1

FINANCING POWER PROJECTS IN GHANA AS A CATALYST FOR POWER

SECTOR REFORM

*Marcia Ashong

ABSTRACT: In an earlier note the author looked into Ghana‟s current Power Sector, a
system debilitated by increased outages and seasonal load shedding. One of the major
findings was that (and as evidenced from examples of successful liberalisation reforms)
increased private sector participation is key to forging Ghana ahead of several failed attempts
at reforming its power sector. This piece looks at how this may be achieved, and
distinguishes Project Finance as the appropriate means to do so. The analysis will focus on
the project financing of a Gas Fired Power Plant with its Gas Source, with a thorough
assessment of some major risk areas, and a careful look at the benefits associated with
bringing the volume risk in-house for the first time in the country‟s history.

* The Author has earned a Bachelor’s in International Relations and Political Science (University of
Minnesota), a Bachelor of Laws LLB (University of Exeter) and is currently pursuing a Masters
Degree in Energy Law and Policy from the Centre for Energy, Petroleum, Mineral Law and Policy
(University of Dundee)
 2

TABLE OF CONTENTS

ABBREVIATIONS 3

1. INTRODUCTION 4

2. WHY PROJECT FINANCING? 6

2.1. Project Finance and Economic Growth 8

2.1.1. Project Financing Developed vs. Developing 9

2.1.2. Project Financing in Ghana‟s Power Sector 10

3. IMPLICATIONS OF A COMBINED CYCLE GAS TURBINE 11

3.1. Why CCGT for Ghana? 12

4. GAS FIRED CCGT PROJECT FEASIBILITY AND RISK ASSESSMENT 14

4.1. Technical Aspects 15

4.2. Political and Country Risks 16

4.2.1. Licensing and Permits 17

4.2.2. Regulatory Issues 18
4.2.3. Country Specific Risks 21

4.3. The Role of Equity and Lenders 22

4.4. Fuel Risks and Gas Markets 23

4.4.1. Gas: West African Gas Pipeline and Jubilee Gas 24

5. CONCLUSION 26
 3

LIST OF ABBREVIATIONS

BOO Build Operate Own

BOT Build Operate Transfer
CCGT Combined Cycle Gas Turbine

CEPMLP Centre for Energy, Petroleum, Mineral Law and Policy

DGO Domestic Gas Obligation

EC Energy Commission
ECA Export Credit Agency
ECG Electricity Company of Ghana
EIA Environmental Impact Assessment
EP’s Equator Principles
FDI Foreign Direct Investment
GOG Government of Ghana
GSA Gas Supply Agreement
IPP Independent Power Producers
MIGA Multilateral Investment Guarantee Agency
MDB Multilateral Development Bank(s)
MW Megawatt
PF Project Finance/Project Financing
PPA Power Purchase Agreement
PPP Public Private Partnership(s)
PP Power Project(s)
PURC Public Utilities Regulatory Commission
TA Tolling Arrangement
TOP Take or Pay
WAGP West African Gas Pipeline
WB World Bank
MW Megawatt
 4

1. INTRODUCTION

The current power sector in Ghana, like many other capacity short environments is
distinguished by constant load shedding and power outages which continue to get worse each
year. Previously the problem was associated more with drought seasons as Ghana became
heavily reliant on hydro-power. More recently, however, causal lines are being blurred,
current outages are resulting from connection loses and poor maintenance of transmission
lines, and the Electricity Company of Ghana (ECG) a State owned entity, which is tasked
with the distribution of electricity to consumers is at the centre of the issue.

Ghana‟s power sector is still a predominantly State owned and run system and therewith lies
its major fault. It is a basic premise of this piece that for Ghana to step out of this trend a
robust private participation should be spearheaded, this paves the way for competition, which
further paves way for lower prices for end users (the ultimate goal). The vital difference
between State monopolistic control and a competitive environment (by competitive the
author means, the availability of various independent and privately owned power plants), is
the allocation of risk, “the placement of risks is what [ultimately] provides the incentive to
improve.”1 Sally Hunt defines some of the main risks in the power sector to be: “Market
demand and prices, technological change rendering plants economically obsolete or at least
uncompetitive, management decisions about maintenance, manning, and investment, and
finally credit risk.”2 Essentially, under a competitive structure, these risks instead of being
borne by the consumers (who bear the upside and downside risks: in Ghana the government
bears majority of these risks as consumer price is largely subsidized to shield from that
effect) are borne by the individual plants (subject of course to mitigation through contracts),
each plant is responsible for most of the above indicated risks, and pay for bad decisions
while profiting from the good. Herewith lies the profit incentive to be efficient.3

It is perhaps easier to ring the bells of competitive reform than it is actually easily achieved.
That granted, it is obvious that a major draw for private participants in any infrastructure
project is the ability of such a participant to secure the funding needed to carry out the

1
Hunt, S., Making Competition Work in Electricity, 28 (2002)
2
Ibid
3
See ECG example, long-term efforts have been in place to improve efficiency of ECG operations but the
situation continues to worsen.
 5

project, preferably through limited or non-recourse project financing (PF), which offers the
chance for creditors to repay loans strictly out of the project revenues ( and off-balance
sheet). The author would, however, advice against public private partnerships (PPP), (PPP for
the purpose of this paper, would be referred to as power projects which involve an element of
State ownership), as these projects, at least in Ghana‟s experience, seem in practice to deter
private participation.4

The following therefore is a guide to the government in providing a conducive environment

for private participants but also a lender and investor manual, because knowing that majority
of Independent Power Producers (IPP‟s), shy away from high equity participation5, mainly
because they simply cannot afford such huge infrastructure projects, the main drive then is to
go for a commercially structured loan in the form of PF. The paper will examine PF from the
lens of a specific project, that is, a Gas Fired Power Plant (Combined Cycle Gas Turbine,
CCGT), with its source, either from the newly established West African Gas Pipeline
(WAGP), or as Gas from Ghana‟s own Jubilee field, set to be in production phase in the final
quarter of 2010, (both sources ultimately designed to provide cheaper fuel for the power
sector). The purpose is to provide an analysis of some of the unique risks associated with
financing such a power project in Ghana, and also ascertain the benefits derived from having
the volume risk in-house. The final result would be to establish the effect such a project
design would have on risk allocation and in influencing the lenders decision.

The author wants to make a clear distinction between the decision to invest and the decision
of a lender as to whether a project is bankable. The main difference between the two being
that the decision to invest lies with the IPP itself and may include several other factors,
whereas the decision of the private lender is based solely on the bankability of the project in
question. The author examines solely the lending decision, as a function of the decision to
invest. Though these concepts are differentiated here, it is also important to bear in mind that
if a project cannot be viewed as bankable from the lenders perspective, what the lenders will
not take is a strong signal to sponsors that the project should not commence.6

4
Malgas, I., Energy Stalemate: Independent Power Projects and Power Sector Reform in Ghana, 23, MIR
Working Paper (2008) “although private and public plants are both created to generate power, the way they
are treated is different and this treatment might undermine the achievement of their overall objectives.”
5
Dow, S., International Project Finance: Risk Identification, CEPMLP International Project Finance Lecture
Notes (26 March 2010)
6
Ibid
 6

2. WHY PROJECT FINANCING?

Over the past three decades PF has become an important tool for financing large-scale and
high risk domestic or international infrastructure projects.7 In fact, following the success of
the North Sea developments (the first large-scale PF)8, PF has been the preferred tool and
used extensively to develop natural resources (mid and downstream), electric power plants
and various other infrastructure projects. “Globally, firms financed $328 billion of capital
expenditures using project finance in 2006, up from $217 billion in 2001.”9 In 2009 alone
Global PF volumes reached $292.5 billion despite the 9% downward trend in general loans as
a result of the global financial crisis, as compared to the 320.9 billion raised in 2008.10 Figure
1 below shows the trend upwards in global PF volumes from 1994 to 2006.

Figure 1 Project Financed Investment 1994 to 200611

7
Megginson, W.L., Kleimeier, S., An Empirical Analysis of Limited Recourse Project Finance, Maastricht School
of Management, and University of Oklahoma (2001)
8
Ibid
9
Esty, B.C., Sesia, A., An Overview of Project Finance and Infrastructure Finance, 1, Harvard Business Review
(2007)
10
Dealogic Global Project Finance Review, Final Results, 1 (2010) [hereinafter, PF Global Review]
11
Esty, Supra note 9, at pg. 19
 7

But the appeal of PF does not lie solely with its popularity but with its structure and results.
The concept behind PF is straight forward, it can simply be defined as “the development or
exploitation of a right, natural resource or other asset, where the bulk of the financing is not
to be provided by any form of share capital and is to be repaid principally out of revenues
produced by the project in question.”12 In other words it is a comprehensive, yet flexible
financing option that demands a long term approach, a concept atypical of conventional
lending practices. PF can be distinguished from other private commercial loans in that
repayments are based solely on project revenues, while interests and rights are held as
security. For private lenders who are naturally predisposed to risk aversion the implications
are immense. By lenders relying solely on the project revenues for loan repayment, they not
only take the credit risks (the risk that the sponsors would be unable pay back loan plus
interest), but also the risk that the project is successful and that adequate revenues would
result for loan repayment purposes. A consistent theme to bear in mind therefore is the risk
sensitivity of lenders, they will only assume measurable risks, in other words banks will not
lend to a project without performing carefully structured due diligent exercises.13 From the
lenders perspective projects are only successful where repayments are consistent, so

12
Vinter, G.D., Price, G., Project Finance, 1 (3rd ed. 2005)
13
Vinter, G.D., supra 8, pg 7
 8

conditions outside this scenario are frankly not in their interest. The realisation, therefore, that
lenders will not particularly be concerned whether the “lights are on or off” for power sector
financing, produces some interesting results, which would be analysed later in this paper (see:
chapter 4.2.2.).

Accordingly, The typical PF process usually involves the establishment of a Special Purpose
Vehicle (SPV), sometimes known as the project company,14 (the utilization of the SPV is
practical for many reasons, one of which is, for a non-incorporated SPV‟s for example, a
petroleum Joint Venture (JV), they create a separate task haven, due to the non-legal nature
of the entity), the allows for an avenue for multiple sponsor participation and sharing of the
venture‟s risks, and any funding is obtained strictly for the project itself.

2.1. Project Finance and Economic Growth

All that said, what makes PF especially attractive to a “developing country” like Ghana? It
helps fund “new investment by structuring the financing around the projects own assets,
without additional sponsor guarantees [of course post completion test]” therefore the method
of project financing is designed to alleviate investment risks and raise funds at relatively low
cost to the benefit of investors,15 with the result being that investors who may otherwise not
participate because of insufficient equity actually do as a result of thr PF opportunity. It is
generally assumed that the prime objective of any project sponsor will be to try to “prevent a
collapse of the project having an adverse impact on their balance sheets through lower equity
participation,”16 this would also be the general assumption of this paper, though, as shall be
demonstrated later, having higher equity stakes has positive implications on the projects risk
profile.17

Additionally, it cannot be understated the effect PF financing has on freeing up governments

funds. Power projects for example are extremely capital intensive ventures and such high

14
The author will use SPV and Project Company interchangeably
15
Ahmed, P.A., Fang, X., Project Finance in Developing Countries, 1, International Finance Corporation (1999)
16
Vinter, G.D., supra 8, pg 1
17
See Chapter 4.3. for further discussion of equity participation and risk profile
 9

volumes of funds should frankly not be spent by governments, there isn‟t any practical
reasoning behind such high government expenditure except perhaps private participation
proves scarce, but taking that out of the equation, government involvement through
borrowing at high premiums is not smart economics.18 Freeing up such funds and vesting the
raising of the finance to the private sector enables the development of other national goals,
(this is especially important for developing countries). With the availability of private capital,
thus, it is difficult to conceptualise, the use of government funds, especially in a decade
where the old paradigm of publically owned utilities has been discredited as a trend of the
past.19

This is the view of the World Bank (WB) which has identified three main reasons for the
creation of private participation in the power sector, these include:

 the high cost of such projects making them well beyond the financial remit of
governments and multi-national institutions,
 the lack of government resources needed to manage these massive infrastructures,
 and the belief that the private sector acting under competition can create the
necessary efficiency needed to manage such projects.20

2.1.1. Project Financing In Developed vs. Developing Countries

There is no doubt then that PF can have positive effects on the economics of a country, by
taking the government out of the picture and placing most of the risks on the private sector,
this is the trend in almost every market. The question however is whether PF is more
beneficial to developing countries than elsewhere. The truth is that developing countries do

18
In Ghana’s case, the Takoradi Thermal Plant the only active CCGT project in Ghana had an estimated cost of
$244 million which included both the cost of the existing plant and the expansion project, of this amount 60
million came from an IFC approved loan, the rest was split between the two Stake holders: the GOG, (which
obtained further WB loans and guarantees earlier in the project) and the IPP CMS Michigan. There is no reason
why the GOG continues to seek loans with high repayment obligations when the same function can be served
taking the government out of the picture and using private sponsors.
19
Ashong, M., Continuing Power Sector Reform Amidst High Cost Power Generation, 4, CEPMLP Downstream
Energy Law and Policy Research Paper (2010). With increased volatility in energy markets as fuel prices
continue to rise, coupled with growing demand for energy, States have been unable to sustain the costs
related to running their own utilities and are increasingly handing them over to the private sector.
20
Baker & McKenzie, The Guide to Financing Power Projects, 4 (1996)
 10

not benefit more from PF than their developed counterparts. The benefits are the same, in
both scenarios PF increases private participation and in both scenarios PF encourages
competitive behaviour. An investor when making its investment decision will often depend
on the lenders assessment of the bankability of the project, the fact that the country in
question is a developing country usually plays a role when assessing the risks inherent within
the project itself. When dealing with developing countries the factors that usually deter
lenders are the conditions on the ground that make projects prone to increased risk.

The design therefore, of PF in Africa for example will focus more directly on the unique
circumstances on the ground which would make the project prone to failure or loan default.
Ghana for instance would have a completely different risk profile than Nigeria, though both
can be labelled “developing”,21 there are clearly differences in the way risks would be
allocated and mitigated in Ghana than they would be in Nigeria. Political risks for instance
would be higher in Nigeria than Ghana for the mere fact that Ghana‟s political reputation is
considered more mature than that of Nigeria. But even with these differences, it is a general
trend that PF continues to grow in Africa. It is on this backdrop that the rise of project finance
in the region has been considered particularly novel. There have been double digit increases
each year (except 2008 due to the global financial recession) in PF volumes in the region, a
clear indication of the unique mechanisms being used to allocate and mitigate risks. Figure 2
below illustrates the growth by region of infrastructure finance, with Africa seeing close to a
30% growth in PF volumes since 2004.22 Energy continues to be the leading sector with
power projects in particular sending Middle Eastern and African PF volumes to $ 12.3
billion, up by 41%.23

21
Developing in the sense of economic development
22
This trend can also be partly attributed to the enhancement of local lending capacity, which has allowed for
credit risk sharing, see chapter 4.3. for further discussion
23
PF Global Review, supra note 10, pg. 4
 11

Figure 2 Project Finance Volume by Region24

2.1.2. Project Finance in Ghana’s Power Sector

Ghana‟s power sector, however, has not experienced such a surge in IPP‟s. PF in the sector
has been minimal at best. Currently, in industry PF is mostly utilized in the mining and
petroleum sectors.25 There are only two major IPP‟s currently in operation in Ghana of which
one is a PPP, and two power projects in their developmental stage: TAQA (the Abu Dhabi
National Energy Company), TAQA‟s interest lies with the Takoradi Thermal Facility Project,
a CCGT26 [hereinafter TII], (TAQA acquired its interest in the project after the project was
already in operation, majority of the projects funding before it became a stakeholder was
provided by the International Finance Corporation27), Balkan Energy Company LLC which
owns 100 % interest in the Osagyefo Barge Power Plant, and privately funded, Infra Co
Limited and Cenpower (a Chinese IPP) both projects are still in their development stages.
Infra Co‟s goal as a project developer is to stimulate private participation in low income
24
PF Global Review, supra note 10, pg. 3
25
Legal 500, Ghana: Project Finance, at http://www.legal500.com/c/ghana/project-finance (Last visited, 25
April 2010)
26
TII is the only operating CCGT program in Ghana, it has a total installed capacity of 550MW, Volta River
Authority, at http://www.vra.com/Power/thermal.php (last visited, 25 April 2010)
27
World Bank, International Finance Corporation, ‘Summary of Project Information,’ at
http://www.ifc.org/ifcext/spiwebsite1.nsf/b7a881f3733a2d0785256a550073ff0f/e2b6a2585ba22ab9852576b
a000e25c6?OpenDocument (Last visited, 25 April 2010)
 12

power sectors by taking equity stakes in projects thereby decreasing the amount needed in
private loans. PF, therefore, in the Infra Co project is non-existent.28 Cenpower on the other
hand operates mainly from Chinese Government funds or State owned bank loans29, which
are not limited recourse loans. Ghana‟s power sector, therefore, can be largely viewed as
being relatively PF shy.

3. IMPLICATIONS OF A COMBINED CYCLE GAS TURBINE PLANT

The rest of this project analysis will focus on the financing of a Combined Cycle Gas Turbine
(CCGT). The choice is simple, a CCGT plant has many advantages not least because as a
fairly new technology it is one of the most efficient systems for the generation of electricity
that there is in the world. The technology is designed to use multiple energy sources to create
power, the turbine uses the heat from the turbine exhaust to boil water, which then produces
steam, the steam then powers a steam turbine and second generator,30 producing twice the
amount of electricity for the same fuel costs, (see figure 3 below for illustration). Also among
its appeal is its low carbon emissions profile. Considering that gas contains less carbon per
unit energy than coal, a well constructed high quality CCGT plant, “running optimally at full
capacity in baseload can produce electricity at a 55% delivered thermal efficiency compared
with a conventional coal or oil plant operating at 35% efficiency.”31 The CCGT plant
therefore produces only 40% of the CO2 that a conventional coal-fired power station
produces, and 75% of that produced by a conventional oil-fired power station, for the same
amount of electricity output.32

Figure 3 CCGT

28
Infra Co: Infrastructure Developer, at
http://infraco.instyledm.com/portal/hgxpp001.aspx?40,3,29,O,E,0,MNU;E;5;1;MNU;, (Last visited, 26 April
2010)
29
Brautigam, D., The Dragon’s Gift: The Real Story of China in Africa, 82 (2009). To promote the performance
of Chinese companies Bank of China opened up branches in various African cities to help facilitate loans and
make it easier for Chinese companies to enter new territories.
30
Vinter, G.D., supra 8, pg 379
31
Bower, J., A 20:20 Vision for Reducing Carbon Emissions from the UK Electricity Sector, Oxford Energy
Comment, Oxford Institute for Energy Studies, (2003), at http://www.oxfordenergy.org/comment.php?0303
(Last visited, 21 April, 2010)
32
This is especially important for Ghana because among its recently released ‘Energy Vision 2009’ was a vision
for the long-term goal of carbon emissions and renewal energy generation
 13

3.1. Why CCGT for Ghana?

Aside from the above indicated advantages, CCGT is particularly attractive to Ghana‟s power
sector as a country which needs to wean itself off reliance on hydro-power. The high
dependence on hydro-power is one of the major reasons Ghana continues to experience
power outages. Choosing hydro thus would be economically detrimental, and for PF purposes
create increased risks associated with drought (this would involve a complicated force
majeure risk assessment, which then begs the question; who would be willing to take the
force majeure risk?).33 Hydro-power generators have also become less popular due to their
drastic environmental impact.34 If the ultimate aim is to find the most efficient and risk
sensitive project for Ghana‟s power sector, hydro power is most likely not the answer. There
is also evidence to show that lenders are disposed to financing high quality projects even in
dire financial situations, therefore the type of project involved (not just whether risks are
easily allocated) plays a vital role.35

33
Considering the adverse effects climate change is having on world weather patterns, leading to increases in
droughts, hydro-power would particularly vulnerable in parts of low recorded rainfall
34
For PF purposes environmental impact assessment has become a vital hurdle in the loan approval process,
especially with the advent of the “Equator Principles.” We shall look more into environmental standards and
the Equator Principals when assessing the environmental risks
35
See for example the T-Power CCGT green-field project in Belgium, which received financial closure in 2008
even at the height of the global financial crisis at which majority of lenders in European markets halted
lending, the success of securing lending has been attributed partly to the fact that the project itself was
considered of high quality. International Power, Annual Report 2008, at,
 14

Furthermore, with the arrival of natural gas from the West African Gas Pipeline (WAGP),
which started operation in early 2010, and the possibility of in-house Gas from the jubilee
field in Ghana, both offering cheaper fuel and further reducing production costs, it seems the
most sensible approach would be to rely on a CCGT plant which requires fuel source that is
fairly consistent. Figure 4 below is an indication of Ghana‟s electricity generation by fuel;
natural gas is almost non-existent in Ghana‟s current energy supply mix. Therefore the
proliferation of CCGT plants in the region would go a long way to balancing this trend and
limiting hydro reliance. The following therefore would be a risk assessment of a CCGT
project with its Gas source for the Ghana electricity sector.

Figure 4 Electricity Generation by Fuel36

https://docs.google.com/viewer?url=http://annualreport2008.ipplc.investis.com/pdfs/case-studies.pdf (Last
visited 28 April 2010)
36
International Energy Agency, Energy Statistics: Electricity Generation by Fuel, Ghana, 2009, at
https://docs.google.com/viewer?url=http://www.iea.org/stats/pdf_graphs/GHELEC.pdf (Last visited 29 April
2010)
 15

4. GAS FIRED CCGT PROJECT FEASIBILITY AND RISK ASSESSMENT

Assessing the risk profile of a project has the effect of making it easier to understand its
scope. It therefore allows the various stakeholders to mitigate and manage these risks and to
allocate them to the parties best able to bear them, accordingly, it is important that each party
understands what their various interests are as well as the interests of their counterparties. For
the purpose of this paper it will be the assumed that the project sponsors have already been
predetermined. Since this is not a PPP project, State involvement will be limited to
assignment of authorisation (consents, guarantees, regulatory measures), or as general off-
taker (though not exclusive). The following will split the various risks into several categories
and analyse each in turn.

4.1. Technical Aspects

Figure 5 below is a chart of a typical power project contractual matrix. For our purposes, to
get optimal performance from the plant, the proposal is for a similar project as the T-power
plant, in Belgium which reached financial closing in 2008. The proposal is for a 420MW
greenfield CCGT plant, based on a full turnkey engineering procurement and construction
(EPC) contract.37 Just like the T-power plant, it is proposed that the project uses the best and
latest technology, designed to in the long run stabilize the costs of production and enable
plant efficiency. The design of the plant should be ideal for both baseload and peak
generation, the current shortness in Ghana‟s power capacity, however, means that for a
number of years at least the plant will be running mostly at baseload to meet demand.38 A
gas-fired power plant on the other hand, is suitable to shifting between baseload and peak
because of its high “ramp rate”39 though any change in the future dynamics of the plant

37
An effective risk allocation mechanism designed to transfer full responsibility for delivering a fully
operational facility, at a certain date and at a fixed price, mitigates also the risk of failing to deliver the project
at its exact specification
38
The current demand in Ghana which sits at 10300GWh, of which current capacity (at an average water year)
lies at 9900GWh, at
https://docs.google.com/viewer?url=http://www.gipc.org.gh/Userfiles/File/Events/ipp_kpone.pdf (Last visited
21 April, 2010)
39
“The speed at which power can be brought on and off the grid.” Vinter, G.D., supra 8, pg 379
 16

would be determined solely by the advancement of the electricity market in Ghana. The
possibility of being able to adjust freely to the changing market demand is essentially another
reason why the CCGT is the best PP to finance.

Figure 5 Typical Project Structure for an IPP

4.2. Political and Country Risks

This refers to the political environment under which the project will operate. It would involve
not just a stable system for starting business but also the sponsors being able to access the
relevant permits or authorizations needed before commencing the project.40 Ghana‟s political
system is fairly stable, politically; it remains a low risk country as compared with some of its
African neighbours. This is partly to do with the relative ease at which it has transitioned
through several peaceful elections, coupled with the fact that it continues to be viewed as an
investor friendly country and remains a recipient of foreign direct investment (FDI).41 The
political environment in Ghana might therefore not be as different as say for a country like
the United Kingdom (UK), though the UK‟s liberalised electricity market might offer more of
a security blanket for investors.

40
Tinsley, R., Advanced Project Financing, 19 (1 ed. 2000)
41
World Bank Group, Multilateral Investment Guarantee Agency, Political Risk Monitor, at
https://docs.google.com/viewer?url=http://www.pri-center.com/documents/PRM_12.11.09.pdf (Last visited,
28 April, 2010)
 17

4.2.1. Licenses and Permits

Prior to any agreed detailed implementation agreement there would usually be a licensing
procedure (see: figure 5 matrix: “consents and approvals”). The licensing authority in Ghana
is the Energy Commission (EC) under Ghana Act 54142, part II of the Act stipulates the
general conditions under which a license may be awarded, leaving some level of discretion
on the licensing authority but a very high threshold for refusal (subject of course to pre-
qualification).43

Some systems introduce investors through build operate transfer schemes (BOT), or build
operate own (BOO). BOT or BOO tenders are forms of authorisation or concessions and
allows for private entities to come into a market to construct a facility stated in the BOT
document, and as the names suggests there may be a need for transfer of ownership after a
stated period, in our matrix above in figure 5, this is the same as the “implementation
arrangements” block. Because of its unique power sector (a mix between private and public
ownership), the GOG has often introduced IPP‟s not through competitive BOT/BOO tenders
but through negotiations. Notwithstanding the adverse effect the negotiated process has on
the country itself, it may be of more benefit to the private sponsors involved (essentially this
process is more risky for the government than the sponsor), for the sponsor:

 it is a fast and simple process

 the sponsor‟s terms are more likely to be accepted by the government
 the costs negotiated are not in direct competition with other sponsors as there is no
information symmetry through a competitive tender,
 this would ultimately put the sponsor in the driving seat of the negotiation

42
The Energy Commission ACT, 31 December 1997, ACT 541 (entered into force 31 Dec. 1997)
[hereinafter, EC ACT]
43
EC ACT, Ibid, § 14, “an application under section 13 shall be granted by the Commission unless there are
compelling reasons founded on technical data, national security, public safety or other reasonable justification
which shall be communicated to the applicant”.
 18

So far Ghana has been involved in two BOT‟s with the expansion of its hydro program.44 The
trend moving forward, is that concessions will be tendered in the future as Ghana advances its
electricity sector reform45, even more so there is ample pressure for transitioning economies
such as Ghana to introduce transparent private participation procedures and there is no other
proponent of this more so than the WB, which continues to be a major donor to Ghana.46
Essentially, however, the question to be asked is whether bidding or not bidding would be of
vital importance to the lender. The jury is still out on that question. What ultimately matters
to the banks is the nature of the project definition contained in the project implementation
arrangement, whether this was easily done through a bidding process or not seems not to play
much of a role, except maybe where there is strong evidence to show that negotiated bids are
on average more detrimental to the PF loan approval process, and so far there has been no
such study to show this trend. Another exception may be where the lender requires certain
WB guarantees of which a precondition might be the nature under which the license was
obtained. Ultimately, it is important that sponsors are aware of the rules of the particular
country. In Ghana‟s case, due to the nature if the power sector and the scarcity of private
players the result is participation through negotiations. Open bidding, however, does foster
competition and is the likely way forward for future participation. It is also important to bear
in mind that an asymmetrical process in the long run could create project conflict and
enhance political risks; guarantees offered in closed doors can easily be abrogated.

These implementation arrangements are designed to transfer a maximum amount of risk, for
example, demand, operating and finance, to the sponsors in exchange for some form of
exclusive operating license. It is important that where it is possible to negotiate the project
definition that the basic structure of a project is available without immense detail, the
existence of too much detail in the project definition could lead to the breach of the license,
especially where a specific detail is not adhered to, this would be important for lenders as
extremely detailed provisions might add more risk to the project. The provisions in the
implementation arrangement must have lucid terms for an isolated and assignable cash flow.
Lenders are particularly interested to know where the project revenues will arise. For the
purpose of this project if we assume that it involves the production of gas as part of the fuel

44
A 400 MW Bui project on the Black Volta and a 125MW project at Pra River
45
Baidoo, K.O., Build Operate Transfer: Can BOT Model Work for Ghana, at
http://www.modernghana.com/news/110323/1/build-operate-transfer-bot.html (Last visited 1 May 2010)
46
Klein, M., Infrastructure Concessions, to Auction or Not to Auction? Public Policy for the Private Sector, note
no. 159, World Bank (1998)
 19

source, it must be clear the impact having such a fuel source would have on the project;
would part of the cash flow be derived from the production of gas? If gas is associated, there
would almost always be a separate authorisation for the production of gas, this has to be
factored into the definition, are fuel costs to be passed through as a basis for the borrowing?
And how are domestic obligations going to affect the project definition? Also, would the
project be based on tolling arrangement (TA)? And what practical impact would the TA have
on the risk profile?47

4.2.2. Regulatory Issues

As well as the EC, sponsors and lenders alike need to be aware of the functions of the Public
Utilities Regulatory Commission (PURC), an independent agency, tasked with setting
electricity tariffs, efficiency, consumption and monitoring standards in the power sector.48 In
almost all developing countries, new greenfield power generation investments means
increased tariffs.49 In the case of thermal plants fuelled by oil or gas, the volatility of these
markets has led to high input fuel costs. These costs are most often passed to the purchaser
through the power purchase agreement (PPA). Unlike the oil sector which is largely
unregulated, the power sector even in the most liberal markets is underlined by some level of
regulation, in Ghana the most heavily regulated aspect of the power sector is the electricity
price for household consumers (tariffs). The economic viability of the project also depends
heavily on the consistency of the tariff rate, the government‟s credibility in honouring a
contracted rate level, and the effect this has on the project‟s cash flow,50 if the risk allocation
and price in the PPA are one sided, the supply price of power that results from the PPA may
turn out to be very high and economically unsustainable51 (especially for the low end
consumers). Since its inception, the PURC has embarked on a continuous effort to raise
consumer tariffs towards a more cost reflective position, even at the rate of increase, current
consumer charges are viewed as being ineffective to sustain the Volta River Authority (the
State owned off-taker) and the GOG is in constant battle with the VRA because it continues

47
The later sections will discuss the effects of a tolling arrangement
48
Public Utilities Regulatory Commission ACT, 16 October 1997, ACT 538 (entered into force 16 Oct. 1997)
[hereinafter, PURC ACT].
49
Energy Sector Management Assistance Program (ESMAP), Regulatory Review of Power Purchase
Agreements: A Proposed Benchmarking Methodology, 1, Formal Report 337/08 World Bank (2008)
50
Dailami, M., Lipkovich, I., Van Dyck, J., A Computer Simulation Approach to Risk Management in
Infrastructure Finance Transactions, 4, Economic Development Institute of the World Bank
51
ESMAP, supra note 49
 20

to default in its payments to the utility. A risk to the sponsor may be that of revenue shortfall
caused by a government subsidy on the consumer price of electricity.

The design therefore of any risk allocation would be determined by the PPA between the
project company and the full off-taker which is usually a state owned entity (in Ghana‟s case
VRA). For this risk not to fall on the project company, the PPA would have to be negotiated
with a credit worthy off-taker (VRA), who then bares the risk of regulatory tariff adjustment.
In this case even if the PURC subsidizes the consumer rate at a tune of say 60% of the cost of
production, the project‟s cash flows would be unaffected, because it would have met its
obligations as under the take or pay (TOP) and price clauses. PURC is further tasked with
reviewing the provisions of the PPA and to take into account the “the cost of production of
the service” and whether the cost of production is “justified and reasonable.”52 This is also
where the difference can be made between whether it matters for the “lights to be on or off,”
if the off-taker merely pays for the availability of the plant then the PPA needs to reflect this
because the risks of there being no power at all (say transmission defects) would not be
transferred to the plant, the price would naturally reflect this.

For a changing power sector like Ghana‟s, the PPA must have the result of not being tied to a
long-term uncompetitive price structure, it would need to be factored into the PPA a
mechanism for future adjustment based on the move to a competitive market (this may be
achieved through a market convertibility clause), if this is not done there is the risk that plant
may become redundant in the competitive environment, resulting in „stranded costs‟.

It is therefore vital that any provisions passing these risks onto the off-taker can be sustained
by the off-taker. In the case where for instance, the project may be under risk for the default
of the off-taker (VRA) further guarantees may be required from the government in order to
secure project loans. This may be in the form of third party assurances, for example letters of
credit from financial institutions, which are “often used to provide coverage to foreign
investors concerned about timely payment from a host government guarantor,”53 and or WB
guarantees to investors backed by the government.

Another growing area of regulatory concern is that of environmental regulation. For PF

purposes environmental issues have been placed as an essential pre-requisite for the

52
PURC Act, supra note 48, § 16
53
Benoit, P., Mitigating Project Risks: World Bank Support for Government Guarantees, 1, Public Policy for the
Private Sector, note no. 79, World Bank (1996)
 21

determination of loans, achieved primarily through the Equator Principles (EP‟s). The EP‟s
are a voluntary set of environmental standards adopted by financial institutions for assessing
environmental risk in PF. As a result, lenders who are party to the principles often do not lend
to projects that fail the EP test. This has several implications for the CCGT project. Firstly,
this means that regardless of what the environmental regulatory authority in Ghana approves
as essentially environmentally sound, the sponsors of the project will still be at risk of failing
the EP test, since they can only rely on the approval of the lenders own environmental impact
assessment (EIA) to secure loans. The second implication is that even where the EP standards
may be at par with Ghana‟s EIA regime in 2010, the situation might not be the same in 2011,
as a result of constant changes and amendments to the principles themselves, what effect
would this have?54 This poses another risk for the project, that is, defining how far the risk
assessment should go, determining liability, or even understanding how the EP‟s may be
enforced and whether damages may be payable for breach.

For the purpose of this project, it is important that the national regulatory regime is not
circumvented, as this might cause a breach of licence. Ghana‟s regulatory laws are
comprehensive and the Environmental Protection Agency (EPA) set up under Act 49055 are
tasked with assessing and issuing of environmental permits for such projects. It is also
advised that while meeting the standards of the Ghanaian EPA, the project sponsors should at
the same time prepare to meet the standards of the lenders EIA. This mitigates the risks of
refusal at loan approval level. Nonetheless, Ghana‟s EIA standards are comprehensive and its
agency thorough, in such case it is highly unlikely that if a projects passes the Ghana test that
it should not also pass the EP‟s test.

Often times project companies would mitigate against the risk of potential expropriation and
change in law clauses which might have an effect on the project through further guarantees
and clauses in the concession. For protection specifically against these political risks,
investors often secure insurance or guarantees from specialized institutions, such as export
credit agencies (ECA) or private political risk insurers. Alternatively, especially for foreign
investors in developing countries, the Multilateral Investment Guarantee Agency (MIGA), a
group in the WB tasked with issuing such insurances. It is normal though that in most
projects, the government would assume majority of the political risks, and certain clauses
54
The involvement of financial institutions in areas which are usually under the ambit of sovereign authority
has created some criticism, as some complain that the banks should not be put in such positions. While others
argue that where there host government lacks adequate standards then the EP’s step in, but in that case, what
is the answer for Ghana which has its own environmental regulations?
55
Environmental Protection Agency ACT, 30 December 1994, ACT 490 (entered into force 30 Dec. 1994)
 22

such as “stability,”56 or “financial balance,”57 clauses as a means of assuring the investor,

these provisions must be sort for any investor especially those that are foreign.

4.2.3. Country Specific Risks

The line between country risk and political risk is very thin, sometimes there may not even be
a need for the differentiation. This paper makes a differentiation between the two: political
risks as we have seen are limited to those of a regulatory nature, and sometimes are coupled
with departmental or ministerial discretion, whereas country risks here would be conditions
specific to the country but not necessarily under the control of political manoeuvrings which
might have an impact on the project, these include: foreign exchange convertibility and
exchange rate protection. For power projects whose revenues are almost always derived from
local currency being able to pass through costs in local currency might prove detrimental to
the project revenues, the government may need to give further assurances, because where this
risk is not borne by the government, it could mean higher tariffs for consumers as a premium
for the project bearing the risk. Most countries employ a hybrid approach,58 Part of the tariff
is indexed to local currency, and part to foreign (example, dollar), with some costs being
passed straight through.59 The best scenario would be for both the energy and capacity
charges to be fully passed through in the PPA to the off-taker, and have the off-taker pay the
project company in hard currency, while getting a guarantee from the government to have
currency convertibility available to the off-taker. Essentially several mechanisms can be
employed to create security.

4.3. Equity Participation and Role of Lending Institutions

As stated earlier investors in the power sector rely on PF not least because it offers a chance
for investors to proceed with projects they would not otherwise do, the return on power
projects unlike oil projects provide no incentive for investors to come in and fund such an

56
Contract stability clauses refer to those that
57
Financial balance
58
Gray, P., Irwin, T., Exchange Rate Risk: Allocating Exchange Rate Risk in Private Infrastructure Projects, 2,
Public Policy for the Private Sector, note no. 266, World Bank (2003)
59
This is especially the case where production materials, as with the case in most developing countries are
imported on different currencies
 23

infrastructure project strictly off balance sheet. Project Financed PP‟s therefore have very
high debt to equity ratios. This in some ways protects the investors more so than it does the
lenders, shareholder liability would therefore be limited to the extent of their equity
contributions. For investors who are shy of developing markets (especially in Ghana‟s case
where project financing in the power industry is scarce) this proves a further incentive.
Equity does, however, provide a margin of safety, so the more equity contributions there are
in a project, the lower the credit risk. Equity acts as an inherent incentive (for the sponsor) to
drive the project to success. Longer maturities are a source of further risk for lenders, and
higher equity contribution reduces this. “The length of debt terms and the interest rate have
significant implications for the cost of private power in developing countries,”60 therefore a
project's debt terms can influence the cost of power by for example, more than $0.01/kWh.61

Lenders are key to PF. In Ghana and many other developing countries loans from such
projects are almost entirely derived from foreign banks. There is evidence that shows that
though foreign banks provide the loans, many of the loan terms (with regards to interest rate
payments) are being offered at reasonable rates in almost every country, this trend is largely
attributed to enhancement of credit by ECA‟s and multilateral development banks (MDB‟s)62,
in our private model the involvement of these institutions would be minimal if at all, for the
lack of State ownership would almost entirely wipe out the option for MDB loans, the
possible consequence being higher premium loans. One way to shield against this risk would
be for the GOG to improve conditions for the involvement of local banks, as part lenders to
the project, by increasing their lending capacity to offer local interest rates63. Nigeria‟s
banking sector reforms provides a good reference point. The introduction of sector reforms
increased the lending capacity of local Nigerian banks by 150% from $20 billion in 2004 to
$50 billion in 2006,64 paving way for local PF lending capacity. With the recent influx of
Nigerian banks, to Ghana‟s banking sector, then this could have the added result of
transferring such lending practices to Ghana.

4.4. Fuel Risks and Gas Markets

60
Babbar, S., Schuster, J., Power Project Finance: Experience in Developing Countries, 13, RMC Discussion
Paper Series, Number 119, World Bank (1998)
61
Ibid
62
Ibid, at pg. 14
63
Local banks are more familiar with local conditions and would be more comfortable with accepting certain
risks foreign banks might not
64
Unuigbe, E., Funding Energy Projects in Developing Countries: Is This the Dawn of Local Lending in Project
Finance? A Nigerian Perspective, CEPMLP
 24

Gas as part of the proposed project can be viewed from three different perspectives, each
having its own inherent risks. First we can view the gas supply as part of the project which
would mean that the production of gas would also be part of the PF lending process, the result
being that a separate authorisation would be required from the GOG for the production of
gas. The number of oil and gas companies willing to get into the power sector, however is
very rare, in our case if the gas is derived from the WAGP then this scenario would prove
even more unlikely, and a convoluted process, as this would not just involve getting
authorisation from Nigeria where the gas would be coming from, but also getting
authorisation from the GOG of Ghana for the production of electricity, and setting up
mechanisms for the transport of gas through the WAGP, this would be an incredibly capital
intensive project which in itself could prove a deterrent. Secondly, the project can be viewed
as a TA, where the project company essentially provides the toller with a service for a fee.65
So for instance VRA supplies gas to the IPP and the IPP produces power, this being ideal for
PF because the project company is shielded from various market risks associated with the
project as it is simply performing a service for which it is remunerated. The problem in this
case is that the only security the project company can offer to lenders is on the capacity
charge, the revenues from the power produced would not be a source of security because the
project company does not own that stream.66 The final option is that the project company
tasks itself to procure gas from either the WAGP or gas from Ghana‟s own jubilee field
which is yet to be in production. This means that VRA‟s role of procuring gas is abrogated,
allowing it to focus on the procurement and distribution of power. This seems the best option
because in this case, the State‟s involvement is limited.

4.4.1. Gas: West African Gas Pipeline and Jubilee Gas

The WAGP started transporting natural gas from Nigeria to Ghana on March 20 2010.67 The
volume of gas however, flowing from the pipeline, is currently 30 million cubic feet per day,
enough to fuel 110MW of power at TII.68 Another potential source of gas is from Ghana‟s
jubilee field set to be in production in the last quarter of 2010. The availability of two
avenues for fuel supply could be mitigation for potential short term interruption of supply
65
Vinter, G.D., supra 8, pg 130
66
Ibid, at pg. 131
67
West African Gas Pipeline Restarts from Year Long Idle, Reuters, 6 April 2010, at
http://www.reuters.com/article/idUSLDE6350WW20100406 (Last visited 30, April 2010)
68
Ibid
 25

from either source‟s. The WAGP brings the added advantage of having already being tested
with TII. In its current capacity however, it is only possible to power one gas turbine of TII,
we work on the assumption that the WAGP will increase its fuel supply capacity for fuel to
be available for other power projects in Ghana considering the total capacity of the pipeline is
estimated to be from 65 to 70 million standard cubic feet per day.69 Another advantage the
WAGP is that it is run by an incorporated company (WAGPco), though it is made of some
national entities (Nigeria and Ghana), it has a strong private consortium (who hold majority
stake and managerial control), direct government interference (and associated political risk) is
therefore minimal, this means volume risks and associated liability can easily be passed to the
WAGPco through a minimum gas obligation as part of a TOP clause under a Gas Supply
Agreement (GSA). Gas, however, is subject to market prices, and may not entirely be
dependent on a price formula contained in a supply contract. Effectively, lenders might
require the sponsors to guarantee a minimum price. The unique make-up of the WAGPco (as
partly owned by VRA) may also be beneficial when negotiating the price of gas because
essentially as the potential off-taker, VRA would not want the high cost fuel to be passed
through in the PPA price so the project company may be able to negotiate even more cheaper
fuel as compared to any standard fuel supply contract, but it is important to also keep in mind
that not all the stakeholders in WAGPco would be willing to come to such an arrangement.

On the other hand the potential of gas from the jubilee field also has several implications for
the project. The GOG through the introduction of a domestic gas obligation (DGO) can
capture the volume of gas at a price set by the government. The obligation if adopted by the
GOG would direct producers of gas to allocate a certain percentage of their gas production
for supply to the domestic market. This means that all the fixed costs of gas production are
dumped onto the non-DGO gas which would be sold at a premium, effectively, by doing so
the government makes domestic gas as cheap as possible to enable further development of the
power sector. The DGO creates a natural hedge and takes gas, a fuel largely affected by
market forces outside the realm of the market and therefore not prone to the same volatility in
price because price is regulated in-house. For the project company, the risk therefore that it
would have borne by buying gas from non-DGO gas at market price is mitigated through a
guaranteed price. The only risks would be regulatory and change in law risks, the possibility

69
Shell Nigeria, Supplying Gas to West Africa: The West African Gas Pipeline Project, 2009, at,
https://docs.google.com/viewer?url=http://www-
static.shell.com/static/nga/downloads/pdfs/briefing_notes/wagp_project.pdf (Last visited 30, April 2010)
 26

that the DGO standards in house might change in the future, government guarantees as
discussed earlier may be negotiated to shield from those risks.

5. CONCLUSION

As has been demonstrated through the lens of the CCGT project, private sector funding
through the PF vehicle has several implications for power projects in Ghana‟s power sector,
not least because they create a separate haven (where risks are effectively allocated), for
private participation in power generation and promotes competition, all with the effective of
driving down the price of consumer tariffs. For lenders coming into the Ghanaian market the
goal is to present a project such as this to the lending institution with levels of certainty built
into the project to avoid the refusal of project loans. In Ghana‟s case, lenders are particularly
concerned with the lack of PF in the sector. Lenders are predisposed to certainty, but this is in
itself curable and the panacea would be the design of a sound project, such as the one
presented in this paper; a project exhaustively scrutinized, where the project sponsors have a
clear understanding of the political context within which they operate. It would be a mistake
for private sponsors to lump Ghana in with its neighbours and assume that because Ghana is a
developing country that the definition of the project would mean the same for every
developing country. This is a common mistake private investor‟s make and can have the
result of higher loan premiums or worse refusal of loan based on inaccurate risk assessment.
Careful consideration of the countries laws, third party rating agencies, and multilateral
institutions can all be utilised to shed light on the specific areas lenders might require
additional protection against. A new project such as this if successful from PF perspective,
would spell an influx of private participants. The arrival of the WAGP and the unprecedented
discovery of commercial quantities of oil and gas in Ghana‟s jubilee field, has given the
countries power sector the tool it needs to spear it ahead its liberalisation reform agenda
ahead and PF is the missing link in this equation because it is the catalyst to which to lure
private investors.
 27

BIBIOLGRAPHY

1. PRIMARY SOURCES

Energy Commission ACT, 31 December 1997, ACT 541, Consolidated Statutes of Ghana
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Public Utilities Regulatory Commission ACT, 16 October 1997, ACT 538, Consolidated
Statutes of Ghana (entered into force 16 Oct. 1997)

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2.2. Articles
 28

Ashong, M., Continuing Power Sector Reform Amidst High Cost Power Generation,
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3. OTHER
Dow, S., International Project Finance: Risk Identification, CEPMLP International Project
Finance Lecture Notes (26 March 2010)
 29

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May 2010)
30