There are some media reports that the International Monetary Fund (IMF) is taking a public debt view of the Bonds issued by  E.S.L.A Plc (the Company) to finance the debt and arrears accumulated by the Energy Sector State-owned Enterprises (SOEs) and the Bulk Oil Distribution Companies (BDCs). I have also read the article written by Seth Terkper Former Minister of Finance in which he argues that Energy bond must not be a “Pure” Public”.

In this write-up, I will like to evaluate the topic/issue from an accounting perspective, assuming the government of Ghana is a legal entity that applies International Public Sector Accounting Standards (IPSAS). IPSAS are based on the International Financial Reporting Standards (IFRS). IPSASB adapts IFRS to a public sector context when appropriate.

Accounting question:

Does the Government of Ghana (Government) control E.S.L.A Plc (the Company) and if so should the Government consolidate the Energy Sector Bond as part of the Government debt?

Background information about the Company

The Energy Sector State-owned enterprises (SOEs) (which include Volta River Authority (VRA), Electricity Company of Ghana Limited (ECG), Ghana Grid Company Limited (GridCo), Tema Oil Refinery Limited (TOR) and Northern Electricity Distribution Company (NEDCo), a subsidiary of VRA) have incurred significant levels of debt and payment arrears over many years as a result of low collection rates and below cost recovery pricing.

One of the strategies the Government of Ghana adopted to pay the debt of the energy sector SOEs was the passage of Energy Sector Levies Act (ESLA) in December 2015 which took effect from January 4, 2016. It was amended on 28 March 2017 by the Energy Sector Levies (Amendment) Act, 2017 (Act 899) (the ESLA Amendment).

In July 2016, the domestic banks (led by representatives of the Ghana Association of Bankers and the chief executives of each bank) agreed on a framework with the Ministry of Finance in relation to the restructuring and repayment (over 3 to 5 years) of approximately GHS 2.2 billion of debts owed by VRA and TOR to domestic banks. At the time, this amount represented legacy debt consisting of approximately USD 358 million and GHS 776.6 million.

In view of the above, the Government of Ghana sponsored the incorporation of a company as an independent special purpose vehicle (SPV) called E.S.L.A. Plc to issue the Bonds and any other securities for the refinancing of the Energy Sector Debt. The service providers to the Company are as follows

         •        National Trust Holding Company (NTHC) – a nominee shareholder to hold all the shares in the Company.

         •        Fidelity Bank Ghana Limited (Fidelity)-  Bond Trustee

         •        KPMG – the Administrator of the SPV.

         •        Ernst and Young (Ghana) Limited (EY) –  Reporting Accountant to the Bond Programme

         •        Deloitte is the statutory auditors of the Company

The company currently has 5 Directors:  Simon Dornoo- Chairman,  Alhassan Sulemana Tampuli- Non-executive Director, James Demitrus- Non-executive Director, Samuel Arkhurst – Nonexecutive Director and Frederick Dennis- Executive Director.

On 23 October 2017, the company issued the following details relating two tranches Bonds to be issued on October 31, 2017:

The prospectus of the energy Bond provides the following information :

         •        list of debtors as at August 31, 2017

         •        List of energy sector debt as August 31, 2017

         •        Summary of the net profit after tax of the Energy Sector SOEs from 2012 to 2016, the payables, receivables and debt profile of the Energy Sector SOEs.

         •        Summary of profit and loss account

         •        Summary of payables and receivable

         •        Summary of debt profile

Conclusions

There are two schools of thoughts on the conclusion to the accounting question.

Both views are presented below using the guidance of IPSAS 35, Consolidated Financial Statements. IPSAS 35 paragraph 20 specifies that an entity controls another entity if and only if the entity has all the following:

(a) Power over the other entity

(b) Exposure, or rights, to variable benefits from its involvement with the other entity and

(c) The ability to use its power over the other entity to affect the nature or amount of the benefits from its involvement with the other entity.

Conclusion 1

The following factors below, considered in light of IPSAS 35, lead to a conclusion that it is inconclusive to say the Government of Ghana controls E.S.L.A Plc (the Company) and therefore the Government of Ghana should not consolidate the bonds issued by the Company as part of Government debt. 

Criteria 1: Assessing whether the Government of Ghana (Government) has power over E.S.L.A Plc (the Company)

The regulations of the Company specifies the following:

         •        The Board shall consist of a minimum number of three (3) directors and a maximum number of ten (10) directors.

         •        The composition of the Board shall include: a) directors appointed in accordance with Company Act sections 181, 298 and 299 and of which the majority shall be non-executive directors; and b) a minimum of two (2) Independent Directors nominated by the Board

         •        Minimum of two (2) Independent Directors are to be nominated by the Board and appointed by the shareholders. Independent Director” means a non-executive director who is free from any his/her independent and partial judgment. Such a person shall not have close ties with any of the directors or any shareholder. For the purposes of this definition, a “non-executive director” is a director who is not engaged in the daily management of the Company business with the Company.

         •        Each director shall have one (1) vote and the chairman of the meeting shall not have a casting vote. No decisions of the Board shall be made unless a majority of the directors vote in favor.

From regulations of the Company, it is not clear whether the Government has the right to appoint the majority of the directors of the Company. Also in absence of the details of the nominee agreement, it will be difficult to argue that the Government can influence the nominee shareholder to choose directors that are favored by the Government.

Criteria 2: Assessing whether Government’s exposure, or rights, to variable benefits from its involvement with Company

         •        No explicit guarantee from the Government for the bond issued by the Company

         •        The company per the prospectus is set up to manage ESLA receivables and use same to settle bond obligations. Any unused portions of the receivables will be returned to the source as public funds not as returns to Government. Equally, if the ESLA receivables fall short to settle bond obligations, there is no recourse to the Government. Consequently, no extra burden on the  Government

         •        The capped amount is already amount owed by the Government to ECG and is not a burden created by the activities of the company. The only time a financial burden will fall on the Government that may be construed as variability on Government's funds is ONLY when the Government unilaterally takes actions as defined as default events triggered by Government. This condition will be a purposeful act of Government not as a result of returns arising from normal course of business by the company.

Conclusion 2

The following factors below, considered in light of IPSAS 35, lead to a conclusion that the Government of Ghana controls E.S.L.A Plc (the Company) and should, therefore, consolidate the bonds issued by the Company as part of Government debt. 

Criteria 1: Assessing whether the Government of Ghana (Government) has power over E.S.L.A Plc (the Company)

IPSAS AG10 dictates that the determination about whether an entity has power depends on the relevant activities, the way decisions about the relevant activities are made and the rights of the entity and other entities in relation to the potentially controlled entity.

IPSAS 35. AG9 specifies that for the purpose of assessing power, only substantive rights and rights that are not protective shall be considered.

         •        Relevant activities of the company

First, let’s examine the relevant activities of the Company

The relevant activities of the Company as defined in the Company’s Regulations are:

a) to issue debt securities backed by receivables collected under the Energy Sector Levies Act, assigned to the Company by the Government of Ghana acting through the Ministry of Finance for the purpose of servicing the debt securities and related expenses;

b) Enter into loan agreements and/or on-lending agreements with public utility companies and other state-owned enterprises in the energy sector in relation to their indebtedness; and

 c) Enter into such other arrangements and transactions in relation to the issuance of debt securities as may be necessary or required by the Government of Ghana acting through the Ministry of Finance.

         •        Who has the rights to make decisions about  the relevant activities of the Company

The company’s regulation (regulation 72) specifies that Subject to section 202 of the Companies Act, the business of the Company shall be managed by the Board which may exercise all such powers of the Company as are not, by the Companies Act or these Regulations, required to be exercised by the members in general meetings.

The limitations of sections 202 of the Companies Act does not deal with the relevant activities of the Company instead deals with the following limitations (a) sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking or of the assets of the company (b) issue any new or unissued shares, other than treasury shares (c) make voluntary contributions to any charitable or other funds, other than pension funds for the benefit of employees of the company or any associated company.

         •        Who appoints the majority of the Board that makes the relevant decisions of the Company

Let’s now consider who has the power to appoint majority of the Board and to affect decisions of the relevant activities of the Company

Based on the regulation of the Company, a minimum of 2 independent Directors of the Company are appointed by the Shareholder, NTHC.  NTHC holds all issued ordinary shares of the Company. NTHC is acting as a nominee shareholder for the Government of Ghana.  The prospectus specifies that Nominee Agreement means the nominee agreement dated September 13, 2017 and entered into between the Sponsor and NTHC, under which NTHC has agreed to act as nominee shareholder in the Issuer for the Sponsor. Sponsor means the Government of Ghana acting through the Ministry of Finance.

Based on NTHC website (http://www.nthcghana.com/company/about), NTHC was established in 1976 (under the auspices of the National Investment Bank) by incorporation under the Companies Code, 1963 (Act 179) and its shareholders are Social Security and National Insurance Trust (SSNIT), National Investment Bank (NIB), SIC Insurance Company Limited, AcreCon Limited and NTHC Provident Fund. SSNIT, NIB and SIC are Government owned entities.

In addition to the above, most nominee shareholders are agent of the parties that they are representing. If this assumption holds, this means NTHC is acting on behalf of the Government of Ghana. Which in effect means the Government has the power to appoint the Directors of the Company.

Note: There may be some information in the nominee agreement that may contradict the above assumption that the Government has an influence over NTHC. The writer have not seen the full nominee agreement and therefore the above assumption of the influence of the Government over NTHC should be read with caution. 

The regulations specify that a minimum of two (2) Independent Directors are to be nominated by the Board and appointed by the shareholders. If Government appointment has no limitations in terms of the number of the directors that it can appoint and instead the regulation mentions the minimum cap of 2, it means the entire 10 directors can be appointed by the shareholders, which is the Government of Ghana.

Though not significant, one should note that SSNIT, a Government entity, owns 9.5% of Fidelity Bank Ghana Limited (the Bond Trustee).Ӭ

         •        Is the Government rights to appoint  directors that could make decisions about the direction of the relevant activities of the Company be  considered protective rights  or substantive rights

Lastly, let’s examine whether the rights of the Government are substantive rights or protective rights

IPSAS 35. AG 26 provides that Determining whether rights are substantive requires judgment, taking into account all facts and circumstances. Factors to consider in making that determination include but are not limited to:

         •        Whether there are any barriers (economic or otherwise) that prevent the holder (or holders) from exercising the rights.

         •        When the exercise of rights requires the agreement of more than one party, or when the rights are held by more than one party, whether a mechanism is in place that provides those parties with the practical ability to exercise their rights collectively if they choose to do so.

         •        Whether the party or parties that hold the rights would benefit from the exercise of those rights. For example, the holder of potential voting rights in another entity shall consider the exercise or conversion price of the instrument. The terms and conditions of potential voting rights are more likely to be substantive when the instrument is in the money or the entity would benefit for other reasons (e.g., by realizing synergies between the entity and the other entity) from the exercise or conversion of the instrument.

From the regulations, it is clear the Government does not need the clearance of any other parties to exercise its rights to appoint majority of the directors and thereby directing the activities of the Company

From the regulations, there are no clear barriers that prevent the Government from appointing majority of the directors which will prevent Government’s ability to direct the relevant activities of the Company.

This can be deduced from the fact that the prospectus specifies that the Government can unilaterally take actions as defined as default events triggered by Government (Sponsor Event of Default). Default by Sponsor includes:

         •        the Sponsor amends or varies (or procures any other person to amend or vary) any portion of the ESLA or does (or permits the omission of) any act or thing as a result of which (i) the ESLA shall be repealed (ii) the rights of the Issuer under the Assignment Agreement shall be adversely affected, or (iii) the Assignment Agreement shall be rendered frustrated or unenforceable;

         •        the Sponsor fails to transfer the relevant tranche of the ESLA Receivables into the ESLA Receivables Account and such failure to transfer continues for a period of more than 10 Business Days;

         •        the Sponsor fails to meet its obligation to satisfy its Capped Cash Commitment; or

         •        The Sponsor fails to meet any of its obligations under the Assignment Agreement which, in the opinion of the Bond Trustee (determined in its sole discretion), is materially prejudicial to the interests of the Bondholders.

Criteria 2: Assessing whether Government’s exposure, or rights, to variable benefits from its involvement with Company

IPSAS 35. 31 specifies that the entity’s benefits from its involvement with the entity being assessed for control can be only financial, only non-financial or both financial and non-financial. Financial benefits include returns on investment such as dividends or similar distributions and are sometimes referred to as “returns”. Non-financial benefits include advantages arising from scarce resources that are not measured in financial terms and economic benefits received directly by service recipients of the entity. Non-financial benefits can occur when the activities of another entity are congruent with, (that is, they are in agreement with), the objectives of the entity and support the entity in achieving its objectives. For example, an entity may obtain benefits when another entity with congruent activities provides services that the first entity would have otherwise been obliged to provide. Congruent activities may be undertaken voluntarily or the entity may have the power to direct the other entity to undertake those activities. Non-financial benefits can also occur when two entities have complementary objectives (that is, the objectives of one entity add to, and make more complete, the objectives of the other entity).

IPSAS 35. BC48 argues that the IPSASB agreed that the term “benefits” is more appropriate than the term “returns” in the public sector, particularly given the existence of control relationships in the absence of a financial investment in the controlled entity. The IPSASB considered that the term “returns” could be regarded as giving an inappropriate emphasis to financial returns, whereas, in the public sector, benefits are more likely to be non-financial than financial. The term “returns” was retained in the context of investment entities.

In addition, IPSAS 35. AG58 notes that in the context of non-financial benefits an entity may receive benefits as a result of the activities of another entity furthering its objectives. The benefits may be variable benefits for the purpose of this Standard because they may expose the entity to the performance risk of the other entity. If the other entity were unable to perform those activities then the entity might incur additional costs, either from undertaking the activities itself or by providing additional funds or other forms of assistance to enable the other entity to continue providing those activities.

         •        The company offers non-financial benefits to the Government 

The company (E.S.L.A Plc) provides the following non-financial benefits to the Government:

         •        The debts owed by the Energy Sector SOEs have accumulated over the years due to following reasons:

         •        The financial performance of VRA has been worsening on year-on year basis mainly due to below cost recovery pricing, high cost of financing, exchange losses and payment arrears from ECG and the Government of Ghana, especially in respect of subsidies.

         •        ECG has been recording significant losses over the years, attributed to Aggregate Technical, Commercial & Collections (ATC &C) losses depreciation of the GHS, increasing costs of power purchases, and below market tariffs.

         •        TOR has been facing a huge debt overhang for a long time and was not able to purchase crude oil to run its operations, whilst it continues to pay for its fixed cost and some variable cost.

Based on the above reasons for the accumulation of debt of energy sector SOEs, some conclude that the SOEs debt arose primarily due to Government actions such as subsidized fuel and energy cost for its citizens and so the Company is providing a benefit to the Government by taking care of the debt burden of SOEs from the Government.

         •        The operational viability of the Energy Sector SOEs will not be sustainable if the Government of Ghana is unable to oversee a reduction, restructuring or refinancing of the legacy debts of the Energy Sector SOEs. If any of the Energy Sector SOEs is unable to continue to operate, it will have a significant impact on the ability of the Government of Ghana to resolve electrical power issues and thereby pose a substantial risk to the economy.  Therefore the formation of the Company to alleviate the debt pressure off SOEs so that they can go ahead to perform their normal activities. This is a benefit to the Government since the Government will not have to look alternatives to provide power and fuel to its citizens. 

         •        The taking over of the debts of the SOEs and payments of those debts through the issuance of bonds free the banking sector from the burden of non-performing loans that could collapse the sector.  The collapse of the banking sector could have a systemic impact on the Ghanaian economy and the energy-sector SOE.

         •        Implicit Government guarantee assumptions places financial burden on the Government

Though SOE loans are not guaranteed by Government of Ghana, most Banks lend to SOE based on an assumption of an implicit guarantee from the Government.

Similarly, an implicit assumption is said to made by investors regarding the 2 tranches of bonds ( GHS 3.6 billion and totaling GHS 16 billion issued by E.S.L.A Plc, (the Company) issued by the Company. This places some sort of financial burden on the Government. 

         •        The Government may benefit from unused portion of  ESLA receivable 

ESLAC revenue is a state revenue which has been assigned to service the bonds to be issued. Any unused portions of the ESLA receivables will be returned to the source as public funds.

         •        The Government faces performance risk of the Company

The Company was incorporated by the Government as a special purpose vehicle to, among others, issue debt securities for the purpose of refinancing the Energy Sector Debt. As a result, the Company has no operating history, and will not be engaged in any business activities other than those related to its formation and its ability to perform its mandate will be entirely dependent upon the ESLA.

Any shortfall and/or delay in the collection of the ESLA Receivables will affect the Company’s ability to honour its obligations to the Bondholders. If the Company is unable to meet the shortfall of ESLA receivable, it will affect the ability of the Company to issue future bonds to pay the entire energy sector- SOEs and BDCs debt. The failure of the Company to issue the additional bonds of GHS 4 billion to finance the energy sector- SOEs and BDCs debt will put the Government in a position to step in to support the shortfall.  This is because of if the Company is not in position to issue the remaining bonds of GHS 4 billion, this development will affect the Banking sector and economy. It is unlikely the government will not take action to prevent this from happening. Accordingly, there is a performance risk on the Government to help support the shortfall.

Criteria 3: The Government’s ability to use its power over the Company to affect the nature or amount of the benefits from its involvement with the Company IPSAS 35. 37. An entity with decision-making rights shall determine whether it is a principal or an agent. An entity shall also determine whether another entity with decision-making rights is acting as an agent for the entity. An agent is a party primarily engaged to act on behalf and for the benefit of another party or parties (the principal(s)) and therefore does not control the other entity when it exercises its decision-making authority. Thus, sometimes a principal’s power may be held and exercisable by an agent, but on behalf of the principal AG60. It is common for public sector entities to be responsible for carrying out government policy. In some cases they may have the authority to act in their own right, in other cases they may act as an agent for a Minister or another entity. For example:

(a) A government department, which is authorized by a Minister to act on the Minister’s behalf, might act solely as an agent of the responsible Minister in relation to another entity. In such cases the department would not control the other entity and would not consolidate it.

(b) A government department may operate under a delegation of power from a Minister. The department uses its own discretion in making decisions and taking actions and is not subject to direction from the Minister. In such cases the department is acting in its own right and would need to apply the other requirements of this Standard to determine whether it controlled another entity. The scope of the department’s decision-making authority over another entity would be a significant factor in distinguishing whether it is acting as an agent or as a principal.

(c) An entity may establish a trust to carry out specified activities and appoints the trustee. The trustee is responsible for making decisions about the financing and operating activities of the trust in accordance with the trust deed. If the entity can replace the trustee at its discretion, the entity would need to assess whether it controls the trust given that, for example, it would be exposed, or have rights, to variable benefits in terms of the extent to which its objectives are achieved or furthered through the activities of the trust.

  •  The Company is as an agent of the Government

E.S.L.A Plc, (the Company) is considered as an agent for the Government of Ghana since the Government can dictate the terms of the debt securities to be issued by the Company. Per the regulations of the Company, the Company is authorised to carry on the following businesses:

a) issue debt securities backed by receivables collected under the Energy Sector Levies Act, assigned to the Company by the Government of Ghana acting through the Ministry of Finance for the purpose of servicing the debt securities and related expenses;

b) Enter into loan agreements and/or on-lending agreements with public utility companies and other state-owned enterprises in the energy sector in relation to their indebtedness; and

 c) Enter into such other arrangements and transactions in relation to the issuance of debt securities as may be necessary or required by the Government of Ghana acting through the Ministry of Finance.

The last part of the company’s object makes it clear that the Company decided to issue bonds is based on direction from the Government of Ghana acting through the Ministry of Finance.

This supports the conclusion that the Government controls the Company. By specifying in detail the way in which the Company must operate its relevant activities in terms of issuance of the debt securities has predetermined the Company’s activities and the nature of benefits to the Government

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