04.10.2020 Opinion

In Whose Interest: Agyapa IPO

By Baffour Gyasi
In Whose Interest: Agyapa IPO
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To answer this question, it is worth reviewing the background, incentives, and cost-benefit relationship of the deal.

The Background

The Parliament of Ghana approved a proposal to create a fund to receive and invest part of revenues (or royalties) received from mining activities in Ghana. The approval resulted in the creation of the "Mineral Income and Investment Fund (MIIF)”. Interestingly, the proposal to create the fund also included 'requests' for the MIIF (when created) to have powers to :

1. Create another entity (Special Purpose Vehicle) such as a limited company

2. Transfer ownership of royalties and responsibility for managing them to the entity (SPV)

created under MIIF

3. Sell part of the company or SPV that holds, owns, and manages the royalties originally

allocated to MIIF

Consistent with the provisions of the Mineral Income and Investment Fund Act, Asaase Royalties Limited was registered in Jersey, a British Crown dependency and tax haven. The company is a wholly-owned (100%) subsidiary of MIIF as of 30 August 2020 and has company registration number 130211. On 10 August 2020, the name of Asaase Royalties Limited was changed to Agyapa Royalties Limited.

The IPO of Agyapa

The Government of Ghana, led by the ministry of finance, is pursuing the Initial Public Offering (IPO) of Agyapa Royalties Limited. This basically means selling shares of a company and in the case of Agyapa, selling part of the future royalty payments assigned to Agyapa Royalties Limited by the MIIF. The outcome of the process is that any individual or entity can buy and sell shares of the company after the IPO.

The shares of Agyapa Royalties Limited will be listed (made available for sale) primarily on the London Stock Exchange in the UK. Through the IPO process, the Government of Ghana would sell 49% of the shares of Agyapa Royalties Limited for up to $1 billion.

Sounds simple and straight-forward, right? Not so simple

The Cost-Benefit Analysis

The IPO would cost Ghana sums in the region of $40 million in direct fees. And $38m of the estimated $40 million would be paid to the investment banks, legal firms, and accounting firms involved in the transaction, including Databank (a firm owned by the Minister of Finance) and Africa Legal Associates, another entity owned by a relative of the current President of the Republic.

The involvement of businesses owned by relatives of the current President in Agyapa's deal certainly creates a web of conflicting interests that undermine the credibility of the transaction. The country, besides the direct fees we have estimated to be in the region of $40 million, would lose many more millions of dollars to the firms involved in the transaction.

To see what we mean, imagine Person A wants to sell a pen to Person C, Person B is the one to make the deal happen and takes the pens at the price of $12 per pen to sell to person C at $18 per pen. Person A loses $6 per pen. In the case of an IPO, the number of shares (pens in hypothetical case) as well as the money lost to the organisers who also would double as early investors in the IPO are in many millions!

In the mechanics of an IPO, an exclusive club of investors are allocated shares at a price known as the "offering price". This price is lower than the "opening price" when the shares start trading on a Stock Exchange for the first time.The difference between the "offering price" and the “opening price” of Agyapa Royalties would further drain value from Ghana to the exclusive club of investors just as Person A loses value to Person B in our example above. This exclusive club of investors would include Ken Ofori-Atta's Databank and Gabby Otchere-Darko's Africa Legal Associates.

IPOs are generally underpriced in what is described as "leaving money on the table". In fact, the average amount of money "left on the table" by issuers like Agyapa Royalties Limited in similar deals tends to be more than 2 times the underwriting fees, which we have estimated to be around $38 million (or 95% of $40 million) for the size of IPO Agyapa is pursuing. Thus the "money left on the table" as a result of the underpricing of Agyapa's shares could be in the region of $76 million.

Thus the same parties involved in the IPO process, such as Databank and Africa Legal Associates, are going to be part of the exclusive club of investors who would buy shares of Agyapa before the IPO at the discounted price they would set and effectively bank the millions of dollars the nation would" leave on the table".

Are the potentially huge profits the beneficiaries of Databank and Africa Legal Associates after, the sole motivation for this transaction?

On page two of the Attorney General's letter to the Minister of Finance dated 22 July 2020, the Attorney General's office pointed out that the terms and conditions of the proposed Agyapa deal were skewed against Ghana! Observing that the people who presented the proposed deal to the AG are Ghanaians who are supposed to be working on behalf of the state, it is fair play to ask "in really whose interest are these Ghanaians working?”

While the proponents of the deal are quick to downplay the lack of duty of loyalty with the excuse that changes have been made to the proposed terms of the deal, the attempt to get the nation into an agreement that failed to reflect the duty of loyalty to the state is enough confirmation that the outcome of any deal led by the same people will be disappointing in the long run. Interestingly, subsection 1b of sections 11 and 18 of the MIIF Act acknowledge this view.

Unless our nation wants to confirm to the rest of the world that we lack a commitment to prevent and uproot corruption, there is no justification for the minister of finance and other relatives of the President to be the ultimate beneficiaries of companies involved in a deal they have sanctioned.

This is one of the main reasons the first basic rule of natural justice is that nobody may be a judge in their own case! According to the rule against bias, any person that makes a decision must not have any personal interest in the outcome of the decision. If such interest is present, the decision-maker must be disqualified even if no actual bias can be shown, i.e. even if it is not demonstrated that the personal interest of the decision-maker has influenced the decision. Where the will to do right exist, if a decision has been made with the input of any such decision-maker, the decision must be quashed!

It is, therefore, a mark of poor judgment to see that with potentially vast sums of roughly $114 million ($38m + $76m) - at stake, our Government has ignored the rule against bias. We cannot excuse this blatant disregard of the conflict of our national interest with those of relatives of the President.

Let us imagine that the Government of Ghana becomes aware of any impropriety with the Agyapa deal after the IPO, would our Government be in a position to seek redress (compensation) when relatives of the President (including the minister of finance) has been involved in the IPO process and have also been direct beneficiaries of any such bad deal?

Definitely not when the minister of finance nominates three members of the board of MIIF and exercises so much control over the affairs of the fund (MIIF), he alone appoints and dismisses the chairperson of the advisory committee of the fund!

In June 2020, Goldman Sachs reached a $3.9 billion settlement with the Government of Malaysia after the investment bank was sued for helping to "dishonestly misappropriate" money from a Malaysian public fund, 1MDB. The investment bank had helped 1MDB to raise funds intended for development projects, and the Government of Malaysia had later observed impropriety. If Ghana finds herself in a situation similar to Malaysia after the IPO, would we would not have a leadership that can investigate without bias and seek redress after key members of our Government have benefited from the IPO.

Let's review the 3 key arguments put forward by the minister of finance in support of Agyapa's deal, as follows:

1. The fund-raising (IPO) enables Ghana to remove potential fluctuations in future cash flows from mining royalties

2. A sale of rights to the royalties (future cash flows) instead of raising debt capital (loans) avoids increasing Ghana's debt burden

3. The current gold prices on the world market are high and as such offers a better window of


The first argument from the minister is porous! Whiles the IPO will secure a maximum fixed amount of up to $1 billion, nobody at the ministry of finance can tell Ghanaians what the actual value of the remaining 51% of Agyapa's share would be even a mere two days after the IPO.

Ghana, after listing the shares of Agyapa Royalties, would have re-introduced the same, if not more, uncertainty in the future cash flows as the value of the remaining 51% of Agyapa's shares would be dictated by the interactions of buyers and sellers on the stock market. As the price of gold fluctuates, the value of Agyapa would fluctuate. The stock of Agyapa would not be immune to the "mood swings" of tradable securities.

The second argument hides behind a supposed good intention while failing to admit the reality that we are not going to stop borrowing after selling shares of Agyapa. The current global economic environment favours raising debt capital (loan), with interest rates on the global capital markets at historically low levels.

In fact, some central banks are charging negative interest rates to force financial institutions to lend or invest instead of saving their pile of cash with the central banks. Ghana can borrow at a relatively cheaper rate in the current economic environment, more so by securing any such lending with the royalties instead of selling the rights to the royalties through Agypapa.

The third argument of the minister of finance would equally support a decision to raise debt capital (loan) as the Government can utilise the current high valuation of gold and gold-related assets (royalties) to pledge higher security collateral for borrowing and bargain for a relatively lower interest rate. There is no credible reason why the current debt capital market conditions should not motivate us to review our choice of monetising royalty assets over debt finance.

The case for a Sovereign Wealth Fund

Most of us agree that we cannot sell our resources or persistently borrow our way out of poverty. If we are serious about fighting poverty in our country, let us objectively look at how the countries that have achieved the goals we are chasing are managing their resources. A look at some of the countries that have created better socio-economic opportunities like Singapore, Norway, and Saudi Arabia, will highlight the benefits of saving and investing a portion of our mining royalties through a Sovereign Wealth Fund.

Saudi Arabia has a sovereign wealth fund worth $300 billion from the only natural resource they have. Norway's is worth $1.2 trillion. Singapore, a small city-state, has two funds worth a combined value of over $700 billion. The state of Texas in the US created the Permanent University Fund (Texas) in 1876 to invest proceeds from Mineral Rights and Public Lands. This fund is worth more than $21 billion today and over many years has provided critical funding to support education in the state of Texas in the US.

These are investment vehicles that received state funds and have invested responsibly over time to increase the value of their state assets instead of selling and spending. These sovereign wealth funds managed by qualified investment managers invest in successful companies around the world. They can also use their state-sponsored investments to initiate strategic business partnerships for their local companies; an added benefit to their economies.

Imagine Ghana's sovereign wealth fund investing in a manufacturing company abroad and including as condition for the investment an agreement with the company to set up a manufacturing plant in Ghana that would employ thousands of our youth and pay taxes as well. In such case, our country, represented by our Sovereign Wealth Fund, would be negotiating with, not begging, foreign companies to invest in Ghana.

If our fathers want to be good - and to all of our citizens - as the name Agyapa suggests, they should be sowing the seeds that would give us prospects other than the post-colonial economic slavery that has seen our youth travelling through the Sahara Desert to Europe.

If we cannot utilise the greater part of the mineral royalties we are already spending to meet our present needs, and save the few percentages that flow to the MIIF for investment and future benefit, how would we chart a path out of poverty? The little drops of royalties, if invested, would make a better nation.

If anybody is wondering why I have not offered any views on the valuation of the royalties and Agyapa's deal, I have decided to wait for the stock market to pronounce that judgment should the Government force its way to list the shares of Agyapa.

Benjamin Graham, a renowned investor and teacher, once said "in the short run, the stock market is like a voting machine — tallying up which firms are popular and unpopular. But in the long run, the stock market is like a weighing machine — assessing the substance of a company."This statement is very applicable to the Agyapa deal.

Those leading the Agyapa deal assume the NPP is currently popular and so the deal and the party will win public approval anyway (popularity contest) but, in the long run, the stock market would assess and confirm the actual value and benefit of the Agyapa IPO.

The legacy of this deal is likely to be like this: If the IPO is hugely successful the 41% of Agyapa's shares sold would have been hugely underpriced/undervalued and a financial loss caused to the state. If the IPO is hugely unsuccessful the remaining 51% shares of Agyapa, owned by Ghana, would have significantly less value and the overall deal worth less than the value of the royalties sold through Agyapa's IPO.

The shares of Agyapa would become an enduring symbol of a bad transaction as it remains on the weighing machine of the London Stock Exchange. And so the outcome of this IPO is not going to be without controversy for a long time. And the credibility and image of the NPP are also at stake.

One of the key issues this controversial deal highlights is that the conscience of our nation needs an awakening. There is a noticeable lack of dissent within the incumbent and opposition parties. Any proposed government policy, program or project is routinely rejected by all members of the opposition where all members of the incumbent Government cannot see anything wrong.

It is, therefore, not too surprising to see that members of the incumbent Government are acting as if we do not know that those who take public office have an implied agreement with the state to subordinate their individual interests for the good of the nation. We do know that any member of our Government who cannot subordinate their interest and keep their private business interests from conflicting with those of Ghana is not worthy of our trust.

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