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Technical analysis confirms bauxite deal unviable

A new report, based on a comprehensive technical analysis conducted by the Africa Centre for Energy Policy (ACEP) and the Natural Resource Governance Institute (NRGI) suggests that the US$2 billion infrastructure financing deal between Ghana and China which involves Sinohydro, a Chinese firm, providing public infrastructure worth that amount in exchange for a small proportion of Ghana’s identified bauxite deposits in the Eastern Region (estimated by government at five percent of the country’s total bauxite endowment) will not be self amortizing.

This implies that the financing will turn out to be a foreign loan for infrastructural development and repayable from the public purse, as claimed by the political opposition, rather than an investment as claimed by government, a stand endorsed by the International Monetary Fund.

Instructively however, the political opposition’s arguments have been based on political points scoring rather than any detailed technical analysis. However, expect it to claim prior technical analysis now that the new report supports its conclusion.

The technical analysis done by the specialized two think tanks – instructively ACEP was founded and hitherto run by the incumbent Deputy Minister of Energy, Mohammed Amin – computes that government’s revenue take will not be nearly enough to service and repay the financing under the terms of the agreement, no matter the actual structure of the deal, which is yet to be fully disclosed by government.

To this end, the report considers the two alternative scenarios, since government has not disclosed which of them applies to the ongoing arrangement.

Under the first scenario, in which the bauxite mining company is the same company that refines bauxite into alumina – with a refinery capacity estimated at 2.5 million tonnes of alumina per annum derivable from the five million tonnes of bauxite to be produced – government would obtain 125,000 tonnes of alumina as royalty based on a refining ratio of 2:1. But to meet the estimated revenues, government would have to secure investment worth over US$2.5 billion to build a bauxite refinery with that requisite capacity.

Under this scenario and assuming capital allowance of five years, the analysis computes that no taxes are guaranteed in the first five years of the 12 year financing leaving only royalties of US$48 million per annum as sure revenues, this translating to US$233.9 million during the repayment period. Based on the financing terms of 2.8 percent over LIBOR (as minimum,) per annum, one percent commitment fee, 1.2 percent management fee and a Sinosure premium of 7-9 percent flat rate and financed upfront, annual payments on the financing would amount to US$263,886,606.08 and the future value of the loan is US$4,522,563,366.42

Ultimately the analysis reckons that government’s take would only be enough to pay about 18 percent of the total repayments required.

Under the second scenario considered, in which there would be separate investors for the bauxite mining and for the refining, but with the refinery capacity remaining the same, government would get 250,000 tonnes of bauxite as royalties, and based on current prices this would generate some US$8 million per annum with net revenue from mining amounting to US$15.2 million (this based on very optimistic financial performance forecasts) and corporate income tax of US$5.3 million. The report projects that government would only be able to pay about five percent of the loan under this scenario.

Meanwhile government would still have to secure the huge investment for the bauxite refinery; if investment in the bauxite refinery was just US$1 billion it would only have capacity to refine between 900,000 and one million tonnes, this being only 40 percent of the anticipated bauxite production.

Actually, this might be the plan since government has not revealed whether it intends to refine all the bauxite due to be mined by the Chinese or whether part of it would be exported unprocessed.

To be sure the report acknowledges lots of benefits derivable from the planned integrated aluminum industry. These range from employment opportunities, value addition potential, increased economic activity, local content and export earnings; to technology transfer and capacity building.

However the report concludes that the project cannot pay the loan – meaning it would have to be repaid out of tax revenues or other sources of public financing – even as ACEP and the NRGI fret that because the project involves a barter deal, the bauxite would probably not be refined in Ghana (China rather) anyway.

The report is likely to generate considerable debate in Ghana although unfortunately this will primarily be along political rather than technical lines. Meanwhile however the deal’s execution has begun with the financing not included in the public debt because. With the endorsement of the IMF it has been classified as an investment.

The new report however asserts that the “investment is going to cost the public treasury heavily”.

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