The economics of Ghana’s US$2 billion bauxite deal

The technical analysis unveiled last week on the economics of Ghana’s US$2 billion bauxite for infrastructure agreement with China, as conducted by the African Centre for Energy Policy and the Natural Resources Governance Institute is very revealing, it strongly suggests that the deal is not self-amortizing as government would want the citizenry to believe.

The implications set out by the analysis should finally put to rest the debate as to whether the arrangement is an investment as claimed by government or a loan as alleged by its political opponents. By the time Ghana has to start paying down most of the financing – including interest and loan fees total payments may exceed US$4 billion – from its traditional revenue sources, primarily tax revenues, it will be clear to all that the financing is indeed a loan.

However, we commend government for succeeding in getting the international financial community, including the International Monetary Fund itself, to accept classifying it as an investment. By keeping it out of the public debt it preserves what is left of Ghana’s international credit worthiness which has practical advantages with regards to both access to and the cost of further public borrowing.

But the new technical report will give the political opposition veritable new ammunition for criticizing the incumbent government, which it will accuse of over-borrowing and subsequently attempting to cover it up. It will also claim that it was aware of the implications of repaying the financing on the public treasury, hence its opposition in the first place.

The former is debatable and the latter is outright falsehood; the political opposition simply sought to score political points from heavy public borrowing which indeed was why it laid the matter to rest when the IMF agreed to classify the financing as an investment.

More important than all this however is the fact that although the deal will not be self-financing and will take a toll on the public purse, it may still be worth the trouble, as long as both the infrastructural projects and the integrated aluminum industry itself are prudently executed.

US$2 billion in socio-economic infrastructure, if properly selected and constructed cannot be a bad thing; it could have huge benefits with regards to improving the operating environment for business and resultant enhancement of private sector productivity. This would come with direly needed job creation and value addition.

The integrated aluminum industry also holds huge potential, even though financing repayment obligations will fall due much faster than revenues will be generated. Eventually however those revenues will exceed the repayments; the aluminum industry will be generating revenues decades after the financing has been fully amortized.

Indeed, this should be seen as a strategic investment rather than a medium-term project for profit. Companies such as Aluworks and Pioneer Kitchenware have prospects of becoming major exporters across West Africa which is the trajectory they were on before energy costs forced VALCO to virtually close down.

It would be difficult, nay impossible to quantify the benefits of the bauxite deal in order to make an accurate quantitative cost-benefit analysis. Indeed, with government reluctant to reveal details of the structure of the entire deal, particularly that of the integrated aluminum industry, even a quantitative analysis of the financing arrangement itself has been problematic as the authors of the report readily admit.

But the deal is already ongoing and there are real benefits to be gained. The effort now should aim at charting the best course to getting them.