Efforts are under way to leverage strengths and boost capacity

In spite of its role as one of Africa’s fastest growing economies, Ghana has yet to fully transition its agriculture and resource commodities base into a vibrant and diversified industrial sector. More than 80% of exports are presently made up of gold, oil and cocoa in raw form, pointing to both an opportunity and a need to undertake more processing domestically.

Facing New Difficulties

Moving towards industrialisation, however, has its challenges. Manufacturers face a confluence of pressures, including rising utility prices in the form of taxes, high costs of sourcing material, as well as eroding consumer confidence in an environment of currency depreciation and inflation. These are all constraints that could be resolved as additional utility, transportation and other support infrastructure comes on-line, and macroeconomic stability is achieved through tightened monetary and fiscal policy.

West Africa, with a population of 300m, is tapped to be among the world’s fastest-growing regions and will be hungry for a wide range of consumer and industrial goods over the coming decades. With greater volumes, companies will be encouraged to manufacture and source locally, and Ghana, while not the region’s largest market, does provide a range of competitive advantages, including a transparent regulatory environment, accessible inputs and lower overheads than some of its neighbours. Furthermore, with the hope that ECOWAS can further deliver on its mandate of regional integration and reduced barriers to trade, Ghana is proactively looking to secure a position as a regional centre.

Secondary Concerns

According to the Ghana Statistical Service (GSS), industry accounted for 28.6% of GDP in 2013. However, discounting the contributions of the primary extractive sectors of oil and gas and mining, manufacturing on its own was estimated to be worth GHS5.3bn ($2.02bn), making up around 5.8% of national output (GHS90.94bn, $34.66bn), a drop from the 6.9% it accounted for in 2012. In 2012 manufacturing GDP was recorded at GHS4.6bn ($1.75bn), putting year-on-year growth for 2013 at 38%. However, when adjusted for inflation using 2006 constant prices, the growth rate calculated by the GSS for manufacturing was just 0.6% compared to 7.5% for the economy at large, attributing this comparative underperformance to lower production in the categories of food and beverages, refined petroleum products, and paper products.

In the World Bank and International Finance Corporation’s co-published 2014 “Doing Business” rankings, Ghana came in at 67th out of 189 countries evaluated, making it one of the more attractive places to do business in Africa after Mauritius and South Africa, and far ahead of other emerging African hotspots like Kenya (129) and Nigeria (147). Recognised for its stability in a volatile region, Ghana unsurprisingly rated as the top performer in West Africa and in the top quartile globally in categories like protecting investors (34), registering property (49) and enforcing contracts (43).

Business Confidence

The Association of Ghana Industries (AGI) conducts a “business barometer” survey every quarter that attempts to gauge the sentiment and mood of the business community. On a scale out of 100, business confidence in the third quarter of 2013 stood at 40.8. In the fourth quarter of that year it fell to 26.7, an 18-month low following a number of exogenous pressures, including planned cutbacks to public sector spending, disruptions to gas imports and a sliding currency.

The survey also asks respondents to rank the challenges they see as having the greatest impact on their business, collating and splitting the responses between the agriculture, manufacturing, services and construction sectors. For manufacturers, cost pressures featured prominently amongst the difficulties cited, with utility prices as the biggest challenge, followed by cost of credit (2nd), cost of raw materials (4th), high levels of taxation (6th) and depreciation of the cedi (7th) all ranking in the top 10. According to the GSS, annual producer price inflation reached a four-year high of 27.8% in March 2014, confirming the reality that manufacturers are having to manage rising input and operational costs.

Access To Power

Ghana fares decently when it comes to power generation and provision, ranking 85th in the World Bank report in the “getting electricity” category, which places it well ahead of Kenya (166), Nigeria (185) and even South Africa (150). With installed generation capacity of 2100 MW compared to Nigeria’s near 4000 MW, Ghana is far better positioned in terms of power on a per capita basis than the continent’s largest oil and gas producer. According to Ghana’s Energy Commission, 72% of Ghanaians were able to access the grid in 2012, which is comfortably in excess of the below 50% average for sub-Saharan Africa.

Ghana, however, is not without its own power challenges, especially when it comes to furnishing the market with a supply that is reliable and perceived as being fairly priced. The country has in recent years suffered occasional power shortages brought about by disruptions in feedstock supply from Nigeria through the West African Gas Pipeline, which in turn has resulted in managed load shedding being imposed on the industry.

This same inability to secure adequate supply means that costlier generation alternatives, often in the form of spot crude oil exports, need to be temporarily pursued, which in turn has led to increased upward pressures on tariffs. In the AGI’s most recent business barometer survey in the third quarter of 2013, high utilities prices featured as the number-one challenge listed by manufacturers.

“In most countries, the electricity tariff structure favours industrial activity, rather than residential consumers, because governments want to encourage industrial development to boost job creation. Here it is the other way around,” John Defor, a policy research officer at the Association of Ghana Industries (AGI), told OBG.

However, it is likely that bottlenecks related to the availability and cost of electricity should only prove an interim obstacle as new power related infrastructure comes online. The Atuabo gas processing plant (GPP), which has the capacity to process 150m standard cu feet per day of gas originating from the country’s Jubilee oil field, is expected to be operational by year-end 2014, and plans are afoot for new liquefied natural gas re-gasification facilities. The government’s target is to more than double national generation capacity to 5000 MW by 2016. Renewable are intended to contribute 10% to the country’s energy mix, and several independent power producers have reached agreements with the government to proceed on large-scale solar developments. Hydro’s output potential is considered to be nearing its threshold as most of the country’s high-yielding reservoirs have already been dammed. As new capacity will come mainly from thermal power and renewables, the degree to which thermal stations will be fed by local gas over crude is very critical to managing costs and something that will be observed keenly by industry in making decisions.

Currency Woes

Over the course of 2013 the cedi fell 20% against the dollar, making the cost of imported materials, on which manufacturers are heavily reliant, a pricier proposition. “Due to currency depreciation, we find ourselves having to raise local prices on a daily basis. However, there is a limit to what the local market can absorb,” Seth Koranteng, managing director of Prikorlar Aluminium, told OBG.

The government has taken aggressive action to attempt to prop up the cedi and slow its decline, and has met with some success. It has, however, relaxed some of the more stringent measures initially imposed, such as foreign exchange controls to reduce local dollarisation, which was proving a bit problematic for manufacturers who purchase inputs abroad but tend to sell on credit or deferred payment. “During a period of rapid depreciation, the value of the invoiced amount to hospitals and pharmacies erodes significantly by the time the payments arrive” Gopal Vasu, CEO of M&G Pharmaceuticals, told OBG.

Finance

In the AGI’s December 2013 survey, access to credit was ranked by small and medium-sized enterprises (SMEs) as their number-one challenge. The challenge is far from unique to Ghana and represents a hurdle in emerging markets across the continent, particularly in West Africa, where lending rates often reach or surpass 20%. Blue chip borrowers can usually access lower rates, but another main stumbling block for manufacturers, according to Defor, is that lending facilities are very short-term. “Those in trade and commerce with quick turnaround times can more easily get bank facility,” Defor said. “But manufacturers, who need a longer gestation period until they make returns, struggle to borrow. It is unfortunate, as traders are just buying and selling and not adding much value and productivity to the economy.” Interest rates have come under pressure as a result of the more interventionist approach to monetary policy management. In February 2014 the central bank added another 200 basis points to bring the rate up to 18%.

Stemming Imports

In AGI’s business barometer survey, competition from imports was ranked as the 10th-most-pertinent challenge for local manufacturers. As with much of Africa, as a lower middle-income country with a price-sensitive consumer base, Ghanaian manufacturers are looking to compete with an influx of cheaper goods arriving to its shores, especially from Asian producers who benefit from economies of scale. “We welcome free trade, but we have opened the gates too wide to where we are procuring goods we could produce locally,” Defor said. For Defor, protectionist measures are unlikely, but there is scope to bolster local competitiveness through export rebates, more favourable funding terms and the promotion of infant Industries. “Our local manufacturing Industry will become an ‘endangered species’ if measures are not taken to check the influx of imports,” he told OBG.

The government has sought to encourage greater competitiveness from local manufacturers through a number of measures, albeit these efforts have been met with mixed results. “Pharmaceutical importers pay the 10% duty imposed on imported finished products in addition to a 17.5% value-added tax on the value of the product. Since January 2014 the government has also imposed 17.5% VAT on locally manufactured pharmaceutical products which hitherto was not there, thus narrowing the tax difference between locally manufactured and imported pharmaceutical products to 10%. Hence, it is better to import pharmaceutical products than to manufacture locally, considering the high cost of manufacturing in Ghana coupled with the high cost of doing business,” Vasu told OBG. However, the benefits are clearer in other segments. As with many West African markets, Ghana has a sizable local beer industry and measures to boost local inputs have had a clear impact in recent years.

In 2009 the excise tax regime on imported hops for alcoholic drinks was made more stringent, and for Peter Ndegwa, managing director of Guinness Ghana Breweries, this gave them the impetus to innovate and explore ways to integrate locally grown cassava as a main ingredient. “Local sourcing has since gone up from 12% to 38%,” he said.

Regional Trade

In November 2013 Haruna Iddrisu, the minister of trade and industry, told the local press that some 31.8% of Ghana’s exports were heading to the ECOWAS sub-region, which is almost on par with exports to the EU (34.2%). This is a significant shift, as historically the EU has accounted for 60% of exports. The figures are impressive given the overall low volume of intra-regional trade in most of Africa. As a whole, for example, total volumes of regional trade in the ECOWAS bloc have generally been equal to roughly one-tenth of total trade.

Learning To Work Together

The Ghana Export Promotion Authority (GEPA), an arm of the country’s Ministry of Trade and Industry, has set forward the objective of doubling non-traditional export revenues from $2.4bn in 2012 to $5bn by 2017. Exports to Nigeria totalled just $144.84m in 2012, and GEPA is hoping to significantly increase this figure, revealing plans to establish a dedicated promotion office in Nigeria’s economic capital of Lagos.

Established in 1975, ECOWAS was founded with a number of bilateral mandates, including further economic integration among its member countries. To date, the organisation has worked to create a common market and increase intra-country trade flows. Given the size of the consumer market in the region, combined with robust average annual growth rates of between 5% and 7%, the potential for tapping into neighbouring markets is huge, although delays and high cross-border transaction costs remain an obstacle. “Poor roads between countries, unnecessary paperwork at borders, and a whole bunch of other hassles make moving goods between borders inefficient,” Yasser Aschkar, managing director of Wire Weaving Industries, told OBG.

For M&G Pharmaceuticals’ Vasu, harmonising duties and standards is essential. When countries have varying regulations for the accreditation of products, this makes it difficult to penetrate the region. Carsten Düwer, managing director of C Woermann Ghana, agreed that there are both formal and informal barriers, noting, “When one country imposes a higher duty on a good than another country, people will purchase the good in the cheaper country and illegally try to sell it next door.”

As an ECOWAS member, Ghana is also party to a recently signed Economic Partnership Agreement (EPA) between ECOWAS and the EU, which has been agreed upon in principle after more than a decade of negotiations. The terms of the free trade deal would grant ECOWAS members full access of its goods to the EU in return for opening up 75% of its own market over a 20-year period. The EU has also agreed to provide ECOWAS with a €6.5bn package to assist the bloc in integrating into the global economy. Ghana, along with Côte d’Ivoire, holds an interim bilateral agreement with the EU, which serves as the main destination for cocoa exports.

Looking To Nigeria

Unlocking intra-regional trade is an attractive proposition for manufacturers looking to invest in scaling up capacity. Entering the Nigerian market, which is home to over half of ECOWAS’s population of 170m, may be key. Given that GEPA has the objective of doubling non-traditional export revenue from $2.4bn in 2012 to $5bn by 2017, the two countries are expected to work closely and GEPA has announced its plans to establish a dedicated promotion office in Nigeria’s economic capital of Lagos in order to oversee trade relations.

Logistics

On a comparative basis, Ghana’s transport and logistics infrastructure is fairly competitive, particularly when measured against its neighbours. Fore example, during the 2011 violence in Côte d’Ivoire, which is a key conduit for imports to Burkina Faso, shipments shifted to Ghana’s Tema Port instead to be transported up north. However, distribution costs and congestion can take a toll. “Ghana serves as a distribution hub into seven West African countries. Getting products across borders is a huge challenge in terms of strained physical infrastructure and cross-border taxes. The lack of structured logistics makes the cost of doing business in the region very high,” Emanuel Malenya, service leader at Cummins Ghana, told OBG.

Additionally, certain sectors require stringent regulation and oversight for reasons of safety and environmental protection, such as chemical manufacturing. Tony Groosman, the managing director of US company Dow Chemical, told OBG, “Transport and distribution is a key part of the chemicals supply chain. Logistics providers in any country must meet the global standards for chemical transport in terms of reliability, environmental health and safety.”

As in most of the continent, the bulk of goods is shipped by truck, which is a fragmented industry in West Africa and one that is constrained by limited road networks. According to findings by the West Africa Trade Hub at the US Agency for International Development, 80% of goods moving across West Africa are transported by truck.

In a study that the agency conducted between January and March 2013, the 1316-km journey between Ghana’s capital Accra and Kantchari in Burkina Faso involved on average 15 check points that resulted in 103 minutes worth of delays in total. Part of the increased congestion is due to Ghana’s success, as growth and expansion in the hydrocarbons and construction sectors have brought about a dramatic rise in imports, leading to greater wait times at ports. “Lower port charges in Togo and Côte d’Ivoire are leading some to divert outbound shipments to these countries,” Düwer said.

Port congestion is expected to be only a short-term complication, as the country’s two main seaports at Takoradi and Tema are undergoing expansion and modernisation programmes to handle larger volumes and a greater variety of cargo. The country’s road network, meanwhile, is also set for a revamp, with the construction and management of privately operated toll roads up for concession.

Free Zones

Ghana has a liberal free zone regime, whereby as long as manufacturers, including those operating single factories outside the designated free zones, can meet certain export criteria, they are eligible for a set of incentives and exemptions. Facilities and packages offered by the Ghana Investment Promotion Centre (GIPC) range from a 10-year tax holiday and rebates, to exemptions from import duties on raw materials, repatriation allowances and the granting of expatriate work visas.

Adding Value

One of the key areas in which Ghana is looking to expand secondary activity is in the downstream sectors of mining, agriculture and hydrocarbons – three sectors that together make up more than 80% of the country’s export revenues. Efforts to boost local content more broadly in those areas have been rolled out, targeting procurement and staffing, but the government is also aiming to increase related processing industries that are more labour intensive and provide higher levels of revenues.

Ghana’s Mineworkers Union has been lobbying for a legal provision that 20% of raw gold produced is retained in country for the purpose of processing into diamonds and jewellery. For AGI’s Defor, adding value to the country’s top export is critical as a means of job creation and a way of reducing dependence of government revenue on global market prices. “When gold prices fell [in 2013], revenue targets for the national budget fell well below target”. Cultivating downstream activity requires focusing on beneficiation in segments where manufacturers can compete on a global level. In the case of jewellery, for example, mass assembly tends to occur in highly populated, destinations with cheaper labour like China and India, while specialised assembly usually migrates to places like Italy, with fashion traditions.

Ghana’s third-largest export commodity, cocoa, is one area where the government has sought to roll out incentives, including a five-year tax holiday and guaranteed loans, in a bid to encourage greater domestic processing. Ghana, which is the world’s second-largest cocoa producer, currently exports the bulk of its crop abroad for processing.

However, this has begun to change in recent years. In 2007 US commodity firm Cargill, which has been sourcing cocoa from Ghana for four decades, constructed its own $100m processing facility to convert raw cocoa into cocoa liquor, butter, powders, animal feed and other products in-country. The factory employs around 200 permanent staff and 200 daily contractors, and according to the US multinational, the facility accounts for between 7% and 8% of total cocoa processing within the country.

Export Crop

Cashew nuts stand out as another example of an export crop that is being processed domestically in larger volumes than what is being exported in raw form. Ghana serves as the headquarters for the African Cashew Alliance and has emerged as a regional cashew-processing centre, receiving raw cashew imports for processing from its neighbours to supplement its own crop production.

The Ghana Cashew Industry Association (GCIA) estimates that the industry generated around $170m in foreign exchange earnings in 2013, making it the second-largest contributor of all non-traditional export crops. According to the association, there are 12 local processing companies with combined capacity of 27,000 metric tonnes, a level that is anticipated to more than double when Usibras Ghana, a subsidiary of Brazil’s Usibras, completes construction of a $25m, 35,000-tonne plant that the firm anticipates will create 2000 new permanent jobs.

West Africa is home to 80% of the world’s cashew nuts, yet according to the African Cashew Alliance the region is only processing 5-6% of output. Ghana bucks the trend, processing roughly half the nuts it produces. Overall, the country is estimated to be able to grow around 40,000 to 50,000 metric tonnes of raw cashew. Other indigenous commodities that Ghana has the potential to process at an industrial level include: maize, palm oil and cassava, each with ethanol potential; shea nuts, which are gaining popularity as an ingredient in skin care cosmetics; and rubber, which has multiple end use applications.

Outlook

Ghana benefits from having many of the ingredients needed for growth in industrial activity. Endowed with resources that are demanded in products the world over, Ghana is slowly taking steps to add value domestically to commodities it presently exports mostly in raw form. Manufacturing in downstream agriculture, mining and petroleum products offers sizable scope, particularly if producers are able to tap into both EU and ECOWAS markets in an accessible fashion. While congestion, high tariffs and limited infrastructure – along with broader macroeconomic challenges like depreciation – have slowed activity in recent months, the bulk of the problems look to be largely short-term in nature.

As capacity upgrades are carried out to improve power and transport infrastructure, and the government balance sheet stabilises, prospects should be much brighter for investors. Crucially, many current challenges are shared by Ghana’s neighbours, which leaves the country in an ideal position to serve as a distribution hub for the rest of the region.

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The Report: Ghana 2014

Industry & Retail chapter from The Report: Ghana 2014

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