How long-term stability and trust bear fruit for Ghana

In sub-Saharan Africa, Blue Skies has subsidiaries in Senegal, South Africa and Benin. Two more are sited beyond the region, in Egypt and Brazil, to provide the geographical diversity required to supply mangoes and other fruit year-round. But it is no surprise that it was in Ghana that the challenges of exporting cut fruit were overcome for the first time.

The country is considered one of the continent’s more stable nations, including relatively high levels of transparency and a free media. “Ghana has put in place the key building blocks investors want to see,” says Rod Wolfenden, EY Africa Markets Leader.

President John Atta Mills died in 2012. In a peaceful transition, Ghanaians followed their constitution by elevating Vice President John Mahama to the office the next day.¹

This stability is reflected today in metrics such as Transparency International’s Corruption Perceptions Index, the World Bank’s Doing Business ranking, and the World Economic Forum’s Global Competitiveness Report — in each, Ghana ranks above average for the region.

The strong state institutions that underpin this stability are rooted in the country’s culture and stem from the 18th century when the Ashanti ethnic group gained control over most of the region and developed its own centralized structure. These institutions were preserved throughout the colonial period and intact when the state gained independence in 1957. Ghana has certainly had its share of strongmen and power plays, but this pre-existing style of governance is one reason that the rule of law balances the individual power of politicians.²

“We’re at the point where the electorate can see what is happening through the media, and demand more,” says Solomon Lartey, who recently resigned as CEO of the insurance company Activa Ghana to found the Africa Sureties and Insurance Advisory Company, which aims to address access-to-finance issues for small businesses. “We can see how many roads or hospitals this government has built and compare it with how many the last government built. The result is that successive governments compete to provide better services.”

The next step for civil society is a deeper understanding of the issues and the data government provides, says Nafi Chinery, the West Africa Regional Manager for the New York-based watchdog group Natural Resource Governance Institute. “Civil society is active and engaged in Ghana, but there’s a gap in understanding the technical aspects of the laws, so it can be hard to push for government accountability,” she says.

People such as Franklin Cudjoe play a key role here. The founder of IMANI, a think tank based in the capital city of Accra, frequently publishes information in relation to government spending.

While occasionally IMANI faces backlash for criticism it levels at the authorities, it has a reputation as a valued and skeptical voice, says Robin McCone, Tax Partner, Ernst & Young Advisory Services Limited. “IMANI’s research is a must-read, and central to the developing civil society here,” he says. While Cudjoe and crew often discourage spending plans, they also see opportunity. “There’s huge potential in agricultural processing,” says Cudjoe. “We’ve seen exponential yields with crops like rice, corn and tomatoes. Now we need to develop value chains.”

GDP grew at 7.1% in 2019, making Ghana’s one of the world’s 10 fastest-growing economies for the year, and it had been expected to expand at a rate of 6.8% in 2020, according to the government, until the COVID-19 crisis hit. Pandemic-adjusted projections are for a 1.5% rate, as the country entered lockdown early enough to avoid widespread illness.³

But even without the virus putting growth on pause, Ghana’s progress hasn’t yet been transformational, and the state remains overly reliant on exporting natural resources.⁴ It is the continent’s largest producer of gold and the world’s second-largest exporter of cocoa. In 2011, revenue from the first productive oil field boosted Ghana from a low- to lower-middle income country, according to the World Bank’s classification system.⁵

Oil brought expectations of an emerging consumer class, with more discretionary income. Expectations were heightened because during the first three years of production the price of Brent crude was consistently above US$100 per barrel. But when global crude prices crashed in 2014,⁶ the Ghanaian cedi tumbled in value and the state required a bailout from the International Monetary Fund. Tax revenues are still too small to cushion state revenues when commodity prices fall - the tax-to-GDP ratio of 12.9%, as of 2018, lags middle-income peers, according to the Ministry of Finance, for which the range is 18% to 20%.⁷ The IMF pegs 15% as the minimum standard to enable a government to speed up growth.⁸

Ghana continues to court large-scale employers who can broaden investment beyond extractives, but it knows that large-scale industrial investment won’t be enough on its own: small businesses and domestic entrepreneurs are other key ingredients.

After winning the 2016 election President Nana Akufo-Addo created the Ministry of Business Development, which provides funding and mentorship to entrepreneurs, and broadcasts a local version of Dragons’ Den or Shark Tank — the reality-TV shows popular in America, Japan and elsewhere in which people pitch ideas to venture capitalists and hope to strike a deal on air. One of the judges is Dan McKorley, a Ghanaian who founded the logistics company McDan Group, and exemplifies the entrepreneurial spirit the government wants to see.

“Ghana is waking up to the need for entrepreneurs,” says McKorley. “And it’s a stable place to try new things.” McKorley’s entrepreneurial experimentation is easy to spot around Kotoka International Airport, the focal point for a second central business district in Accra. McDan owns 50 warehouses in the area and is renovating buildings on the airport grounds, including a cargo terminal.

The government needs more entrepreneurs such as McKorley, so employment opportunities keep pace with the 25,000 graduates produced by the educational system per year. Bright Aferi, now 27, saw the problem when he was still a chemistry student at the University of Ghana, in 2015. He solved it inadvertently, by purchasing a pair of loafers.

“They were made in Ghana, and they didn’t even last two weeks,” says Aferi. “We should be able to make good shoes here. I thought I could do this on the side, and maybe full time if I had to, as a fallback plan.”

Aferi recruited a friend, Michael Opoku Kyei, and the two created HillBill Shoes, located in Accra and employing eleven workers. He’s now raised about US$130,000 in total, enough to import machinery that will boost production from 140 pairs of shoes per month to 1,000.

“The thing that really helped was the training in how to structure business plans,” says Aferi. “It helped me understand how to get investors on board.”

For Pile, Cudjoe, McKorley and others, agriculture stands out as a good starting point in developing the supply chains that Ghana wants.

In addition to presenting a significant opportunity for domestic entrepreneurs and foreign investors, agriculture is Ghana’s main source of economic activity already. It accounts for 20% of GDP with about half of that total coming from cocoa exports. It also employs about 46% of Ghanaians, albeit often in subsistence-level jobs.⁹

Efficiency has been improving, says Cudjoe, thanks to the increased use of fertilizers, irrigation and extension services that build farmers’ capabilities. The next step is using these harvests as the starting point for more domestic supply chains like the ones Pile has built, either to export processed goods or to replace existing imports with domestic output. Blue Skies recently began exporting non-dairy ice cream and producing fresh juices for the domestic market, and it is considering exporting dried fruit and nuts, as well as expanding logistics into sea freight.

Challenges for large-scale investment in agribusiness start with the difficulty in finding enough land to grow fruit in a vertically integrated operation. Land ownership is fragmented and culturally sensitive in Ghana, as well as elsewhere in sub-Saharan Africa. Pile, and others who have managed to build supply chains based on produce, don’t always own and farm the land, preferring to provide local farmers with free seeds, fertilizer and support, ultimately buying the resulting harvest.

Building loyalties took time and incurred early losses. That’s one reason why it’s also important to hunt efficiencies, says Pile. Composting the fruit scraps on the factory floor generates soil for farmers, in turn boosting yields by 5% and cutting fertilizer costs by 30%.  Such an approach ensures that – out of the millions of fruits processed – no organic waste is sent to landfill.¹⁰

“People often talk about the cost of doing business as being higher in Africa, but entrepreneurs who hunt for efficiencies will find them and succeed,” says Wolfenden.

Ghana’s electricity supply is another reason for its attractiveness due to shortages that exist in most sub-Saharan African countries.   

Typically, power plants feed an aging power grid, and governments set a regulated price below the cost of production for the utility companies that distribute power. The low price keeps users happy but it starves the utilities of the money they need to maintain and expand their systems, while the ensuing blackouts discourage investing in manufacturing.

Roughly two-thirds of Africans have little or no access to power,¹¹ which creates a cycle of social and economic losses. Schoolchildren can’t do their homework after dark, hospitals struggle to keep medicines cold, and governments divert money from long-term development plans to short-term fixes.

Ghana broke this cycle by incentivizing commercial investment in power, including through signing long-term power-purchase agreements with private power producers that promise them payment even if power isn’t used.

That’s a concern for the state’s budget, and the onus is on the government to find new sources of demand. But having enough power is a big step in the right direction, says Justin DeAngelis, whose Boston-based private equity firm Denham Capital is an investor in several of the new plants. “Investments in power are leading indicators of economic growth,” says DeAngelis. “You need power to grow an industrial base and to keep the lights on for the populace.”

Developing and constructing power plants is a long process, he says, and the investment thesis differs from most “private equity-style” investments in Africa. Whereas many such investments are based on the notion of significant economic growth boosting the number of people with discretionary income and creating the potential for big returns. Denham Capital through its power investments is seeking a steady payback profile protected through long-term contracts and risk mitigation tools. DeAngelis notes the focus is on delivering new, low-cost sustainable infrastructure that helps the different countries in which Denham operates  

These are typically found in power-purchase agreements, sovereign guarantees, insurance policies and other instruments available from international institutions, such as the World Bank.

Government aid and development agencies also offer investors this kind of help, including the US government’s Power Africa program. It gives investors resources from 12 state agencies, such as financing, political risk insurance, technical assistance and political access of the US International Development Finance Corporation.

The state agencies seek projects already in development but in need of help to overcome obstacles, and the overall aim is to add 30,000 megawatts of generation capacity and 60 million new connections for homes and businesses. Thus far, the program has helped to secure private investment worth US$20b, providing 10,471 megawatts of new capacity in development — more than half of it from renewable energy — and first-time access to power for 68 million people.¹²

Power Africa seeks to support private investors and considers economic development projects as commercial, for-profit activity, a shift from development initiatives of the past. These agencies could have used their capital to build one or two power plants themselves, but now they believe that small-scale support of existing private-sector ideas makes a bigger impact.

If all goes well, the small public capital dispensed will leverage greater amounts of private investment, backed by relationships the development institutions have cultivated. “The multilaterals and development finance institutions are not just lending into my deals,” says DeAngelis. “They bring advocacy and impact.”

Investors such as DeAngelis, as well as civil-society voices like Cudjoe, were disappointed when the state the state partially drew down and subsequently cancelled a management contract in November that the Millennium Challenge Corporation of the US negotiated as a part of Power Africa. The deal would have provided US$190m in funding for the electricity sector and awarded a management contract to an outside firm to reform the Electricity Company of Ghana, one of the two main distribution companies.

“It’s three steps forward and one step back sometimes with the reform process,” says DeAngelis. “But overall Ghana has been a good place to invest.”

But for countries that can speed up that process even just a little bit, says Cudjoe, new opportunities beckon thanks to the African Continental Free Trade Agreement. A total of 49 of 55 African countries have become signatories and Accra was chosen to site the secretariat.¹³ Implementation is sure to be a challenge, but the deal is a significant step toward a future of free trade within the continent.

“Countries that are reforming faster will be able to take most advantage,” says Cudjoe. “The opportunities are staring us in the face.”

Summary

Ghana’s progress hasn’t yet been transformational, but with greater stability and transparency from government, it has more favorable conditions for investment. To grow, the nation is focused on further developing its agricultural sector and electrical grid and encouraging domestic entrepreneurship amid a push for large-scale employers.