When is a Loan Not a Loan?

Our poor MPs have taken a severe beating from the media and the internet chat rooms (especially Okyeame and SIL) for their recent attempt to "borrow" 28 billion cedis ($4,000,000) from the already bankrupt consolidated funds to help them acquire cars. In a rare show of agreement, MPs of both the NPP and NDC justified the need for the "loan" arguing that the cars will facilitate their work in parliament and allow them to stay in touch with their, mainly rural, constituents. The majority chief whip, in a telephone interview on "SKY FM", wondered why there was such a public outcry since "MPs were going to pay back every penny of the loans."

In yet another "asagonomic" statement, Moses Asaga emphatically declared that "this time around, I think all ministers, who are MPs must be allowed to access the loans so that when they are no longer ministers, they will still have a means of reliable transport to tour their constituencies."

Not to be outdone, the minority chief whip, Doe Adjahoe, added that "the resolution of the issue is crucial because it is a matter which would keep coming up and so there should be a consensus as to how to deal with it, to prevent recurrence."

This will be the third term for some MPs, like Adjahoe, and perhaps a third time to drink from the fountain of "consolidated fund car loan".

Appropriately, but perhaps belatedly, the executive has attempted to distance itself from this loan proposal. Mr. Kwabena Agyepong, the deputy press secretary, speaking to the media made it rather clear that "the whole project from conception to the final decision emanated from parliament." Various news reports indicate that the president was outraged and convened a hasty meeting between the executive and representatives from parliament. Regrettably, that meeting did not clarify matters and ended with a terse and confusing statement that "government will help source loans for MPs to purchase their own vehicles."

On a positive note, President Kufuor should be congratulated for temporarily halting the "loans". On the negative side, the decision to help source loans for MPs is a non-starter because the current conundrum is a by-product of the government trying to help source loans for MPs from the consolidated funds.

The car loan saga raises two interrelated issues: (1) when is a loan not a loan? (2) do our MPs need cars and, if so, what is the best way to solve the transportation problem?

Unlike most commentators, I have no problems with MPs or anyone acquiring a loan to buy any asset. However, where I differ, from most commentators, is that I do not consider the 140,000,000 cedi ($20,000) "loan" proposal as a loan proposal at all! Rather, I consider it as a gift, sloppily disguised as a loan, from the consolidated fund to the MPs. I base my conclusion on the purported loan amount (140,000,000 cedis each), purported monthly installments (1,400,000 cedis) purported payment periods (48 months) and a 30 percent interest rate. The loan amount does not appear to be in dispute. The purported monthly installment is based on a statement attributable to Rex Owusu Ansah, the clerk of parliament and reported by various media. No MP has challenged this amount and a September deduction has, allegedly, already been effected. The payment period is based on the history of similar loans to MPs in 1993 and 1997, which I will focus on shortly. This duration has also not been contested by the MPs. The interest rate is based on Mr. Obetsebi-Lamptey's statement, of 15/10/2001, that the NPP had lowered interest rates from 40 percent to 30 percent while addressing the chiefs and people of Akuapem at a durbar to mark their annual "Odwira" festival. This rate is much lower than the inter bank lending rate quoted by the bank of Ghana on its web pages at www.bog.gov.gh which hovers around 40 percent. However, I suspect, as in 1992 and 1996, that the proposed loan would have carried concessionary terms providing justification for the use of the more conservative 30 percent.

To understand how our MPs were using this loan proposal as a means to "steal" from the consolidated fund requires a little discussion of the mechanics of a loan. A loan is nothing more than a contract which commits a borrower to make a series of specified future payments to a lender in exchange for an immediate consideration that the borrower receives from the lender. The loan contract is consummated because the lender and the borrower have different time preferences for money. The MPs want the money today to buy their cars and promise to repay the consolidated fund at a future date. The trick to making the contract workable is a concept, called present value, which simply requires the MPs to return to the consolidated fund an amount in the future that is worth the same amount of money that they are borrowing today. This is where the interest rate comes in.

Consider an example of an MP who borrows 1,000 cedis when the interest rate is 30 percent and promises to pay this amount at the end of the year. The MP must pay 1,300 cedis at the end of the year to cover the principal and the interest. If he pays only 1,000 cedis then he has "stolen" 300 cedis from the lender. The lender demands 1,300 cedis because he could simply dump the 1,000 cedis in a bank and allow it to grow to 1,300 cedis. The interest rate acknowledges things like inflation and riskiness. Put another way, "a cedi in hand now is worth thirty next year" a saying that is easily understood by any Ghanaian.

Which brings us back to the MPs attempt to borrow 140,000,000 cedis from the consolidated fund. Given a payment term of 48 months and a concessionary interest rate of 30 percent, what should be the monthly installment on the loan? The answer turns out to be 5,040,839.13 cedis which is significantly higher than the 1,400,000 cedis that is being quoted as the installment amount on the proposed loan.

So exactly what is a monthly payment of 1,400,000 cedis over 48 months worth? Well this is sad news. It turns out that 48 sequential monthly payments of 1,400,000 cedis, at an interest rate of 30 percent, is only worth 38,882,415 cedis. The difference of 101,117,585 cedis (140,000,000 - 38,882,415) would have been a clever transfer from the consolidated fund to the MPs. It is important to understand that this calculation is based on the 30 percent interest rate and the 48 months. If one changed these assumptions, one would come out with different numbers but the same qualitative results.

By way of sensitivity analysis, consider the situation where the loan was given at zero percent interest rate for 48 months. Even making this highly unrealistic and certainly foolish assumption, will still imply that the MPs will only be paying the equivalent of 67,200,000 cedis (or $9,600). The difference of 72,800,000 cedis (or $10,400) is a net raid on the consolidated fund and can buy a nice used BMW in Europe or USA. For the deal to work at zero percent and be a real loan, the MPs must pay 2,916,667 cedis every month for 48 months.

This analysis would come as a shocker to Ghanaians but highlights the importance of information. Thankfully, investigative reporting by the media prevented this proposed looting of the consolidated fund. The media has been unfairly criticized these days and it is time we saluted them. But the analysis should lead us to ask for the full terms of the car loans (and any other loan granted to MPs) in 1993 and 1997.

We know that 890 million cedis were disbursed to 178 MPs to acquire vehicles in 1993. We also know that MPs were given loans of 26 million cedis each ($15,000 at the time) in 1997 to acquire vehicles. What we do not know for sure are the payment terms and whether the MPs have paid the full amount of the loans using the concept of present value as explained earlier. It is time to examine these loans carefully and retrieve any outstanding differences plus interest and penalties. The trick is to go back and base these loans on interest rates prevailing at the time when the loans were made.

Incidentally, the same issues arise for the houses that were purportedly built for MPs and ended up being sold to some of them. That, too, requires investigation and analysis. It is time, once again, to remind our public officers that there will be significant consequences sometime, somehow, somewhere for those who cause financial loss to the state.

In this light, I was horrified by a Daily Graphic report that "attempts to find out at the GCB the exact percentage chargeable on the loans, as well as the details of the terms of the repayment, were foiled, as officials were tight lipped." How can we the people, who hire these MPs, not have access to any and all financial contracts that they sign with the republic? Any loans drawn on the consolidated funds by any public officers as well as salaries, allowances, per diems, etc. should be "sunshined" (i.e., made publicly available in the media and on the internet).

With regard to the second question, I agree with our "mmobrowa" MPs that they need cars to allow them to function effectively. Unlike most workers, our MPs are forced to relocate out of their homes to work in Accra and are required by the nature of their jobs to be in close and constant touch with their constituents. I also agree with Doe Adjahoe that this is a problem that will not go away. We faced it in 1992, 1996, now and we will face it in 2004. It is disappointing and raises serious questions about the state of the mind of our MPs who continue to propose the same selfish solution to this real problem. The solution is not giving individual MPs "loans" to buy their personal cars but rather acquiring official vehicles for each constituency that is owned and maintained by the state. Each of those vehicles should be given a constituency number plate (e.g., MP Abetifi).

In concert, with the Auditor General department, each MP should be allowed a generous mileage allowance based on the location of his constituency and the commute within Accra. The odomoter should be audited every year and MPs charged for exceeding the mileage limits. This will ensure the vehicles are used for only official purposes. As long as the state acquires good vehicles, I believe these vehicles could be used for 3 cycles of parliament (12 years). This will take care of the "Asaganomic" mentality which says acquire a car as an MP so that when you are no longer an MP you will still have a car."

Of course, any MP should feel free to go to any bank to borrow at the prevailing interest rates and pay the appropriate installments, as indicated by a present value analysis. If an asset recovery team is put together to work out the correct figures on the 1993 and 1997 loans, the amounts retrievable by way of error correction, forgone interest and penalties should be enough to buy 200 vehicles that will be allocated to each constituency to be used by each incumbent MP. We shall be watching them.