Privatisation or private participation in ECG?: Considerations

By: Ferdinand  D. ADADZI

There are many challenges facing us as a country, which the expectation is that the new government will urgently address. One that seems to be quite immediate is the power supply challenges, which are now topical due to the news that scheduled maintenance of the West Africa Gas Pipeline was rescheduled and fuel supply challenges may cause that to result in some power outages.

The government, in its first week in office, has to urgently deal with the problem to avoid such disruption to power supply for both domestic and industrial use. In the midst of the various press releases and statements on dealing with the imminent power supply challenges, the Government has mentioned that it may look at privatisation of ECG.

The President and his nominated minister of energy indicated that the government is looking at the option of privatisation or private participation.

Privatisation or private participation & the models

Privatisation as a tool to get private sector parties involved in public service delivery involves a number of different models that must be carefully thought through based on the specific problems identified and the role private sector parties must perform in order to overcome such a problem(s).

Privatisation, in the strict sense, involves the transfer of ownership, control and management of a state-owned enterprise or entity to a private sector party. However, in the broad sense, it can mean any involvement of a private sector party in the delivery of traditional public service, usually through a right granted contractually by the government to enable the private sector party to deliver the public infrastructure and related services.

The recent unsuccessful private sector participation (PSP) in the operations of the very entity at the center of the discussion – the Electricity Company of Ghana Ltd (ECG) – is strictly not privatisation. The PSP was an arrangement to get a private sector player involved in the power distribution under the ECG without transferring the ownership and control of ECG.

This was implemented under the second Compact signed between the Government of Ghana and the United States of America. Many reasons account for the unsuccessful implementation of the concession arrangement opted for under the PSP under the Compact.

Full privatisation strictly undertaken will involve the transfer of ownership of the public sector entity, which generally is the transfer of the shares. There can be partial privatisation, where the government continues to hold some ownership.

Privatisation can also be implemented as an asset transfer arrangement. As many will recall, a number of privatisations were implemented during the PNDC era, where a number of statutory corporations were divested under the auspices of the Divestiture Implementation Committee.

In order to divest ownership, the statutory corporations were converted to companies pursuant to the Statutory Corporation (Conversion to Companies) Act and its legislative instruments that listed fifty-one corporations to convert.

Interestingly, this included ECG, which was converted from the Electricity Corporation of Ghana, a statutory corporation, to the Electricity Company of Ghana Ltd, a private company limited by shares whose shares are solely owned by the government. That is, whilst it was converted, it was not privatised, and the government still retained the full ownership as a sole shareholder.

Other models for getting the private sector involved in the provision of public infrastructure and related service delivery include various options under public-private partnerships (PPPs). Various contractual arrangements are used, including concessions, operations and maintenance, build-operate-transfer, build-own-operate-transfer, rehabilitate-operate-transfer, and many more models, which are covered under the Public Private Partnership Act, 2020.

Management Contracts are not covered under the PPP Act but come under the Public Procurement Authority Act. Outsourcing without the transfer of operational and financial risk also does not come under the PPP Act but remains an option for involving private participation.

Considerations for ECG privatisation

A decision to adopt privatisation or private participation as a solution must be based on many considerations. First, in deciding to involve private participation in ECG’s operations, one needs to have in mind that there are two general competing interests at stake.

A private party’s ultimate interest is to maximise profit and shareholders’ value, whilst that of a public entity or government is to have sustained provision of services at the most affordable tariff.

The private and public parties do not, therefore, have the same perspective. A private party is focused on its investors, whilst a public party is focused on the consuming public. The government entering into such public-private arrangements must, therefore, have clear key performance indicators to ensure sustainable provision of services at affordable tariffs. This is particularly the case given the near monopoly ECG enjoys, at least in the southern sector.

Secondly, if the numerous problems facing the power sector are traced to the distribution segment of the power sector, be it technical and commercial losses, political interference, inefficient management, improper procurement, technological challenges, setting of realistic tariffs, collection of revenue, etc., or a combination of any of these, are to be overcome through some form of private participation, the right model for the private participation must be determined. Clear identification of the problem must drive the decision on whether privatisation or any form of private participation is the right tool and, if it is, what model must be adopted.

The emphasis here is that a proper diagnosis of the problems facing the power sector is required for a determination of the solution to implement. Private sector involvement in the sector may not be appropriate to resolve all the problems facing the sector.

For example, if the problem is with realistic tariffs, the involvement of the private sector will not change the under-recovery of the cost of power generation, transmission and distribution.

If private sector involvement is the proposed and most efficient solution, one must determine the right model for such involvement. As pointed out above, there are many models to involve a private sector party. This could involve actual privatisation, where the government divests its interest wholly or partially.

In seeking to do this, the right legal framework must be strictly followed with proper economic, technical, commercial and financial due diligence informing clear benchmarks that must be set for the divestiture. It must be quickly added that even though this is an option, it is an unlikely model given the strategic nature of ECG, its critical role in the power sector and the security concerns.

Other models under the PPPs can also be looked at. The PSP option implemented under the Compact resulted in the grant of concession to the private party consortium. The current framework for PPPs in Ghana is the Public Private Partnership Act, 2020.

\Other than specific exemptions, any contractual arrangement between the public entity and private party for the provision of public infrastructure and services traditionally provided by the government, where the private party performs all or part of the infrastructure or service delivery function of the government and assumes defined risks over a significant period comes under the purview of the PPP Law.

As noted, outsourcing of specific services, be it management of the operations under a management contract or revenue collection, will not come under a PPP arrangement once there is no assumption of financial and operational risks by the private party. This must be guided by the Public Procurement Act.

For the implementation of any of these models to have any significant impact in the medium to long term, the structure of implementing the selected model must be informed by key considerations, including proper value for money assessment, clear and measurable output specifications based on key performance indicators, transparency and fairness in the adopted procurement process based on the proper procurement cycle with clear steps and objective measurable criteria, safeguards for public interest, environmental and social consideration, affordability, proper risks allocation, well-drafted contracts with clear obligations and performance indicators, etc.

One of the problematic requirements in the implementation of the selection of a private party involvement is the requirement of local content and local participation, particularly where the technical and financial capabilities required can only be satisfied by foreign players. Currently, the regulations fixed the minimum equity level for local participation at 30% at the start and moving up to 51% in ten years.

This is the area where political patronage comes into play, leading to issues of corruption. A situation where a local party without the necessary financial and technical capability but with the right political association is imposed on a foreign counterpart generally leads to challenges as the very problem of political interference in the management of public operators is transferred into the private party management.

Successful privatisation or public-private contractual arrangement requires expertise from different fields – technical (electricity, asset evaluation, loss reduction expert, service quality standards), financial (valuation, financial modelling, tariff analysis, funding structure, etc.), legal (regulatory, contract drafting and review, environment and social regulations, license and permits, etc.), economic (market analysis, cost-benefit analysis, policy impact assessment, risks, etc.), environment and social, project management, risk management, institutional, and governance, etc.

The right transaction advisor with the combined relevant expertise is required. In addition, this does not simply call for engaging a foreign consultant. The problems are local. A transaction advisor must appreciate the local nuances of each relevant field to understand what is required.

Last but not the least, any decision on privatisation or private participation in the operations of ECG must be taken after broad stakeholder consultations. It is important to get input from relevant stakeholders to make an informed decision and garner implementation support.

The stakeholder engagement should not be listed to regulators and government entities but include business associations, civil societies, relevant labour unions and other relevant stakeholders.

Conclusion

Whilst this article does not argue that privatisation or private participation is the solution to the power sector challenges, it indicates that adopting privatisation or private participation in any of its many forms must be based on a proper assessment of the challenges, clear identification of the problem and a well-thought-out solution.

If privatisation or private participation is to be adopted, the model must be fit for purpose. The appropriate framework must be adopted, and the right advisors must be engaged to guide the process, which must be devoid of political patronage. Above all, there must be broad base stakeholder engagement to have buy-in and support for any decision and its implementation.

[1] Ferdinand  is a Partner at AB & David Africa, a pan-African business law firm with independent offices in six (6) countries and a network of firms in 30 African countries. He is a member of the firm’s Energy, Infrastructure & PPP Group, Corporate & Finance Group and Government Business Group. Ferdinand has over twenty-one years of experience advising government and private sector entities on infrastructure transactions and power projects. He is also a senior lecturer at GIMPA Faculty of Law, lecturing in Company Law and Contract Law.

He has many publications to his credit, including a seminal textbook on Company Law titled ‘Modern Principles of Company Law in Ghana (R. Ed)’.

Contact: Tel: 233 (0)24 226 2180

Email: [email protected]

The post Privatisation or private participation in ECG?: Considerations appeared first on The Business & Financial Times.

Read Full Story