VRA's health - Reflections on the President's State of the Nation Address

The State of the Nation Address by President Mills on February 19, 2009 gave some indications of how the NDC government intends to move from electioneering promises to policy and action. There are many talking points. However this article discusses some issues raised by the President's pronouncements about Energy and Power, including restoring the financial health of the Volta River Authority (VRA).

The 2006-2007 electricity crisis (the second in a decade) exposed the cumulative consequences of the failures of the first NDC era and the compounding of these by the Kufuor government. Under the NPP, the VRA was reduced to a shadow of itself by a combination of mismanagement due to political interference and poor policy decisions which undermined its economic viability.

The VRA's $800m debt that President Mills mentioned is one element of VRA's poor state. While the continuously rising price of oil till late 2008 was a complicating factor, the Kufuor regime worsened the problem with its love affair with VALCO.

President Mills signaled a recognition of the need to restore the financial health of VRA and for new investments in power generation to meet rising demand. President Mills declared that “The anticipated increase in generation will enable cost-effective supply to meet the nation's requirements including that of VALCO” (my emphasis). The imperative of encouraging investment in renewable energy sources came to the fore during the 2007 crisis and one hopes that it is an issue the full energy policy of the Mills government will pay some attention to.

'Cost-effective supply' means that power is produced by the most efficient possible means, but even the most efficient power supplier needs to sell its power at an economic price. Against this background President Mills' specific mention of VALCO while asserting a commitment to cost effectiveness is puzzling. VALCO, like any consumer, should be able to buy the power it needs for its operations. However during the NPP years, VALCO, after it was acquired by the government, became noteworthy precisely because its guaranteed supply of heavily subsidized power, thanks to political patronage, showed anything but a commitment to the health of VRA. One of the NPP's more pernicious legacies is the VRA-VALCO power agreement which impedes a restoration of VRA's financial health.

Kufuor's VALCO romance
In his valedictory address to Parliament on January 5, former President Kufuor underlined his VALCO romance when he mentioned an integrated aluminum industry centred on VALCO as one of three 'already initiated', 'strategic programmes' that he hoped the incoming Mills administration would continue. He believed that would 'help Ghana to attain its vision of becoming a middle- income economy by 2015'. 'These developments will give a major boost to our economy and help to realise the dream of Kwame Nkrumah for industrialisation that inspired the construction of the Akosombo dam', Kufuor claimed.

It would be startling if Mills contracts the VALCO bug from Kufuor if only because he has announced an aversion to anything with a whiff of impropriety. It is only three months since a major and still unexplained scandal erupted within hours of Parliament approving, by acclamation, the sale of 70 per cent of VAL CO's shares. Within hours Norsk Hydro and Vale, the two supposedly key members of International Aluminum Partners (IAP), the consortium buying the shares, denied being part of the deal.

Parliament, the NPP government and VALCO's chief executive, Dr Charles Mensa (who witnessed for IAP's signatory to the contract), have neither offered a satisfactory explanation nor told Ghanaians who IAP are, if not Vale and Norsk Hydro. The only publicly known contact for the mysterious new majority owners of VALCO is a box number in the tax haven of British Virgin Islands.

As part of the IAP deal, the NPP government imposed a 15-year power sale agreement on VRA which is anything but economic for VRA. The 'binding and irrevocable agreement' guarantees VALCO power at 3.5 cents per kilowatt hour (kWh). At the time VRA's estimated power generating cost was about 15 cents per kWh. This implies a loss of 11.5 cents to VRA on each kWh it gives to VALCO. This will translate into a public subsidy to VALCO in excess of $200m a year if it runs three of its production potlines.

This is more than the $175m IAP paid for its 70 per cent share. VRA's generation costs are currently around 10 cents per kWh, thanks to a near best case scenario of low oil prices and a good water level, but still well above what VALCO is paying. (VALCO has been closed since late last year because the fall in the world price of aluminum has made its production unprofitable even with this massive public subsidy.)

Not Nkrumah's vision
Kufuor, despite his known aversion to Nkrumah, appears to have embraced his vision for an integrated aluminum project in an industrialised Ghana. The January 5 reference to Nkrumah's vision was only the latest occasion on which Kufuor has sought to project himself as walking in the great man's shoes.

Several of Kufuor's speeches during his second term reveal the consuming passion that VALCO and an integrated aluminum project became for him. Unfortunately for Ghana this obsession has been insatiably fed, over the years, with millions of Ghana cedis worth of subsidised electricity.

What has been pursued in the last few years however is a caricature of what Nkrumah envisaged. His was a dream of national industrialization using cheap and abundant power from the Volta River Project with an integrated aluminum industry as a component. Cheap and abundant power was central to the vision for national industrialization spread across the country in several sub sectors.

In the Kufuor dream industrialization is reduced to an integrated aluminum industry centred on a public-foreign private partnership which is not linked with a plan for national industrialization. Since state acquisition this has meant keeping VALCO going even though power is neither abundant nor cheap.

Rational policy will recognise that the benefits of an integrated aluminum industry can only be realised when there is sufficient power at an economic price for a smelter.

In his farewell address to Parliament, Mr Kufuor claimed that "Government has worked extensively on this integrated [aluminum] project and much progress has been made. It should be realisable within the next five years." This is both an exaggeration and a covering up of the multitude of sins which have been committed in the name of 'an integrated aluminum industry' besides the unexplained scandal around the IAP transaction and the destructive VALCO-VRA power contract.

We now know that the Minister of Trade and Industry misled Parliament when he stated in the memorandum in support of the Ghana Government-IAP contract that Norsk Hydro and Vale were at the centre of a consortium that was going to invest in a $4.7 billion integrated aluminum project.

There are credible indications that the so called 'extensive work' does not offer the technical basis for proceeding with the project which would comprise of a new bauxite mine at Nyinahin, a two million ton alumina refinery plant at Tema, refurbishment of the Kumasi-Tema railway line and a 1200MW power plant in Tema.

More importantly since Vale and Norsk Hydro distanced themselves there has been no public information about the identity and credibility of the investors in the IAP who are able to raise and invest the big sums being mentioned. Even more puzzling is the fact that that IAP paid a premium for its share in VALCO at a time of contracting global demand for aluminum and sharply plunging prices. The closer one looks, the shadier the whole 'integrated aluminum project' appears.

Last December a group of citizens and organisations, including Third World Network-Africa, intervened with Parliament to oppose the passage of an Aluminum Authority and Integrated Aluminum Bill. It aimed to create a body with very sweeping powers out precedent. The Aluminum Authority would not only both regulate and invest in the bauxite/aluminum industry but also combine the regulatory powers which are currently shared among the Minerals Commission, the sector Ministry and Parliament.

This unprecedented combination of powers in the Aluminum Authority runs against the trend of separating operators from regulators that is exemplified by the PURC, National Petroleum Authority (NPA), the National Communication Authority (NCA) and more recently the Ghana Petroleum Regulatory Authority.

Interestingly, the Aluminium Authority Bill was laid before Parliament around the same time as the law creating the Petroleum Regulator Authority. The two could not be more divergent in nature but the memorandum to the Aluminium Bill offers no credible justification for the difference.

Who initiated the Aluminium Authority Bill?
During Parliamentary committee hearings on the Aluminium Authority Bill it emerged that that the bill had originated not from the sector Ministry but from the Attorney General working Dr. Charles Mensa. The sector Ministry it seems was a mere conduit.

To prepare the grounds the Attorney General had ordered the Minerals Commission to write a letter authorising the ceding of its constitutional powers over bauxite and aluminium to the super powerful Aluminium Authority. These steps could only have been taken with support from the highest levels of state power.

The mysterious IAP consortium looms large as the prime beneficiary of the aggressive use of political power against VRA for subsidised power, and the attempt to create a bauxite-aluminum enclave under the super powerful Aluminum Authority.

Amidst all this an obvious question is crying for an answer: If all these steps of burdening VRA and the national budget with a subsidy to VALCO, the readiness to dismember the Minerals Commission and sail close to the margins of constitutionality are not in the public interest, then for whose benefit other than the IAP did the NPP government so relentlessly press on?

What should the Mills government do?
The subsidy to VALCO is not in the public interest. The Mills government should urgently deal with it as part of its efforts to restore VRA's health and to reduce the fiscal deficit. The VALCO-VRA agreement should be abrogated and VALCO like all other major industrial consumers such as the mines can negotiate and pay an economic price.

It is also important that the government take steps to formally kill the Aluminium Authority and Integrated Industry Bill and retain the integrity of the Minerals Commission. There is no evidence that the "bauxite/aluminum sector has special needs that require such as entity alongside Minerals Commission. Such a step will fit in with Mills' avowed aim of cutting the cost of government.

As part of its announced good governance and anti-corruption drive, the Mills government should seek answers to the issues raised by the scandal surrounding the sale of VALCO's shares to IAP. Who are the owners of IAP? Did the government knowingly mislead the nation about the involvement of Norsk Hydro and Vale in the IAP? How and by whom was the share sale transaction negotiated? How did VRA sign such an irrational agreement to supply subsidised power to VALCO? Did it act under political pressure, if so from whom? These and many more questions are crying for answers which will help the country chart a path in the power sector away from the negative legacy of Kufuor's romance with VALCO.

Written by Yao Graham
Co-ordinator of the Third World Network-Africa