied from the Sankofa Fields. It implies the use of those IDA resources to settle any default.

We also note that the Millennium Challenge Corporation (MCC) Compact II is complementary in enabling ECG and downstream energy SOEs to meet their PRG and other obligations for power supplied by VRA, GhanaGas and private sector IPPs such as Sunon-Asogli.

Further, the weak SOE balance sheets are due to unpaid subsidies for power consumed and operational inefficiencies that must be resolved in restructuring plans. While the subsidy conundrum is not new, the related outstanding SOE debt from unpaid direct loans and letters of credit (LCs) continue to weigh heavily as NPLs on our banks.

We cannot afford the shock of other bank collapses. Suppliers also threaten to call explicit (e.g., promissory notes) or implied (i.e., shareholder) guarantees for unpaid bills for gas supplies. The two-and-half years disruption in gas supply from Nigeria had worsened the situation.

We must be aware of precedents

When we entered the ECF program in 2014, the IMF mission insisted that BOG must “sweep” the Sinking Fund (set up with flows from the Stabilization Fund under the PRMA) into the Consolidated Fund for general use and to reduce the budget deficit.

Ghana argued that the opposition to the Sinking Fund and the Ghana Infrastructure Investment Fund (GIIF) means we must use our oil revenues for consumption and not to manage our debt and improve infrastructure.

To date the Sinking Fund is technically a negative budget-financing” or “deficit-reduction” item, not a verifiable asset (cash) or reserve used to offset total Public Debt (i.e., liability) on the Balance Sheet of the Public Accounts presented to Parliament by the Controller. We must persist in changing this non-accounting classification by coding our debt stock and flows in the Chart of Accounts (COA) under the Ghana Integrated Financial Management System (GIFMIS) reforms.

Secondly, the US$ 1.0 billion Sovereign Bond (liability) issued in 2015 was never set off against public debt in the DSA even though it is still “guaranteed’ fully by the World Bank.

The full amount was also deposited in a verifiable BOG account (asset) in a New York Bank since we undertook to use the entire proceeds to refinance or replace existing debt. Hence, until we completed the refinancing in 2016, our public debt was “grossed-up” or inflated by the value of the Bond.

This double-counting is the result of not treating the debt as a contingent liability that should crystalize only if we were to misapply the funds—considered remote because of the New York escrow account.

This extreme “developing country” approach to “grossing-up” public debt—a classical form of single-entry or cash accounting—violates the rules which households, businesses, and (middle-income and advanced) countries use to prepare Balance Sheets—incidentally, under the IMF Government Fiscal Statistics (GFS) rules for preparing government accounts.

Given Ghana’s enduring MIC status, it should be assisted to continue with its adoption of alternative accrual accounting rules, as best practice and structural change, under the International Public Sector Accounting Standards (IPSAS) that the Controller, Auditor-General and Institute of Chartered Accountants, Ghana (ICAG) have all approved.

The way forward for Ghana

We strongly propose that, whatever treatment the multilaterals give to the ESLA-backed Bond, Ghana should continue to create the necessary “asset” accounts to move our debt methodology to an accrual or “contingent liability” basis.

This “smart borrowing” approach will require that we persist in allowing the oil revenues to flow into “asset” accounts such as the Sinking Fund, Debt Service Reserve Accounts (DSRA), GIIF, ESLA and other Escrows.

Secondly, some of the Escrow accounts fall under the “self-financing” rule that requires that we use flows from SOE and other commercial projects to pay or service direct and guaranteed loans for such projects. We must resist the temptation of diverting these debt and infrastructure accounts for consumption, notably when we get into tight fiscal situations that may be due to policy misalignments or external factors beyond our control, such as precipitous falls in commodity prices.

Third, the risk of increase in public debt is real, if we do not manage the levy well. However, the opportunity cost of not issuing the Bond is higher, given the potential collapse of more banks under the weight of SOE debt, as happened with the Capital and UT Banks.

This will be more disastrous for the economy than any theoretical debate over “grossing-up” and “contingent liabilities”. Parliament must make the ESLA law certain by placing a firm “sunset clause” on the levy and more firmly legislating its use to settle specific SOE debt. In this regard, a key issue is whether the ESLA levy itself will last 10 or 15 years—in line with the tenor of the Bond. We must be transparent on this issue, if the delay in issuing the bond under an earlier shorter term syndicated loan means an increase in the SOE debt.

A fourth appropriate medium-term goal is to take advantage of the additional oil flows to make the “energy” bond as enviable as the “cocoa” bond in the future.

This requires that we clarify the fiscal status of ESLA Plc, in relation to the goal of using the Ghana Infrastructure Investment Fund (GIIF) as the sovereign wealth fund (SWF) to spearhead a commercial loan strategy for Ghana. Fifth, we must also set up and strengthen the Debt Management Office (DMO) under the PFM Act, as part of the shift to accrual accounting.

In line with the Chart of Accounts (COA), we must implement the codes assigned to debt instruments and related assets or reserves in the Public Accounts, under the PFM or GIFMIS reforms. This will require SOEs and CAGD to record all transactions, simultaneous with deposits and disbursements at Bank of Ghana and commercial banks.

We are aware of the failure to build national consensus around the new debt management or “smart-borrowing” strategies, given the politics and chorus that made the “nominal” debt a deafening key issue. It is time to build this consensus in the national interest, given the “turnaround” in the economy as well as a potentially entrenched MIC status—that require us to use part of any increased oil revenues to plan for the gradual but inevitable loss of access to concessional loans and grants. We must have a healthy subsidy and SOE performance policies to avoid any form of retrogression on our new debt strategy.

Moreover, as the IMF and World Bank admonish in other contexts, we cannot afford to be categorized among the countries that are accused of dissipating their natural resources endowments on mainly consumption.

It is against this background that the multilateral agencies and development partners must take our debt management strategy seriously. The right approach is to offer technical assistance to Ghana to achieve these goals, as the World Bank Treasury, Commonwealth Secretariat, and IMF Fiscal Affairs Department (FAD) have been doing.

This will enable Ghana to correct any flaws that may exist in administering the new debt policies—it is retrogressive to take the easier option of continuing with cash accounting and “grossing-up” our public debt. (The writer is the former Finance Minister of Ghana)