High aims: Finding workable solutions and the best path to sector development

In spite of the sudden surge in available hydrocarbons feedstock, the sizeable pool of locally sourced commodities and the country’s comparatively developed links to neighbouring markets, Ghana’s industrial economy is small and import-reliant. Manufacturing makes only a modest contribution to GDP, with a share far smaller than expected in 2012. However, if the country’s growth objectives come to pass, Ghana could emerge as a regional manufacturing centre as it learns to leverage its competitive advantages.

For now, activities such as agribusiness, metals production, textiles or food processing carry on without those advantages, but an emphasis on improving the contribution of the economy’s secondary sectors means that there is a growing government focus on tackling roadblocks and heightening efficiency.

OBJECTIVES: Leaders are hoping to make industrial activity, particularly manufacturing, Ghana’s next economic driver, seeking to both increase local value addition and enhance the scope for job creation and import substitution. As of 2012 Ghana’s economy relies on imports in almost all areas, including end-user goods and semi-processed inputs. Agriculture is still the primary employer, particularly in rural zones.

Industry and government leaders recognise that Ghana’s economic growth in the past two decades was driven by commodities, such as gold and cocoa, soon to be joined by oil and gas, is not sustainable.

Gold represents nearly two-thirds of the country’s exports, and the market for the precious metal has skyrocketed over the past decade, with prices rising to historic highs. Ghana’s treasury has greatly benefitted, but there is little chance that the price and income from gold will continue at current levels over the long run, even as mining receipts are set to rise in 2012, following a new tax regime that directs more income from the sector into state coffers.

The government is also interested in using the receipts from the oil and gas sector to build up infrastructure. Transportation bottlenecks, chaos at ports, expensive electricity and other constraints, if not properly addressed, will hamper the industrialisation goal. Addressing these issues entails coordinating efforts to clear away problems that can be mutually reinforcing and an obstacle for future economic gains.

POLICY DIRECTION: Given that hydrocarbons production is a thriving and profitable activity in several West African nations, perhaps the greatest competitive advantage for Ghana’s industrial sector is the country’s political stability. This allows Ghana to serve as a place for exporting products from throughout the region and other parts of the continent. Several firms are already taking advantage of Ghana’s favourable location and conditions, with companies such as consumer goods producer Nestlé selecting Ghana’s capital, Accra, to be its regional headquarters.

Ghana aims to leverage its energy gains to increase its manufacturing strength and export products to neighbours. Alongside and in support of this objective, the government has been enacting policies to lower the difficulty of starting and operating businesses in the country. These include simplifying registration and legal processes, tweaking tax codes, making credit more available, putting proper incentives in place and leveraging local raw materials.

The Ghana Free Zones Board is promoting export-oriented activities by allowing companies reliant on particular raw materials to locate closer to the source rather restrict them to a designated zone. Reforms to the pension system could also make access to equity finance easier, and new programmes such as index insurance may help agribusiness along by easing credit concerns (see Insurance chapter). Progress along these lines landed Ghana recognition in the Work Bank’s 2011 “Doing Business Report” as the number one country in the world in terms of reforms and improving access to credit.

SLUGGISH GROWTH: Manufacturing activity has historically grown at a sluggish pace in Ghana, at about 2.3% annually over the past decade, according to “An Enterprise Map of Ghana”, a 2012 study by local consulting firm Sync Consult and academics from the London School of Economics.

Preliminary figures in local media pegged the manufacturing growth rate in 2011 at 1.7%, significantly below the government’s target of 7%. Industry and manufacturing also represent a small proportion of the country’s exports, with natural resources gold and cocoa holding 76% of the total value of exports in 2010, according to the most recent figures available in the 2010 data report from the Ghana Statistical Services. Total exports that year reached $7.96bn, with gold earning $3.8bn and cocoa beans $2.22bn.

The statistics show that industrial activity contributed GSH8.04bn ($4.8bn) to the economy in 2010. The figure includes construction and resource extraction, and amounts to about 18.6% of GDP, of which manufacturing accounted for GSH2.94bn ($1.74bn), or 6.8% of the total GDP contribution. The value of industrial activity was up 18.5% from 2009, and the value of manufacturing rose by a similar proportion.

SECTOR COMPOSITION: Within the industrial segment, a trend among manufacturers is to start off in distribution and trading before gradually easing into industrial production. Of the 50 firms “An Enterprise Map of Ghana” examined, 27 were trading companies – importers of goods that eventually moved into manufacturing. There are benefits to this historical approach, but it also underlines the lack of start-up initiative in Ghana’s manufacturing segment and can partially explain its slow expansion.

“Such companies enjoy a key advantage in terms of relevant capabilities, in that they have a deep understanding of the local market and of domestic and international supply chains that allows them to better identify viable opportunities and to source supplies effectively,’’ the survey explains. However, the study maintains that, “manufacturing know-how, in the basic industrial areas that most of these firms are involved in, is less difficult to acquire than understanding [local distribution].”

Despite its current limitations and contributions to the overall economy, Ghana’s industrial base has several anchor activities, such as fast-moving consumer goods and cement, which can be expected to grow. Another strong example is the breweries and beverages subsector, a robust segment that has had market success domestically and in export (see analysis).

CEMENT: The cement sector has seen large increases in demand, a trend that look likely to continue as economic growth generates the need for new buildings. According to the Ministry of Water, Works and Housing, demand stood at about 4.5m tonnes in 2009 and increased to 4.8m tonnes in 2010, and need for cement is projected to jump to 5.5m tonnes in 2012 (see Construction chapter). Of the three domestic cement producers, Ghana Cement Works (Ghacem) is the biggest. Established in 1967, Ghacem enjoyed a monopoly until deregulation of the market in 2000, and today the firm owns about two-thirds of the cement capacity. The two other cement producers are Diamond Cement in Aflao and Savannah Diamond Cement in Buipe. There are also a number of importers of bagged cement and of bulk cement bagged domestically. Local producers have objected to the bulk imports, highlighting their unfair advantage because bulk cement is taxed at a lower rate due to its classification as an input instead of a finished product.

In 2012 builders began to increasingly complain about rising cement prices, with the Association of Building and Civil Engineering Contractors of Ghana calling the hikes “arbitrary” in media coverage. However, the rise in building costs can be attributed to macroeconomic trends, and cement makers have pointed out that imported inputs are more expensive because of the cedi’s depreciation throughout the year. Similarly, clinker and gypsum must be imported, but limestone can be locally sourced.

Along with beverages, cement and metals, key industries include agribusiness (see analysis), textiles, wood, plastics and rubber, and pharmaceuticals.

METALS: Thanks to the country’s rich deposits, metals and minerals processing are primary industrial activities. Valco is Ghana’s only aluminium smelter and is wholly owned by the government. The firm plays an important part in the metals segment, and given its dominant role, recent disruptions in the plant’s operations have affected the whole industry.

SMELTER: Valco was founded in Ghana by US firm Kaiser Aluminium and Chemical, and the venture included a 35-year deal for a fixed rate of electricity. In the 1960s Valco was a key investor in the development of the Akosombo Dam, a hydroelectric dam and the country’s signature infrastructure project, which provided much of the energy for Valco’s smelters.

As electricity demand grew in the country, Valco’s arrangement drew controversy, and it lost access to power and fell into disuse or below operational capacity in recent years. Between 2004 and 2008, Kaiser and other minority foreign investors sold their stakes to the Ghanaian government, which is now seeking to revive the full capacity of the smelter.

As of early 2012, the plant was running at half capacity, constrained for the most part by limited access to power. The company expects to receive enough electricity from the national grid to reopen its second pot line by the end of 2012.

Significant bauxite deposits make Ghana an attractive location for aluminium production, since the mineral is the main input. However, output of bauxite is minimal, with just one company, Ghana Bauxite, currently active in mining the ore. The company is a joint venture between the Chinese and Ghanaian governments, split 80% and 20%, respectively.

In 2011 Dutch company Vimetco said it would begin exploring entering the bauxite segment in Ghana, which could boost production. However, a major constraint is transportation, as railroad infrastructure must be rehabilitated to keep transportation costs for the ore at a minimum. Ghana Bauxite uses road transportation at present. Upgrading the country’s infrastructure, including plans for railroads, is expected to cost $1.6bn per year throughout the coming decade.

SECTOR ORGANISATION: Ghana’s vision for industrial growth is carried out by the Ministry of Trade and Investment, in concert with several enabling specialist agencies. The Ghana Investment Promotion Centre seeks to attract activities aimed at the domestic market, and Ghana Free Zones Board is responsible for nurturing an export-oriented industry. The board has established four free zones, although only one had become operational as of mid-2012, in Tema, an industrial area on the far outskirts of Accra.

Ghana has historically allowed export-oriented firms that prefer to operate outside of the free zone to do so while still benefitting from some of the incentives offered in the zone. However, this may change in the future, in part because of the difficulty in monitoring output to ensure that companies are exporting the required 70% of their production and paying duties on what they sell domestically (see analysis).

The National Board for Small-Scale Industries is charged with developing micro- and small enterprises. The Ministry of Trade and Investment defines a micro-enterprise as one with five workers or fewer, and a small one as having five to 29 employees. Medium-sized enterprises are those with 29-100 workers.

FINANCING: Growth financing is often available from donor-funding agencies and foreign development banks, such as the $3bn pledged by the China Development Bank and money tied to specific programmes from the African Development Bank (AfDB) and other partners. One example is the Rural Enterprises Project, which is funded mainly by the government, along with the AfDB and International Fund for Agricultural Development, and provides services and support for small businesses outside cities.

Ghana does not have a conventional development bank. The National Investment Bank once played that role, but after a number of loans fell into default, it moved into traditional commercial banking. However, Ghana Commercial Bank, which today is 21% government-owned, but was fully state-controlled until 1996, is now the largest lender in the country and sometimes acts as a development financer, according to Johnson Adasi, the director for small and medium-sized enterprises (SMEs) and technology at the Ministry of Trade and Industry.

Other commercial lenders are also increasingly setting up dedicated units for SME lending, Adasi said. For example, the Ghana Regional Appropriate Technology Industrial Service Foundation was established by the government in 1987 with donor help to boost small-scale industrialisation and focus on technology transfer. It has established nine training centres and provides access to tools and equipment.

OPERATING ENVIRONMENT: No matter the agency or role, Ghana’s challenge is to improve its operating environment, which is regionally competitive but still suffers from a number of obstacles and constraints. One of the country’s top concerns is infrastructure. Transportation infrastructure is lacking, which means that only selected areas along the coast are suitable for industry and export. These include Tema, where an industrial cluster has already formed, and Takoradi to the west. Takoradi has the potential to become an industrial centre because it is the closest spot on land to Ghana’s offshore energy production sites. The country envisions pipelines carrying natural gas to power plants in the Takoradi area, as well as industrial users, once electricity demand is met.

Of the $1.6bn required annually over the next 10 years to improve the country’s transportation infrastructure, part of the initial funding will come from. Further on, as Ghana’s take from oil sector revenues increases – once industry operators finish the cost-recovery period – Ghana will be able to finance more of the projects on its own.

TRANSPORT NEEDS: The lack of surface transportation is especially a constraint for agribusiness, which is among the industrial activities in Ghana that shows the most potential (see analysis). Air transportation plays a key role for perishable produce to be exported. Plans are in the works to expand an inland airport in Tamale for international cargo traffic. However, the transportation of grains, cereals, cash crops and other farm outputs to local processing facilities is key to Ghana’s industrialised future. Infrastructure plans include upgrading the country’s road network, as well as revitalising its moribund railroads.

Another constraint for most manufacturing activities is that inputs typically need to be imported. A number of raw materials cannot be sourced from within Ghana and must therefore be acquired from abroad. Infrastructural problems and the high transportation costs they create raise the price of both imports and Ghana’s semi-finished goods, thereby reducing demand among the country’s manufacturers. “There is a range of difficulties related to port clearance, when you import raw materials and export finished products from Ghana,” Moataz El Hout, Nestlé’s managing director, told OBG.

However, the state could help boost the segment’s development by employing an incentives structure that encourages local sourcing through tax breaks or other support, Peter Ndegwa, the managing director of Ghana Guinness Breweries, told OBG. Managing a local sourcing scheme is among the chief solutions to a major short-term problem as of June 2012.

CURRENCY WOES: The current fall in the Ghanaian cedi’s value and its attendant risks are likely a short-term issue. In fact, the currency is expected to rise following the commencement of oil extraction and sales in 2011, and fears of Dutch disease, whereby a rise in foreign capital inflow due to resource discovery or heightened extraction increase the value of local currency to the detriment of the export manufacturing sector, were a prominent part of business and political discourse until the cedi’s fall early in 2012.

However, unlike in countries with greater reliance on exports, the current depressed cedi does not benefit Ghana’s economy. Some three-quarters of exports are natural resources, and the country’s manufactured exports are not significant enough yet for a lower cedi to make Ghanaian goods competitive in overseas markets. Although the phenomenon is hardly unique to Ghana, the volatility of the cedi has dampened output for domestic producers and hampered long-term industry forecasting.

The cedi was the second-worst-performing currency in Africa for most of the first half of 2012, according to Bloomberg data. The currency fell to GHS1.9325 against the US dollar on June 22, 2012, the lowest value since June 1993, when Bloomberg began following the currency. The year-to-date drop against the dollar in June 2012 was 16%. A variety of factors explain the decline, but no one explanation dominated among Accra’s business community.

The strongest factors contributing to the currency’s decline include a drop in government-issued debt, and thus fewer foreign investors looking to buy the currency to then purchase sovereign debt; lower-than-expected oil production; the sluggish global economy; and typical election-year jitters which have led cedi holders to park their money in a foreign currency lest troubles prevent a peaceful transfer of power. However, one positive side effect of the cedi’s decline is that it could spur more local manufacturers to increase their efforts at domestic sourcing as a means to eliminating some currency-based risk. “Everyone agrees that there needs to be more local sourcing, but what Ghana needs is a strategy standardised at an industry level,” said Ndegwa.

SOLUTION: Ndegwa recommended one potential solution that has worked in other African countries and that Ghana has said it will adopt: reducing excise taxes based on the use of local inputs. This could reduce incoming funds to the treasury in the short term, but add to coffers in the long term by enabling economic activity. However, in 2012 taxes are likely to be a bigger factor than usual for industry, according to the Association of Ghana Industries, because duties on imported raw materials are calculated in foreign currencies, representing an additional risk.

ENERGY PRICING: Another across-the-board challenge is energy costs. Industries pay a higher rate for electricity than residential users, which is opposite of typical tariff schedules for power. As of spring 2011, industrial customers were paying about 23 pesewas ($0.14) per kWh, against 9.02 pesewas ($0.05) for residential customers. A plan has been in the works to restructure pricing so as to give the biggest users the lowest rates. In the meantime, industrial consumers using large quantities of power can negotiate directly with suppliers. Doing so often allows for the option to pay extra in order to ensure a secure supply, or winning a discount in exchange for tolerating sporadic outages when supply is short.

The long-term solution to the power problem lies offshore; if Ghana’s proven reserves of natural gas increase and can be used for power, the country can provide a greater supply that is more secure and less costly. At present, sporadic power outages require that companies invest in generators and diesel fuel to run them, which is far more expensive on a per-kilowatt-hour basis than what is delivered through the national grid. For example, Joe Ofori-Atta, the director of South Africa’s Woolworths outlet department stores in Ghana, estimates that generators increase energy costs by 20% and overall costs by between 6% and 8%. These heightened costs are even more burdensome for energy-intensive industries.

Hayssam Fakhry, managing director of pipe producer Interplast, told OBG, “The development of the country’s gas resources could really have an impact of the expansion of local manufacturing.”

ACCESS TO FUNDS: For the 90% of private-sector industrial companies that qualify as SMEs, an additional problem with Ghana’s operating environment is accessing finance. Interest rates are high when borrowing from the country’s commercial banks, hovering at about 26% as of June 2012, although some larger companies are able to secure lower rates thanks to their reputations and business relationships. Maturities are typically between three and five years.

This is compounded by the fact that, as mentioned above, Ghana does not have a national development bank able to make concessional loans to boost economic growth, although several other concessionary sources exist, such as donor-funded initiatives. “For large companies, the banks are chasing them,” said Adasi. “Big firms with competent management and collateral can get loans without a problem, but SMEs don’t have the access. Some are going into overdraft in their accounts to run their businesses.”

TACKLING IMPORTS: For those producing for the consumer market, the next challenge is competing with imports. Chinese goods in particular come in at low prices, both in the formal and informal economies.

Protectionism is unlikely to be a solution, especially given Ghana’s budding relationship with China, which is helping to finance its infrastructure programme. “It would seem that in spite of the increased credit to the private sector, the country’s manufacturers still face difficulties, one of which is cheap imports from countries that are fast assuming the profile of major development partners to Ghana,” according to the 2012 Budget Highlights report on Ghana by international consultancy PwC.

China is the biggest source of imports, comprising 12.4% of the total in 2010, according to the Ghana Statistical Service, down slightly from 12.9% in 2009. The US was the second-largest source of imports, with 12.8% of the share, up from 8.1% in 2009. Such changes are common, due in part to the overall volume of imports. Closer to home, Nigeria’s share of imports into Ghana fell from 8.4% to 2.1% from 2008 to 2009. The total value of non-oil merchandise imports reached some $8.69bn in 2010.

For now, until oil exports ramp up, Ghana runs a trade deficit in almost every category: industrial supplies, fuels and lubricants, capital goods, transport equipment and parts, and consumer goods, among others. The exception is food and beverages, where the country maintains a trade surplus (see analysis). In 2010 Ghana sold GHS1.52bn ($901.2m) worth of foodstuffs abroad and imported GHS1.42bn ($841.9m).

NEW DIRECTIONS FOR INDUSTRY: A new five-year plan for industry was introduced for the 2011-15 period, with the broad aim of increasing industrial competitiveness. The plan separates its interventions into four categories: improving the manufacturing value chain, including boosting the domestic supply of inputs, machinery and infrastructure; adding technology and innovation by supporting research, intellectual property and use of technology; putting in place the proper incentives and regulations; and integrating various issues related to social development, such as health and safety, data management, and gender-related workplace issues.

The government also hopes to further facilitate public-private partnerships (PPPs). A PPP unit within the Ministry of Finance and Economic Planning has been established. In March 2012 the World Bank announced a $30m initiative to support the PPP process for infrastructure development. The first phase of the project will be upgrading the legislative, institutional, financial, fiduciary and technical capacities of governing bodies and related parties in hopes of creating a pipeline of bankable PPP projects, according to a World Bank statement.

The Washington-based global development bank noted that Ghana lags behind a number of its African peers in attracting private finance for infrastructure – less than 1% of GDP’s worth, against a range of 1% to 1.6% for Benin, the Democratic Republic of Congo, Kenya, Nigeria, Senegal, Tanzania and Uganda. The leader on the continent is Mozambique, at 3.5%, according to World Bank data.

POWERING UP: However, the variable perhaps most likely to determine success or failure in Ghana is energy. Ghana wants to use receipts from oil and natural gas extraction to finance infrastructure upgrades and to boost the economy. Policy orthodoxy in gas-rich countries in recent years has focused on using gas to generate electricity for the grid cheaply and then using it to hook up residential customers and provide targeted energy-intensive industries with the competitive advantage of low-cost feedstock.

The hope is that these moves can generate jobs in the manufacturing sector, thus boosting domestic demand and creating a positive feedback loop to serve as a driver of economic growth. As this strategy has evolved, some countries have decided to abandon it. In Egypt, for example, cheap gas directed to industrial schemes has not been a major source of new jobs, and prices for gas were raised in early 2012 for cement companies, steel manufacturers and other heavy industries. Ghana may decide on a more targeted approach, highlighting only those industries that are the most reliant on large labour forces.

INSECURE SUPPLY: There are nonetheless short-term concerns in terms of securing supply. Ghana was hoping that until its gas sector reaches a critical mass that it could rely on gas sent from Nigeria, three countries to the east. That gas is currently transported via the West African Gas Pipeline, which has terminal points in the Niger Delta in Nigeria and in Ghana, with offloading points in Benin and Togo. However, due to a combination of technical problems, supply issues and contractual ambiguities, Ghana is getting a small fraction – in irregular quantities – of what it had anticipated from the pipeline. Ghanaian officials claim that the problem lies with Nigeria’s willingness to export the gas, while Nigeria alleges that the ownership consortium has violated contract terms by not addressing technical problems (see Energy chapter).

While this issue is an example of execution risk that seems mostly beyond Ghana’s control, concerns about the energy sector thus far highlight the fact that, while Ghana has a number of concrete plans from which to draw, seeing them through is still an issue.

By June 2012 construction on gas infrastructure had not yet begun, and a crucial $3bn concessional loan from the China Development Bank was cast in doubt. Chinese officials said in mid-June that the loan was not guaranteed and may be cancelled on concerns over how Ghana would use the money. The opposition’s presidential candidate, Nana Akufo-Addo of the New Patriotic Party, said he would seek to renegotiate the loan if elected, due to domestic opposition to stipulations designed to ensure Chinese involvement in building the economy. The loan was extended on condition that Ghana hire Chinese companies for 60% of the infrastructure projects financed through the loan, Akufo-Addo told the media.

OUTLOOK: Ghana is not the first country to see inflated expectations due to new commodity production. However, progress as of June 2012 indicates the need to tamp down projections, as well as a growing trend among some foreign investors wanting more guarantees before agreeing to projects.

“Independent power producers want all sorts of arrangements to make sure they get paid,” said Kodwo Ampofo, the executive director of Emos Consultancy, a business and financial advisory firm in Ghana. “Their main concerns are government and management.” This obviously carries knock-on effects for the nascent manufacturing sector, which is looking to adjust medium- and long-term forecasting pending the finalisation of some crucial pieces of the industrial development puzzle, including energy sourcing, pricing and infrastructure development.

In many ways, Ghana has all the necessary fundamentals to underwrite a significant expansion of the industrial and manufacturing sectors, with a stable regulatory environment, a raft of reforms on the horizon, a growing pool of locally accessible feedstock and inputs, and strong links to neighbouring countries.

However, it is clear that patience is going to be required in making the country the robust regional manufacturing economy it is aiming to become, which means that the upcoming years will be key in determining the success of the sector over the long term.

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The Report: Ghana 2012

Industry chapter from The Report: Ghana 2012

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