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The Agyapa Royalties deal recently passed by Ghana’s Parliament is just a way to park the country’s debts off the balance sheet, Prof Kwaku Asare, a law professor and accountant has said.

Parliament passed the deal two weeks ago by approving five agreements to allow the country to derive maximum value from its mineral resources and monetise its mineral income accruing to the country in a sustainable and responsible manner, in line the Minerals Income Investment Fund (MIIF) Act, 2018 (Act 978).

The approval will enable the country to use a special purpose vehicle, Agyapa Royalties Limited, to secure about $1 billion to finance large infrastructural projects.

In line with that, Agyapa, which will operate as an independent private sector entity, will be able to raise funds from the capital market, both locally and internationally, as an alternative to the conventional debt capital market transactions.

The funds, which are expected to be raised from the Ghana Stock Exchange (GSE) and the London Stock Exchange (LSE), will be long-term capital, without a corresponding increase in Ghana’s total debt stock and hence without a public debt repayment obligation.

However, Prof Asare, in a short write-up, said the deal has several disadvantages, adding: “It is just a gimmick to park debts off the country’s balance sheet”.

Read Prof Kwaku Asare’s full post below:

What Agyapa has been set up to do is to swap the country’s future cash flows from mineral royalties for immediate cash. It is analogous to going to the bank and taking cash now in exchange for your salary for the next x periods.

These types of transactions have several hidden costs.

First, it disadvantages all existing lenders since the revenues that would otherwise have been available to service their debt have been now allocated to a particular party.

This tends to undermine the credibility of the government, alienate traditional lenders and increase the cost of borrowing.

Second, it can trigger all kinds of legal challenges, especially as it is likely that some traditional lenders may have protected themselves by barring such arrangements.

Third, it is a nightmare for budgeting flexibility.

Instead of the flexibility of allocating mineral royalties to higher priority areas, as determined by future events, the country has locked itself into using it in a particular way.

Fourth, following from the third, such an arrangement deprives future governments of the revenue that should be available to them during their tenure.

It, therefore, ties their hands.

Imagine the extreme case where the government of the day decides to monetise future VAT or payroll taxes!

Fifth, it is just a gimmick to park debts off the country’s balance sheet. Even though the country is borrowing, the accountants say they are not! But this does not fool anyone and the nation pays for it in the debt market.

Sixth, the transaction cost could be high unless the country uses its own staff from the Attorney-General and other financial institutions.

Given these costs, it is imperative for the government to give as much information on this deal as possible.

In particular, the government should name all transaction advisors and specify how much has been paid to them.

The Mineral Income Investment Fund has a 9-member Board, supported by a 5-member Investment Advisory Committee who are all on government payroll.

So, the case for paying for transaction advisors must not only be made, it must also be compelling.

Then there is an Attorney General Department, etc.

Further, what are government plans to use the cash that results from the monetisation of the future royalties?

If there is no clear plan and the cash is to flow into the general funds to pay salaries or other unproductive activities then the case for monetising is considerably weaker.

On the other hand, if the cash is to be used to invest in an identifiable project with clear potential for generating economic activity and cash flows then the case for rallying around it is stronger, in spite of the aforementioned costs.

Finally, I still do not understand why the country has not been able to pass the Public-Private Partnership (PPP) Bill notwithstanding that we are doing over $5B annually in such projects.

The PPP Bill was drafted about a decade ago but such projects are still being consummated under the 2011 policy, creating needless legal and regulatory uncertainty.


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