Banking crisis: How ESLA could’ve been used to minimise the

impact

By Seth E. Terkper

This article discusses the potential of using Energy Sector Levies Act
(ESLA) 2015 (Act 899) to substantially resolve the ongoing banking or
financial sector crisis.
The Act was a ‘smart-borrowing’ initiative under the Home-Grown
Policies that Cabinet and Parliament approved in the 2013 and 2014
budgets. We note that the EMEA award-winning ESLA structure was
not among the measures under 2014 IMF Enhanced Credit Facility
(ECF) Agreement.

The relevance to the financial crisis is clear from the Ministry of

Finance (MoF) 2016 report sent to Parliament in 2017—Annual Report
on the Management of the Energy Sector Levies and Accounts (Years
2016)—which notes the objectives of ESLA as follows:

“The Act (i) consolidates existing Energy Sector Levies and

defines a framework to correct imbalances in the collection,
distribution, and utilisation of the levies; (iii) ensures the financial
viability of energy sector sate-owned enterprises (SoEs); (iv)
facilitate investments in the sector; and (v) mitigate against market,
credit and liquidity risks of energy sector SoES and their
counterpart creditor banks” (par. 2, p 6; emphasis added).

The 2017 ESLA report repeats the goal of using ESLA to leverage
the markets to resolve the adverse direct and indirect impact of debt to
creditors and counterpart banks.

“The debt overhang also increased the exposure of those

institutions to credit and liquidity risk and, consequently, impacted
significantly on the balance sheets of their counterpart creditor
banks. To address these challenges, government passed the ESLA
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 in December 2015, with full implementation beginning in 2016”
(see also Par. 70 to 72).

From the above, it is clear that ESLA is a crisis resolution tool for
SoE non-performing loans (NPLs) and arrears to suppliers (e.g., N-Gas,
Sunon-Asogli); improvement in rural electrification and public lighting;
stabilisation of petrol pump prices; an enhanced levy for the Road Fund
to clear arrears to contractors and counterpart banks. MoF’s setting up
of ESLA Plc in 2017 as a quasi-fiscal agency seems to compromise the
non-classification of SoE debt as public debt. In contrast, the innovative
2015 ESLA mechanism ‘ring-fences’ the inflows to pay debt on SoE
balance sheets—through a mandatory ‘escrow’ or debt service account
(DSA).

1. Flows and uses of ESLA in 2016

In early 2016, MoF used the actual and estimated ESLA flows, in a
‘cascade’ model, to pay US$250 million cash and restructure of GH¢2.2
billion of debt on VRA’s balance sheet. The successful model uses the
‘ring-fenced’ DSA flows to pay the banks directly, to settle NPLs due
from VRA, TOR and BDCs.

1.1 Strong ESLA inflows: As the Tables in Section 5 show, about

Gh¢2 billion of the total annual ESLA flows are dedicated to
settling energy and road sector debt. It was possible to use these
funds to ease the pressures facing the banking sector without
further loans.

1.2 ‘Cascade model’ helpful to banking sector: The model uses

ESLA flows meant to (a) pay debt to creditors ; under (b) a
tripartite agreement with government to (c) use the ‘ring-fenced’
flows in ‘escrow” accounts to settle NPLs due counterpart banks.

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1.3 Successful resolution of SoE and other debt in FY2016. The
ESLA ‘cascade’ debt resolution model was used in 2016 as
follows:

 VRA debt: With payment of Gh¢250 million upfront, MOF

successfully restructured Gh¢2.2 billion of VRA debt owed to
12 domestic banks—paying both principal and interest in five)
years. By end-2016, MOF had paid two quarterly instalments of
Gh¢228 million.
 Road arrears: The enhanced [ESLA] road levy was used to
restructure over Gh¢1 billion of Road Fund debt to contractors
and creditors, including a loan due to SSNIT since 2010.
 TOR and BDC debt: the ESLA TOR levies for debt recovery
and price stabilisation were used to restructure over Gh¢1billion
of TOR and BDC debt.

1.4 Strategic stock initiative: this initiative supported the liberalisation

of fuel-pump prices, with MoF releasing nearly Gh¢190 million to
the Bulk Oil Storage and Transit (BOST) company to (a) buy fuel
for storage at low crude oil price points; and (b) release it at a
reasonable margin for re-export or domestic use when prices
increase.

1.5 Draft AFRIEXEM Term Sheet: At end-2016, MoF had the final
draft of a Term Sheet negotiated with a consortium of banks led by
AFRIEXIM Bank. The US$600 million loan with five-year tenor
and eight percent interest rate was for restructuring additional
VRA and other energy SoE debt due to suppliers such as N-Gas
and Sunon-Asogli.

2. ESLA performance in 2017

New administrations take time on existing policies but the

Parliamentary debate of ESLA was extensive though it led to an
Opposition boycott of the ‘nuisance tax’ and sluggish take off in 2017.
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2.1 Delays in FY 2017 worsened the situation: The 2016 draft
AFRIEXIM facility was set aside, with MoF choosing to make
piecemeal payments. This delayed the restructuring of US$600
million of debt owing to creditors and counterpart banks.

2.2 ESLA extension for 10 years means more inflows. The 2017
ESLA Bond implies a levy extension for seven-to-10 years—
compared with five years for the 2016 VRA facility. At an annual
flow of GH¢3.2 billion, ESLA could generate over Gh¢30 billion
to support the estimated US$8 billion only needed to resolve the
banking crisis.

2.3 FY 2017 (Interest-only) Bond reintroduces risks: The ‘principal-

plus-interest’ 2016 VRA debt resolution is subsumed in a riskier
‘interest-only’ 2017 ESLA Bond.

 Liquidity risk: the longer tenor and interest-only payment means

less inflows to the banks and inevitable BoG ‘fiscalisation’ of
huge financial costs.
 Bullet and roll-over risks: the payment of principal as a ‘bullet
in seven or 10 years implies a major “’oll-over’ risk, devoid of
‘smart-borrowing’ schemes like a sinking fund and buy-back.
 Interest and forex risks: the 2017 ESLA Bonds converted the
eight per cent 2016 VRA dollar loan—under a ‘swap’ of
existing VRA $-debt service flows—into a 19 per cent cedi-
loan. This increases interest and forex risks under a depreciating
cedi scenario.

Ghana had used ‘soft amortisation’ structures to minimise roll-over

risks for its external bonds, with the 2023 sovereign bond being the
only ‘bullet’ of four bonds at end-2016.

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2.4 ESLA subject to FY2017 Budget ‘cap’: The ‘capping’ of various
statutory funds such as DACF, GETFund and NHIL is extended to
ESLA. The 2017 ESLA Report (par. 41) states:

“… a shortfall in lodgment of GH¢306 million (21.1 %) was

recorded, as a result of …. government policy on ‘capping’
statutory funds, which reduced transfers into the Road and
Energy Fund Accounts by GH¢ 157.23 million”.

Clearly, national policy makes ESLA secondary to schemes such

as FSHS, whereas an alignment to pay creditors in the banking,
energy, and road sectors would have improved the fortunes of the
financial and real sectors.

2.5 ESLA as mainstream revenue: Besides the ‘ring-fenced debt-

service amount, the 2016 Budget/Mid-Year treated some of the
ESLA flows as mainstream revenue since they accrued to agencies
such as Energy Board that were on central government budget. The
‘cap’ raises the ESLA transfers f201to thee Budget from 2017.

2.6 Strategic Stocks and BOST refund: The 2016 ESLA report notes
that MOF released Gh¢189.39 million to BOST to start the
strategic oil stocks scheme (par. 34, p 14), as alternative to subsidy
payments. This scheme stabilized pump prizes from.end-2015
through 2016. However, the 2017 ESLA Report notes:

“An amount of Gh¢189.39 million was transferred to BOST … for

the procurement of strategic oil stock in 2016 … As at end-
December 2017, BOST had refunded Gh¢120 million … leaving
an outstanding balance of GH¢69.39 million” (par. 45, p 25).

The quote is curious since the amount was to create a revolving

fund for managing stocks, prices and subsidy—a primary reason
for the SoE debt ESLA levies. It is not a traditional loan to be
refunded.
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2.7 Payments outside ESLA legislation: The 2017 ESLA and other
documents d show ESLA proceeds being used to pay (a) pension
arrears [NPRA TPFA] of GH¢600 million and (b) Partial Risk
Guarantee (PRG) of GH¢61.5 million. These were not part of the
‘legacy’ debt in the 2015 ESLA Memorandum. The PRG also
suggests ECG inability to pay for the SANKOFA “gas-to-energy”
Letter of Credit (LC) waterfall payment arrangements.

2.8 ESLA Plc and exposure to public debt: SOEs are profit-making
entities whose debt is not co-mingled with the public debt. ESLA
simply viewed the statutory levy as merely improving the
probability of payment. Though quasi-fiscal agency, ESLA Plc
must not resemble a guarantee institution instead of being
managers.

3. Restructuring SoE and counterpart bank debts

In 2016, MoF successfully negotiated a facility to refinance

Ghc¢2.2 billion of loans owed by VRA to 12 domestic banks, led by the
President of the Association of Bankers. Table 1 shows extracts from the
sheet.

Table 1: Restructuring Agreement (2016) with 12 Banks

Amount Rate Period

Item (million) (%) (years) Comments
GH¢(million) component
Loan amount GH¢ 25 5 Flexible rate pegged to T-
765.0 Bill rate
US$ (million) component
Loan amount US$ 8 5 Fixed rate
357.0
Common elements
Estimated Ghc Foreign component x-rate
VRA debt 4,200.0 of
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1st 2,200.0
restructuring
amt
Upfront Ghc Paid from the 1st ESLA
payment 250.0 flows
Repayment 5
period
Instalments Ghc 2 quarterly instalments
228.8 (end-2016)

A second term sheet was handed over during the 2016 Election
Transition process for refinancing debt owed to banks and suppliers. The
US$600 million loan from an AFRIEXIM-led consortium of six banks
was repayable at eight per cent in five years. It was not utilised but
replaced with the ESLA plc bonds in August 2017 (Table 2), including a
swap of the 2016 multi-currency facility (Table 1).

Table 2: Structure of ESLA bonds issued in FY 2018 Commented [m1]: Should it be FY 2017 or 2018?

Amount (GH¢ Interest Period Comments

Items mill)
Target Realised (%) (years)
1st 2,408.6 19.0 7 These bonds were
Tranche 10 issued together
2nd 2,375.4 19.5 10 under the same
Tranche market program
Total 4,784.0 and include
SOE plus 9,393.5 refinancing of the
liability 2016 facility for
the debt on VRA
& TOR balance
sheets (Table …)
Other terms/features?

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 Table 3 summarises the status of energy-sector debt, payments,
and balances from the 2017 ESLA report. With GH¢20-to-GH¢30
billion ESLA funds to back GH¢6-to-GH¢8 billion of bank debt, the
state should revert to paying principal plus interest to protect depositors
more. Due to the delays in 2017, the SOE and BDC debt rose from about
GHc 4 billion to GHc9 billion— partly on account of higher foreign
exchange and interest rate risks.

Table 3: Post-2018 bond liability, payment and balance status

Liability Payme Balanc

Sourc nt e Comment
e Exc Total s
US$ h, GH¢ (GH¢ GH¢ m Ghc m
m rate m m)
VRA 887.0 4.4 3,902. These
6 “cedi-
582.8 4,485. 2,050.1 2,435.3 Bonds”
4 (see Table
TOR 257.8 4.4 1,134. ..)
4 refinanced
973.4 2,107. 775.0 1,332.9 both
8 foreign &
ECG 424.0 4.4 1,865. domestic
5 component
318.7 1,664. 519.5 1,664.7 s of the
7 debt under
the
FY2016
loan
restructuri
ng facility
BDCs 140.0 4.4 616.0 616.0 616.0 0.0
Total 1,708. 9,353. 3,960.6 5,432.9
8 5
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4. THE POTENTIAL OF ESLA

Table 4 shows the ESLA rates underlying the inflows from 2016.
As noted, they could remain in force for ten years to support the 2017
Bonds—unless another viable source of revenue is identified to lift the
burden on taxpayers.

Table 4: Energy Sector Levies and Pricing Formula

Tot
Products
al
Collec Benefa Ke
Mari Fu Elec
tion ctor/ Petr Dies ro- LP
Levy ne el trici
Agenc Institut ol el sin G
Gas Oil ty
y ion e
pp ppk
price per litre (ppl) kg wh
Energy
Debt 0.0 0.3 1.2
Recovery GRA 0.41 0.41 0.03 4 7 0 0 6
o/w forex
loss GRA EDS a/c 0.05 0.05 0.1
0.0 0.0 0.2
TOR debt GRA EDS a/c 0.08 0.08 0.03 4 4 7
Power 0.2 0.8
Gen/Infra GRA PGISsA 0.28 0.28 8 4
Road Fund Road
Levy GRA Fund 0.4 0.4 0.8
Energy Energy 0.0 0.0 0.0
Fund Levy GRA Cmx 0.01 0.01 1 1 4

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 Price
Stabilizatio 0.3
n NPA PSR a/c 0.12 0.1 0.1 2
Public
lighting 0.5 0.0
levy ECG/N MOP/E % 05
National EDCO/ DCs/PG 0.5 0.0
electrifx VRA ISsA % 05
Source: ESLA Report (2016), Section 7, Appendix A

Table 5 shows estimates and actual inflows from the levies and are
deemed to be enough to support a major restructuring of debt owed to
suppliers, contractors, and counterpart banks.

Table 5: Programmed, collection, and actual 2016 ESLA

performance

January-December 2016 (GH¢ million)

Collecti
on Deviation
%
Levy
(Prog % (Act
Act- - -
Progra Lodgm Prog- Lodg Actu Lodg
m Actual ent Actual mt al) mt)
Energy 1,174.6 1,281. 1,264.1 106.6 (17.10
Debt Rec 0 20 0 0 ) 9.08 (1.33)
Price
Stabilisati (57.90 (12.20 (14.6
on 396.40 338.50 326.30 ) ) 1) (3.60)

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 Public (127.3 (145.5 (43.0 (86.40
Lighting 295.70 168.40 22.90 0) 0) 5) )
Nat. (20.00 (244.2 (6.74 (88.19
Electrificx 296.90 276.90 32.70 ) 0) ) )
Road 1,061.8 1,204. 1,002.0 142.4 (202.2 (16.79
Fund 0 20 0 0 0) 13.41 )
Energy (3.56 (17.11
Fund 30.90 29.80 24.70 (1.10) (5.10) ) )
3,256.3 3,299. 2,672.7 (626.3 (18.98
Total 0 00 0 42.70 0) 1.31 )
Source: ESLA Report (2016), Section 7, Appendix B

The ESLA law requires that MoF sets up specific accounts to

manage the inflows and outflows—amended since FY2017 to include all
the accounts under the ESLA law. Tables six and seven shows that there
are significant deviations between the ESLA lodgments and actual
utilisation.

Table 6: 2016 ESLA lodgments versus utilisation

Lodgme Utilisatio Deviation
Levy Accounts nt n
GH¢ million Nomin Perce
al nt
1. Energy Debt Service 478.0 311.0 (167.0) (34.9)
0 a/c (EDSA)
1. Tema Oil Refinery nr 187.0 nr nr
1 (TOR) debt
1. Forex loss nr 124.0 nr nr
2
2. Power Gen & Infra 841.7 787.0 (54.7) (6.5)
0 sub-a/c (PGISsA)
2. Debt payment nr 787.0 nr nr
1

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 2. Power supply nr 0.0 nr nr
2
2. Under-recovery nr 0.0 nr nr
3
2. PRG nr 0.0 nr nr
4
3. Price Stabex & 326.3 313.3 (13.0) (4.0)
0 Rec’vry a/c (PSRLA)
3. Petrol under-recovery nr 0.0 nr nr
1
3. Petrol price stabilization nr 269.5 nr nr
2
3. Premix subsidy nr 43.8 nr nr
3
Total utilisation 1,646.0 1,411.3 (234.7) (14.3)
Source: 2017 ESLA Report, MOF; nr (not reported)

As Tables seven and eight show, the 2017 ESLA flows were also
strong, given global economic recovery and firms passing the increase in
crude oil prices to consumers.

Table 7: Programmed, collection, and actual 2017 ESLA

performance

Deviation
Nominal Amount (Nominal) Deviation (%)
Lev
Progra Actual - Progra Actual -
y
Progra Actua Lodgme m - Lodgme m- Lodgme
m l nt Actual nt Actual ntt
EDR 1,358. 1,293
L 1 .0 1,293.0 (65.1) 0.0 (4.8) 0.0
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 PSR
L 415.3 345.3 345.3 (70.0) 0.0 (16.9) 0.0
PLL 229.0 180.0 179.7 (49.0) (0.3) (21.4) (0.2)
NES
L 189.7 151.1 151.1 (38.6) 0.0 (20.3) 0.0
1,331. 1,152 (179.4
RFL 4 .0 1,058.1 ) (93.9) (13.5) (8.9)
EFL 31.9 30.7 28.1 (1.2) (2.6) (3.7) (9.3)
Tot 3,555. 3,152 (403.3
al 4 .1 3,055.3 ) (96.8) (80.5) (18.3)
Source: 2017 ESLA Report, MOF

The Tables continue to exhibit the same significant deviation between

collection and lodgment.

Table 8: 2017 ESLA Lodgments versus utilization

Lodgm Utilix Deviation

Levy t Comments
GH¢ million GH¢ %
m
1. EDSA 438.9 228.8 (210.1 (47.9
0 ) )
1. TOR debt 156.8 181.8 nr nr
1
1. Forex loss 282.1 47.0 nr nr
2
2. PG&IS 687.5 919.0 231.5 33.7 See new item 3.0
0
2. Debt pmt 640.0 855.1 nr nr
1
2. Power 19.0 0.0 nr nr
2 supply

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 2. Under- 28,6 0.0 nr nr
3 recovery
2. PRG Na 61.5 na na Not in ESLA Act
5
2. Bank Na 2.4 na na
6 charges
3. Trs: ESLA Na 279.8 na na 2017 ESLA Bond
0 plc Prospectus
4. Price 345.0 21.7 21.7
0 Stabex
4. Petrol Nr 0.0 nr nr
1 underrec
4. Petrol px Nr 0.0 nr nr
2 stabex
4. Premix Nr 21.7 nr nr
3 subsidy
Total 1472.3 1,449. 43.1
utilization 3
Source: 2017 ESLA Report, MOF; nr=not reported; na=not
applicable

Table nine shows additional data and inflows that are attributable
to extending the coverage of reporting to all ESLA levies and the
channeling of the energy debt service through ESLA plc.

5. CONCLUSION

On the 10th anniversary of the fall of Lehman Brothers in the US,

which many experts believe to be the immediate cause of the global
financial crisis, it is useful to remind ourselves that ESLA is designed to
resolve several fiscal, real sector, and banking challenges.

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 While remote causes such as the ‘sub-prime (rate) lending’ debacle
remained in the background, the fall of Lehman Brothers raised issues
relating to idealism versus pragmatism in making public policy.

The ideal was to make Lehman fall but the contagion effect was
disastrous and led to pragmatic interventions by treasuries and central
banks, led by the quantitative easing measures by the US Federal
Reserve and Treasury.
The immediate outcome from drying global financial flows, lack of
credit to business, loss of jobs, and slump in global demand that led to
a sharp fall in commodities prices. It has taken a decade for the world to
see simultaneous recoveries in the economies of developing, emerging
or BRIC and advanced economies.

ESLA and the refinancing of VRA’s legacy debt was a pragmatic

way of preventing the impact of the energy and road sector debt from
contagiously affecting depositors’ funds, jobs and meltdown of the
Ghanaian economy—which, in 2015, was just emerging from the energy
crisis caused by the damage of the West Africa Gas Pipeline and
disruption in gas supply from Nigeria, christened or nicknamed
“dumsor”. It was a tripartite agreement that improved the NPL situation
in 12 domestic banks.

We are seeing the contrast in allowing some banks to fail and

others forced into a consolidation program. Big is not always beautiful
in this context because the global financial crisis also coined the term
‘too big to fail’, when it came to the question of allowing bigger banks
than Lehman Brothers to also fail.
Already, the fiscal cost in the form of levies (ESLA) and loans has
been heavy; the impact on the real sector in job losses is also real. Given
the strong ESLA inflows, we still have an opportunity to redirect the
levy to the core business of resolving the real and financial sector crisis.

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 We can do this by removing impediments such as the ESLA ‘cap’
and mainstreaming of its flows, to focus better on the NPLs emanating
from the energy, road, and other sectors.
The banking sector also benefits from removing these constraints
by seeing larger ESLA inflows.t in this way, we can revert to paying
principal plus interest for all ESLA-backed loans or bonds.
This is to avoid the ‘bullet’ risk associated with the 2007
Sovereign Bond and use of the Sinking Fund to pay over US$500
million of petroleum revenue between 2014 and 2017 to redeem the
maturing US$750 million debt.

The writer is a former Minister of Finance and Lead Consultant,

PFM Tax Africa

Pull quote
ESLA and the refinancing of VRA’s legacy debt was a pragmatic
way of preventing the impact of the energy and road sector debt from
contagiously affecting depositors’ funds, jobs and meltdown of the
Ghanaian economy

Number crunch
Gh¢30
At an annual flow of GH¢3.2 billion, ESLA could generate over
Gh¢30 billion to support the estimated US$8 billion facility needed to
resolve the banking crisis

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