Downside of power compact identified; Deal to cost US$133m in tax exemptions

The US$500 million Millennium Challenge Corporation (MCC) support for the energy sector will occasion a loss of about US$133 million to the state as a result of tax exemptions that will be offered to private sector participants under the MCC programme, the Trades Union Congress (TUC) has estimated.

The focus of the compact, which was signed in August last year, will introduce independent power producers and private distributors in electricity supply, as well as the privatisation of the Electricity Company of Ghana (ECG).

According to the Public Utility Workers Union (PUWU) and the Public Services Workers Union (PSWU), both a branch of the TUC, under the second compact of the United States sponsored Millennium Challenge Corporation (MCC), the government is required to waive all taxes related to the project.

“What they are bringing is actually US$400 and something. What adds up to make it the US$500 is Ghana government money which is counterpart funding to the project. And even that US$400, the agreement says that government should waive all taxes related to the project. 

“And by the computation, about US$133 million will be lost to tax exemptions and that is money that should come to us. So if you take that from the US$400 and something then what money are we talking about here,”  Deputy General Secretary of the PUWU, Mr Michael Adumatta Nyantakyi, said in an interview with the GRAPHIC BUSINESS in Accra.  quizzed.

As part of an effort to address power generation and supply challenges in the country, the government signed the second MCC Compact dubbed: “Ghana Power Compact” which seeks to double the access to power, improve the energy sector with special attention for scaling up Private Sector Participation (PSP) in Electricity Company of Ghana (ECG).  

The compact, which is said to be the largest US government-funded transaction under President Obama’s Power Africa initiative, intends to invest up to US$498.2 million to support the transformation of Ghana’s electricity sector and stimulate private investment.    

Already, the US company, General Electric, is set to deliver a total of 1,000 megawatts of power in 10 years, with an initial 360 megawatts expected by September next year.

However, the Public Utility Workers Union (PUWU) and the Public Services Workers Union (PSWU) of the Ghana Trades Union Congress in a position paper suggested that government and the MCC should adopt a phase approach for privatising ECG. 

They want the next three years to be used to allow the various reform interventions initiated by ECG itself to become fully operational and assess their impact on the company’s efficiency and profitability. 

The unions maintained that the proposed approach under the compact to solve the challenges facing the power sector, does inure to the country’s interest.  

“A wrong diagnosis of a problem will bring about wrong prescription which will not solve the problem. The fundamental problem in Ghana’s energy sector is a shortfall in generation and that should be tackled as a matter of urgency,” they said. 

“What we are saying is that ECG has put a number of interventions geared towards addressing these challenges. So we are telling government that instead of rushing to package the juicy part and give to a private operator why not look at the schedule because that is going to be the solution,” Mr. Nyantakyi said.

The five-year compact is designed to create a self-sustaining energy sector in Ghana by reforming laws and regulations needed to transform the country’s power sector. 

The government is expected to invest US$37.4 million in the initiative, to bring the compact’s total investment to US$535.6 million. 

Mr Nyantakyi said the issue of capital in the power sub-sector could not be fully addressed by the MCC inflows.

Focusing on ECG 

According to him, the main difficulty with power and ECG is the government’s failure to pay its bills; 40 per cent of ECG’s monthly bills go to government which it does not pay up. 

He wondered why the government whose attitude was undermining ECG’s capacity to support the country’s economic development was indebted to ECG to the tune of over GH₵1.25 billion, more than 62 per cent of ECG’s total debt.

That, he said, led ECG to manage the remaining 60 per cent and that if government paid its bills, ECG would not only reduce its losses significantly, but would in turn be able to pay the independent power producers (IPPs) and the Volta River Authority. 

“Which company can operate efficiently if it is continuously denied 40 per cent of its planned revenue? Because this is a crucial factor, the MCC has made it a condition precedent for the disbursement of the second tranche under the compact. If government can comply with this condition and pay its debt as well as allow the automatic tariff adjustment formula to operate because of the MCC compact, why wouldn’t it do so to make ECG and VRA run efficiently?” he asked. 

He added: “It is our firm position that if the challenge of power supply is not first addressed, the much touted PSP will only bring about increased tariffs and accumulation of profits for the private operator whose ultimate objective is not the betterment of the national economy and the Ghanaian society.”  

Current power challenges and Labour’s concerns 

The country is experiencing its worst load shedding as a result of a generation deficit of about 450 megawatts.The ECG began a load-shedding programme earlier this year following the announcement of over 500 megawatts of power they had to shed.

As of December 2014, the ECG owed Volta River Authority (VRA) about GH₵935 million, GRIDCo about GH₵200 million and Sunon-Asogli about GH¢400 million.  

According to the unions, rural electrification was a loss-making component, which made ECG a manager of a mixed profitability grid of both the viable and non-viable customers. 

Therefore, the MCC compact proposal to hive off Accra and Tema to a private operator would lead to a deceleration of the rural electrification programme and only increase the speed of rural-urban migration which was already a major challenge confronting the country. 

“Wherever privatisation of PSP has been carried out in the energy sector, tariffs have ultimately gone high. The key question is whether Ghanaians are ready to pay higher prices for reliable power supply,” they said.