After achieving independence, Ghana chose a state-centered approach to economic development. By the early 1980s the public sector completely dominated production, accounting for 75 percent of formal employment. State enterprises were involved in almost all sectors of the economy, including mining, agriculture, finance and banking, manufacturing, trade, construction, energy, and telecommunications (Friedrich Ebert Foundation, 1994, p. 53). However, most of these enterprises proved to be inefficient, and political interference made them increase their employment to a point where productivity was extremely low. As a result, in 1983 state enterprises had become a major burden on government finances and were perpetuating market distortions, especially regarding prices.
The need for a comprehensive reform of the state enterprise sector was fully recognized by the Economic Recovery Program, introduced in 1983 to reverse the economic decline of the previous decade.20 This program included, among other things, overall policy changes (for example, price liberalization) to ensure the commercial operation of state enterprises, reduction and retraining of the work force to improve their efficiency, restoration of financial solvency and discipline through clearance of cross-debts (debts of state enterprises to each other) and arrears, and rationalization of the state enterprise sector through privatization and mergers. At the initial stage, responsibility for implementing the divestiture program, together with other reforms in the state enterprise sector, fell to the State Enterprise Commission (SEC). However, lack of commitment to carry out these reforms, together with widespread doubts about the benefits of large-scale privatization, resulted in negligible progress (see Friedrich Ebert Foundation, 1994, pp. 9–17). That said, it was also true that an overall policy environment conducive to private sector-led development had yet to be fully established in the late 1980s. As a result, there were still about 350 state enterprises, and the sector continued to be a burden on government resources.21
The Divestiture Implementation Committee and the Early Efforts
In 1988 a major new effort to privatize state enterprises began with the establishment of the Divestiture Implementation Committee (DIC), which took over divestiture responsibility from the SEC. Although the DIC’s responsibility would only be formalized in 1993–when the Divestiture of State Interest Law established the legal framework for divestiture–it immediately assumed responsibilities for communicating government policies and consulting interested bodies on divestiture, formulating criteria for the selection of enterprises to be divested, developing and implementing divestiture procedures, and evaluating the effects of all divestitures (see Opoku, 1999, pp. 4–5). The SEC became mainly responsible for monitoring the performance of state enterprises and, more generally, advising government on their restructuring, rehabilitation, and divestiture.
The 1988 divestiture program was different from previous attempts in that it was formulated concurrently with efforts to liberalize the Ghanaian economy to attract private sector investment. Thus it was intended to reduce or eliminate the financial burden of the state enterprise sector on government finances, improve the overall efficiency of the Ghanaian economy, downsize the public sector, and refocus the role of the state in the economy.
During 1989–92 only 59 state enterprises were divested, generating proceeds amounting to (¢21.7 billion (Table 7.1). As a substantial number of the divested enterprises did not have a viable business, and many had negative net worth, 26 of them were liquidated (21 in 1990 alone) and yielded no proceeds. Aside from these liquidations, the overall pace of divestiture during this period was very slow. Factors that contributed to the lack of sales included weaknesses in the DIC, including the inability to process enterprises in a reasonable time; lack of up-to-date financial and other relevant information on the enterprises being offered for sale; lack of transparency of the divestiture process itself; a slow process of asset valuation by the Land Valuation Board; indecision on how to deal with liabilities of the enterprises, particularly severance payments; and lack of coordination among the DIC and other government bodies involved (see SDC Investments Ltd., 1995, pp. 11–14). Finally, the slow progress of divestiture also sometimes reflected strong resistance from workers and management of the enterprises being sold, as they strove to increase their share of the benefits from the sale.
Divestiture of State Enterprises
As of the end of September 1999.
Includes all enterprises divested through the DIC or outside the DIC framework.
Calculated using the average exchange rate for the period.
Calculated using the exchange rate as of the end of September 1999.
Calculated using GDP in the last year of the period.
Divestiture of State Enterprises
Multiple-Year Summaries | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Item | 1989 | 1990 | 1991 | 1992 | 1993 | 1994–96 | 1997–98 | 19991 | 1989–92 | 1993–98 | 1993–99 | 1989–99 | |||
No. of enterprises divested2 | 2 | 32 | 12 | 13 | 10 | 79 | 33 | 11 | 59 | 122 | 149 | 208 | |||
Joint ventures | 0 | 0 | 1 | 2 | 0 | 10 | 2 | 0 | 3 | 12 | 12 | 15 | |||
Leases | 0 | 2 | 0 | 0 | 0 | 2 | 1 | 0 | 2 | 3 | 4 | 6 | |||
Liquidations | 0 | 21 | 3 | 2 | 3 | 7 | 2 | 0 | 26 | 12 | 14 | 40 | |||
Outright sales | 2 | 1 | 5 | 3 | 4 | 45 | 19 | 9 | 11 | 68 | 88 | 99 | |||
Sale of shares | 0 | 8 | 3 | 6 | 3 | 15 | 9 | 2 | 17 | 27 | 31 | 48 | |||
Amounts divested (in millions) | |||||||||||||||
Cedis | 28 | 488 | 6,989 | 4,048 | 2,684 | 137,980 | 34,466 | 8,265 | 11,554 | 175,131 | 188,943 | 200,497 | |||
Dollars | 0.0 | 3.6 | 2.1 | 9.1 | 0.8 | 522.1 | 48.7 | 39.0 | 14.8 | 571.6 | 621.8 | 636.6 | |||
Pounds sterling | 0.0 | 3.3 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 3.4 | 0.0 | 0.0 | 3.4 | |||
Deutsche marks | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 8 | |||
French francs | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 21.0 | 0.0 | 0.0 | 0.0 | 21.0 | 21.0 | 21 | |||
Total (in millions of cedis)3 | 28 | 3,561 | 7,853 | 10,301 | 3,223 | 756,583 | 140,982 | 104,502 | 21,743 | 900,787 | 1,046,815 | 1,068,558 | |||
Proceeds collected (in millions) | |||||||||||||||
Cedis | 11 | 488 | 6,922 | 4,048 | 2,684 | 131,565 | 22,155 | 5,815 | 11,469 | 156,405 | 163,420 | 174,889 | |||
Dollars | 0.0 | 3.6 | 2.1 | 7.6 | 0.6 | 501.9 | 32.1 | 1.5 | 13.3 | 534.5 | 554.0 | 567.3 | |||
Pounds sterling | 0.0 | 3.3 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 3.4 | 0.0 | 0.0 | 3.4 | |||
Deutsche marks | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 8.1 | |||
French francs | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 21.0 | 0.0 | 0.0 | 0.0 | 21.0 | 21.0 | 21.0 | |||
Total (in millions of cedis) | 11 | 3,561 | 7,785 | 9,645 | 3,060 | 59,960 | 92,085 | 9,520 | 21,002 | 155,106 | 164,626 | 185,628 | |||
Proceeds outstanding (in millions)2 | |||||||||||||||
Cedis | 18 | 0 | 68 | 0 | 0 | 6,416 | 12,311 | 6,796 | 85 | 18,726 | 25,522 | 25,608 | |||
Dollars | 0.0 | 0.0 | 0.0 | 1.5 | 0.3 | 20.2 | 16.6 | 30.7 | 1.5 | 37.1 | 67.8 | 69.3 | |||
Total | |||||||||||||||
In millions of cedis4 | 18 | 0 | 68 | 5,303 | 834 | 77,931 | 70,888 | 115,466 | 5,388 | 149,703 | 265,170 | 270,557 | |||
As a percentage of GDP5 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.4 | 0.3 | 0.6 | 0.0 | 0.7 | 1.3 | 1.3 |
As of the end of September 1999.
Includes all enterprises divested through the DIC or outside the DIC framework.
Calculated using the average exchange rate for the period.
Calculated using the exchange rate as of the end of September 1999.
Calculated using GDP in the last year of the period.
Divestiture of State Enterprises
Multiple-Year Summaries | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Item | 1989 | 1990 | 1991 | 1992 | 1993 | 1994–96 | 1997–98 | 19991 | 1989–92 | 1993–98 | 1993–99 | 1989–99 | |||
No. of enterprises divested2 | 2 | 32 | 12 | 13 | 10 | 79 | 33 | 11 | 59 | 122 | 149 | 208 | |||
Joint ventures | 0 | 0 | 1 | 2 | 0 | 10 | 2 | 0 | 3 | 12 | 12 | 15 | |||
Leases | 0 | 2 | 0 | 0 | 0 | 2 | 1 | 0 | 2 | 3 | 4 | 6 | |||
Liquidations | 0 | 21 | 3 | 2 | 3 | 7 | 2 | 0 | 26 | 12 | 14 | 40 | |||
Outright sales | 2 | 1 | 5 | 3 | 4 | 45 | 19 | 9 | 11 | 68 | 88 | 99 | |||
Sale of shares | 0 | 8 | 3 | 6 | 3 | 15 | 9 | 2 | 17 | 27 | 31 | 48 | |||
Amounts divested (in millions) | |||||||||||||||
Cedis | 28 | 488 | 6,989 | 4,048 | 2,684 | 137,980 | 34,466 | 8,265 | 11,554 | 175,131 | 188,943 | 200,497 | |||
Dollars | 0.0 | 3.6 | 2.1 | 9.1 | 0.8 | 522.1 | 48.7 | 39.0 | 14.8 | 571.6 | 621.8 | 636.6 | |||
Pounds sterling | 0.0 | 3.3 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 3.4 | 0.0 | 0.0 | 3.4 | |||
Deutsche marks | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 8 | |||
French francs | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 21.0 | 0.0 | 0.0 | 0.0 | 21.0 | 21.0 | 21 | |||
Total (in millions of cedis)3 | 28 | 3,561 | 7,853 | 10,301 | 3,223 | 756,583 | 140,982 | 104,502 | 21,743 | 900,787 | 1,046,815 | 1,068,558 | |||
Proceeds collected (in millions) | |||||||||||||||
Cedis | 11 | 488 | 6,922 | 4,048 | 2,684 | 131,565 | 22,155 | 5,815 | 11,469 | 156,405 | 163,420 | 174,889 | |||
Dollars | 0.0 | 3.6 | 2.1 | 7.6 | 0.6 | 501.9 | 32.1 | 1.5 | 13.3 | 534.5 | 554.0 | 567.3 | |||
Pounds sterling | 0.0 | 3.3 | 0.1 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 3.4 | 0.0 | 0.0 | 3.4 | |||
Deutsche marks | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 0.0 | 0.0 | 8.1 | 0.0 | 0.0 | 8.1 | |||
French francs | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 21.0 | 0.0 | 0.0 | 0.0 | 21.0 | 21.0 | 21.0 | |||
Total (in millions of cedis) | 11 | 3,561 | 7,785 | 9,645 | 3,060 | 59,960 | 92,085 | 9,520 | 21,002 | 155,106 | 164,626 | 185,628 | |||
Proceeds outstanding (in millions)2 | |||||||||||||||
Cedis | 18 | 0 | 68 | 0 | 0 | 6,416 | 12,311 | 6,796 | 85 | 18,726 | 25,522 | 25,608 | |||
Dollars | 0.0 | 0.0 | 0.0 | 1.5 | 0.3 | 20.2 | 16.6 | 30.7 | 1.5 | 37.1 | 67.8 | 69.3 | |||
Total | |||||||||||||||
In millions of cedis4 | 18 | 0 | 68 | 5,303 | 834 | 77,931 | 70,888 | 115,466 | 5,388 | 149,703 | 265,170 | 270,557 | |||
As a percentage of GDP5 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.4 | 0.3 | 0.6 | 0.0 | 0.7 | 1.3 | 1.3 |
As of the end of September 1999.
Includes all enterprises divested through the DIC or outside the DIC framework.
Calculated using the average exchange rate for the period.
Calculated using the exchange rate as of the end of September 1999.
Calculated using GDP in the last year of the period.
Recent Divestiture Experience: 1993–99
In 1992 Ghana’s macroeconomic performance suffered a major setback when pre-election civil unrest forced the government to grant large wage increases as well as incur other expenditures aimed at obtaining the support of key pressure groups (see section V). The result was a sharp deterioration in the fiscal position of the government and an acceleration of inflation. Faced with this situation, the government had to find a way to adjust the fiscal position quickly, yet it was not prepared to cut expenditure by as much as would be needed to reverse the fiscal deterioration. As a compromise, the government chose to tackle the fiscal problem largely through flotation on the stock exchange of its shares in some of the most profitable enterprises (see below). The divestiture procedures used by the DIC are summarized in Box 7.1.
Procedural Changes
To restore momentum to the divestiture process and enhance its contribution to overall economic efficiency, an accelerated divestiture phase was envisaged. In support of this effort, the International Development Association approved in July 1995 a Private Sector Adjustment Credit (PSAC) amounting to SDR46.9 million, complemented by technical assistance from the United Kingdom’s Department for International Development (International Development Association, 1998).
In this context, several changes were introduced to improve the efficiency of the DIC (see SDC Investments Ltd., 1995, pp. 12–14, and International Development Association, 1998, p. 3). First, the DIC, which previously had consisted only of government officials, was restructured in early 1995 to include two members from the private sector and a representative of the trade unions–a change aimed at increasing transparency and involving other stakeholders. The DIC also established a communications office to educate the public at large on the merits of divestiture and to solicit inputs into the divestiture program. It also agreed to meet more frequently than once a month, its schedule before 1995.
Second, to improve its efficiency and accelerate the pace of divestiture, the DIC began employing suitable private consultants to help prepare the information memoranda required to offer state enterprises for sale (see Box 7.1). A new divestiture procedures manual was introduced, and both the DIC and the private sector consultants were required to use the same standard procedures to divest enterprises.
Finally, the DIC for the first time set explicit targets for divestiture. Under the PSAC, approved in 1995, a list of 114 enterprises was drawn up, of which 46 medium-sized and 64 small enterprises were to be divested and 4 large and strategic ones– Ghana Telecom, the State Insurance Corporation, the State Housing Corporation, and Mim Timber– were to be prepared for divestiture. This list was later expanded to include a total of 149 enterprises; of these, 34 small, 14 medium-sized, and all 4 large and strategic enterprises were scheduled to be divested during the period from September 1995 to October 1997.
Overview of Performance
Bavon (1998) showed, using pooled data from 32 Ghanaian firms over a 10-year period (1986–95), that the financial performance of private firms, in terms of both return on assets and return on sales, was stronger than that of state enterprises. Other factors were also found to play a role in explaining financial performance, however.
The pace of divestiture accelerated during 1994–96, when 79 state enterprises valued at ¢756.6 billion were divested (Table 7.1 and Figures 7.1 and 7.2). These divestitures included sale of the government’s interests in Ashanti Goldfields ($462.4 million), three state-owned banks ($68.7 million), and a strategic stake in Ghana Telecom ($38 million; Table 7.2) and some other important enterprises.22 However, from 1997 to 1999 the pace of divestiture lost some momentum, and only 44 enterprises valued at (¢245.5 billion were divested.
Selected Divestitures Outside the DIC Framework
Calculated using the average exchange rate in the year of divestiture.
Selected Divestitures Outside the DIC Framework
Proceeds from Sale of Shares | |||||
---|---|---|---|---|---|
Enterprise | Date of Divestiture |
Sales in dollars (in millions) |
Sales in cedis (in millions) |
Total (in millions of dollars) 1 |
|
Ashanti Goldfields Company | 1994 | 293.8 | 60,900 | 357.4 | |
1996 | 105.0 | 0 | 105.0 | ||
Social Security Bank | 1995 | 23.6 | 12,021 | 33.7 | |
Merchant Bank | 1995 | 6.3 | 10,500 | 15.0 | |
Ghana Commercial Bank | 1996 | 0 | 32,796 | 20.0 | |
Ghana Telecom | 1996 | 38.0 | 0 | 38.0 | |
Total | 1994–96 | 466.7 | 116,217 | 569.1 |
Calculated using the average exchange rate in the year of divestiture.
Selected Divestitures Outside the DIC Framework
Proceeds from Sale of Shares | |||||
---|---|---|---|---|---|
Enterprise | Date of Divestiture |
Sales in dollars (in millions) |
Sales in cedis (in millions) |
Total (in millions of dollars) 1 |
|
Ashanti Goldfields Company | 1994 | 293.8 | 60,900 | 357.4 | |
1996 | 105.0 | 0 | 105.0 | ||
Social Security Bank | 1995 | 23.6 | 12,021 | 33.7 | |
Merchant Bank | 1995 | 6.3 | 10,500 | 15.0 | |
Ghana Commercial Bank | 1996 | 0 | 32,796 | 20.0 | |
Ghana Telecom | 1996 | 38.0 | 0 | 38.0 | |
Total | 1994–96 | 466.7 | 116,217 | 569.1 |
Calculated using the average exchange rate in the year of divestiture.
State Enterprise Divestitures
(Number of enterprises)
Source: Divestiture Implementation Committee.Divestiture Proceeds
(In billions of cedis)
Source: Divestiture Implementation Committee.Divestiture Procedures
Since 1989, the list of enterprises to be divested has been prepared by the government, following consultations among interested government agencies, including the SEC, line ministries, and the DIC itself, and then submitted to the DIC.1 The selection criteria included the need to minimize economic disruption and adverse impacts on the economy and to maximize future tax revenue. As these criteria were not objectively defined and the process lacked transparency, in practice the choice of enterprises for divestiture was somewhat arbitrary. Following selection, the process would begin with monthly meetings of the DIC to decide on such issues as the number of government shares to be divested and the modality (lease, joint venture, outright sale, sale of shares, or liquidation) to be employed.
The choice of the modality of divestiture had to balance the desire for a speedy restart of the enterprise through new management, new investment, and better know-how against a preference for majority ownership by nationals and against the need to prevent management and workers from stalling the process. In the case of large enterprises, the mode of divestiture involved breaking the enterprise up into smaller units for outright sale to nationals, or finding a strategic investor who would take a significant share and management of the enterprise while the remaining shares were floated on the Ghana Stock Exchange.
The next step was the preparation by the DIC of a dossier, known as an information memorandum, to be presented to potential buyers. The dossier would contain updated financial information, including data on the value of assets, and other relevant information about the enterprise. Then, based on the memorandum, selected enterprises would be offered for sale through advertisements in Ghanaian newspapers and, for larger enterprises, in international publications.
Potential bidders would be allowed to undertake due diligence, that is, look closely into the assets, operations, and records of the enterprise, before submitting bids. A team of experts from the DIC, the line ministries, and other government bodies would then undertake the evaluation of investors’ bids. The selection of an investor would be based on the bid itself (the price offered, payment options, and financing) and on the investors’ qualifications (the business plan, ability to undertake future investment, and projected employment). Under certain circumstances, for example in the event of bids judged equivalent in price terms, Ghanaian investors were given preference. Negotiations with the selected investor on such issues as the investor’s qualifications, the offered price, and the timing of payments would precede the purchase and sale agreement. The sale of the enterprise was completed after approvals, first from the DIC and then from the President’s Office, had been obtained and the agreement had been signed with the investor.
1 This discussion is based on information provided by the DIC and in Opoku (1999).Over the period 1993–99 a total of about 149 enterprises were divested, including manufacturing enterprises such as producers of cement, textiles, and matches; farms; real estate units (housing and buildings); hotels; banks; transport companies; and department stores. Of these 149 enterprises, 31 were divested through the sale of shares, and 88 through outright sale; 14 were liquidated; and 12 were divested through joint ventures. Large enterprises such as the Ghana National Trading Corporation, the State Fishing Corporation, and the State Hotels Corporation were unbundled into smaller units so that Ghanaian investors could have a better chance of competing in their acquisition.
Statistics from the DIC indicate that as of the end of 1998 local entrepreneurs had bought about 80 percent of the divested enterprises. An interesting finding in privatization processes in Africa is that when nationals purchase a state enterprise, they are more likely than foreign buyers to buy it on credit than on a cash basis. They are also more likely later to default or request delays in payments agreed to when purchasing the enterprise. The privatization process in Ghana is no exception to this rule, as evidenced by the fact that substantial divestiture proceeds had yet to be received from the purchasers by the end of 1999.
Obstacles and Shortcomings
The initial acceleration of divestiture during 1994–96 could not be sustained in later years despite mounting concern about the operation of some state enterprises. The contribution of some of these enterprises to economic growth has remained consistently below their potential, and at times they have imposed a significant burden on the government. The checkered history of the Ghana National Petroleum Commission is an example of how the privatization process can be postponed and ultimately sidetracked, despite clear evidence that moving forward decisively would have been in the national interest (Box 7.2).
The emphasis of the divestiture program seems to have been on small and medium-sized enterprises; many large (and even some medium-sized) state enterprises have so far not been divested.23 By 1998, of the large and strategic enterprises targeted for divestiture, only Ghana Telecom had been divested (International Development Association, 1998, p. 6).
Moreover, as their privatization was significantly delayed, some state enterprises’ net worth became negative. Also, as already noted, a substantial portion of the proceeds of some divested enterprises has yet to be collected. From total proceeds of ¢1,068.6 billion for 1989–99, about one-quarter (¢270.6 billion, or 1.3 percent of GDP) remained uncollected at the end of 1999.
An important factor in this slow progress continued to be the DIC’s lack of dynamism in preparing state enterprises–in particular the large and “strategic” enterprises–for divestiture and in selecting consultants for outsourcing. The outsourcing of divestiture itself did not help achieve its stated objectives of accelerating the process, increasing transparency, helping the DIC play more of a supervisory role, and increasing revenue (IMAS Ltd., 1999). This shortcoming was largely attributed to inexperience in divestiture on the part of local private consultants, lack of transparency in their selection, and the inadequate preparation for privatization of some of the enterprises.24 Moreover, the divestiture manual, which was to outline agreed norms and standards for divestiture to be used by both the DIC and the private consultants, came out only in January 1997. Also, interference by officials and interested parties, unwillingness to divest certain enterprises for political or “strategic” reasons, and the inability of Ghanaian investors to mobilize resources for investment all played a role in the slow progress of divestiture. Decisions were often postponed for various reasons, including the absence from the country of key DIC members.
In addition, inadequate transparency and a cumbersome legal and regulatory environment, of which the difficulty in transferring land titles has been an important example, beset the whole divestiture process. The process itself, which required approval of final sale by the President’s Office, proved to be too drawn out, on occasion giving rise to unwarranted consultations with interested parties and extensions of the period required for final approval of the sale.
Finally, the democratization of Ghanaian society beginning in the early 1990s has become an important factor in divestiture, as it calls for more transparency. Parliament has shown an interest in the divestiture process: it has required more information on the sale of key enterprises, and in some cases, members have been vocal in opposing the divestiture of “strategic enterprises. Workers and management of certain state enterprises have at times voiced their opposition to their sale to outside investors and have instead suggested worker-management buyouts. A case in point was Ghana Oil, whose divestiture has been delayed because of opposition by a worker-management group (Box 7.3). The divestiture process of the Produce Buying Company was also delayed by several years to accommodate various stakeholders. The divestiture of Tema Oil Refinery has also been postponed in part because of opposition or reluctance to divest this strategic enterprise.
Achievements
It would be wrong, however, to focus solely on the difficulties faced by the divestiture program without according due regard to the program’s achievements. The sale of state enterprises has generated proceeds for the Ghanaian treasury, which have been important in financing the country’s fiscal deficits since 1993. More important, the divested enterprises have generally achieved a vigorous expansion in production, owing to investment in new technology and increased capacity utilization, as well as improved employee skills (Technology Consultancy Centre, 1999). As a result, both the tax base and the level of employment have risen since divestiture got under way. Consumers have benefited from an increased supply of quality goods and competitive pricing. The divestiture program has also contributed to the development of the capital market, providing Ghanaian investors an opportunity to make equity investments locally.25
Moreover, the divestiture program has signaled a stronger commitment on the part of the government to private sector-led development by attracting domestic and foreign private capital, technology, and managerial skills. It has also given an impetus to other government efforts to create an environment that is supportive of private sector activities, a strategy that was reiterated in the context of Ghana—Vision 2020, These efforts included the Private Sector Advisory Group, established in 1991 to enhance dialogue between the public and the private sectors; the enactment of a liberal investment code; and the establishment of the Ghana Investment Promotion Center in 1994.26 Also, the 1995 Free Zone Act was designed to attract foreign direct investment in export-oriented activities, and the Statutory Corporations Act made it easier to convert public corporations into companies ready for privatization.
The Ghana National Petroleum Corporation
The Ghana National Petroleum Corporation (GNPC) was created in 1983 and given responsibility for the exploration and procurement of crude oil. To finance its activities, the GNPC was also given a monopoly on the importation of crude oil, and through an arrangement with the Tema Oil Refinery it became the sole wholesale supplier of petroleum products to oil marketing companies operating in Ghana. The company branched out into other activities, creating a number of subsidiaries in areas as diverse as salt production and gold mining. Despite this broad range of activities and privileged arrangements, however, the GNPC seldom made profits. It financed a number of long-term projects through successive extensions in maturities of oil import credits extended or guaranteed by the Bank of Ghana. These operations resulted in high interest costs and foreign exchange losses. In 1994, faced with $15 million in additional losses from investments in financial derivatives, the GNPC fell in arrears on credits provided by the Bank of Ghana, causing a major monetary expansion that seriously undermined the implementation of monetary policy. The company’s total losses at that time were estimated at around ¢200 billion, or about 4 percent of GDP.
These problems prompted the government to take corrective action in 1995. The company’s accounts were audited, and its access to new Bank of Ghana credits was eliminated. It was also decided to sell the GNPC’s nonessential assets and to use the receipts to repay the Bank of Ghana. The GNPC itself was placed on the list of enterprises to be privatized. Finally, from April 1996 onward, the GNPC’s monopoly on the importation of crude oil was replaced by a system of open bidding for oil procurement contracts. The GNPC was then directed to focus primarily on hydrocarbon-and energy-related activities.
Despite these decisions, no serious effort has yet been made to privatize the GNPC, and indeed the company is no longer on the list of companies to be privatized. Leasing of its drilling rigs–and income from nonessential assets and financial investments–allowed it to begin repaying its debt to the Bank of Ghana in August 1997. The sale of its nonfinancial assets, finally achieved in March 1998, allowed it to pay off the rest of its debt to the central bank in April 1998. In 1999 the GNPC continued to operate as a state enterprise representing Ghanaian interests in the West African Gas Pipeline, while trying to develop a natural gas–fired power plant utilizing gas from the Tano field in southern Ghana. That project, however, has faced a number of difficulties, including the government’s refusal to offer the necessary guarantees, and failure to find a private sector partner willing to take on a significant share of the project’s risks. In 1996 the World Bank concluded that, although viable at the margin, the gas project was not the best option available to Ghana. In January 1999 it was revealed that the GNPC had suffered losses in hedging operations amounting to about $40.2 million, plunging GNPC into a new controversy.
There are many examples of divested state enterprises that have turned around dramatically. Following divestiture, the new owners have often invested in new equipment, increasing employment and production. The following are a few of the successes:27
-
Ashanti Goldfields Company. Following its privatization, Ashanti Goldfields has been able to tap international capital markets for investment in new equipment and technology and to expand its operations in Ghana as well as in other countries. Ashanti is listed not only on the Ghana Stock Exchange but also on stock exchanges in New York, London, Toronto, and Zimbabwe. It currently has operations in the Democratic Republic of the Congo, Guinea, Tanzania, and Zimbabwe. As a result of its investment in new technology, Ashanti’s gold production rose from 1.17 million ounces in 1997 to 1.57 million in 1998, and its average cost of production declined from $254 an ounce to $217 an ounce during the same period.
-
Golden Tulip Hotel. Formerly known as the Continental Hotel, this facility near Accra’s international airport was operating in poor condition and wages were in arrears. Following divestiture, the hotel was upgraded through new investment, staff training, and additional employment. Total employment rose from 116 to more than 350. As a result of this hiring and an increase in the number of rooms from 130 to 218, the hotel’s capacity to accommodate guests rose–and the quality of services improved dramatically.
-
Tema Steel Company. This company, formerly known as GIHOC Steel, had practically ceased operations before divestiture. After it was divested in 1991, the new owners rehabilitated the company, and production soared to its current level of 21,500 tons a year from its predivestiture level of 4,500 tons a year, because of increased productivity. Employment rose from the predivestiture level of 130 people to almost 600 by 1998.
-
West African Mills Company. After divestiture the new owners installed modern equipment–investing more than DM30 million–and employed more workers to boost production. Employment rose from the predivestiture level of 170 to 450. Production of cocoa butter more than doubled, and processing of cocoa beans rose by more than five times its predivestiture level of 10,000 metric tons annually.
Divestiture of Strategic Companies
Ghana Oil Company, The attempt to sell Ghana Oil was delayed in 1998 because of the perceived need to enhance transparency in the choice of the investment adviser.1 Following the company’s offer for sale in October 1998, some members of parliament voiced concern regarding sale of this “strategic” enterprise. A worker-management group was put together to make a bid for the company and to oppose the sale of a controlling interest to a single investor. In early 1999, bids from Total Ghana Ltd., Engen of South Africa, and a buyout consortium representing the worker-management group were evaluated. The President’s Office has asked the DIC to make sure that proper transparency procedures had been followed before it would give final clearance for the sale. Property had not been transferred as of July 2000.
Produce Buying Company. Privatization of the PBC has been opposed at one time or another by members of parliament, executive officials (including cabinet members), farmers, and the staff of the PBC and the Cocoa Board. Nevertheless, its sale is a key element of the medium-term cocoa strategy approved by the cabinet after a lengthy process of stakeholder consultation. The sale of the PBC was first decided in 1996. It was then delayed pending the formulation of a medium-term cocoa strategy. A proposal to divide the PBC into three companies was then floated, but this was discarded in 1998, as it was felt that it could result in lengthy discussions regarding the division of the companies’ assets, which could delay the process. A proposal to sell the PBC to a strategic investor was also blocked in 1998, as this mode of divestiture was seen as favoring large foreign investors. Instead, the government decided to float 50 percent of PBC shares on the stock exchange, to allow wider shareholder participation by Ghanaians. Of the remaining shares, 25 percent will be given to farmers’ groups and 5 percent to PBC employees, and the government will retain the other 20 percent. PBC shares were finally offered for sale through the Ghana Stock Exchange in December 1999.
Tema Oil Refinery. The divestiture of Tema Oil Refinery has been delayed, partly to allow time to rehabilitate the refinery but also to accommodate opposition to its sale by several groups, including members of parliament and executive officials, because of its “strategic” nature. Following the decision to divest the company and its valuation by an investment adviser in 1998, it was decided that the divestiture should be delayed while the enterprise was financially restructured. The restructuring resulted in two general-manager positions being created to oversee petroleum trading and refinery activities, respectively. It became clear from the analysis carried out during the financial restructuring that the company’s main profit center is its trading activities and that the government should seek to sell the company to a strategic investor with expertise in petroleum trading. The government had committed itself to offer Tema for sale by the end of 1999. Negotiations for equity participation by two foreign firms continued and a Memorandum of Understanding with the strategic investors was signed in July 2000.
1 This discussion is based on information supplied by the DIC and the Ministry of Mines and Energy.Summary and Conclusions
Implementation of Ghana’s divestiture program over the last 10 years has left several medium-sized and large enterprises still state-owned. Further delay in the divestiture of these enterprises, in particular those with weak financial situations, not only postpones the efficiency gains expected from divestiture, but could also make the divestiture process more costly for the government. In particular, the opportunity cost of delaying divestiture, in terms of lost tax revenue, employment, and production, could be substantial. The Ghana—Vision 2020 strategy requires rapid and sustainable economic growth to allow the country to make inroads in poverty alleviation. Divestiture is a key element in this strategy. The government will need to find ways to accelerate the divestiture process and take it to its conclusion in the next three to five years.
Several measures need to be implemented if divestiture is to regain its momentum, including measures to enhance transparency, strengthen the DIC’s structure, and change its strategy. First, impact studies have noted the lack of transparency and effective participation by stakeholders as major impediments to progress (Integrated Solutions Ltd., 1991; IMAS Ltd., 1995; SDC Investments Ltd., 1999). Accordingly, the timely availability of information on divestiture, the involvement of various stakeholders at an early stage, and the conduct of the bidding process with full knowledge on the part of the stakeholders and the public at large would go a long way to enhancing transparency and accountability. This approach would also help expedite the divestiture process by preempting potential questions and uninformed opposition to divestiture. The government should also make every effort to publicize the good performance of enterprises already divested.
Second, the weaknesses in the administration of the divestiture program need to be corrected (IMAS Ltd., 1999). To enhance the independence of the DIC and to expedite its decisions, the government may want to consider changes in the composition of the committee, to increase the representation of the private sector and other interested but neutral bodies. Moreover, the DIC secretariat may have to be restructured to resolve weaknesses that have impeded information flow and decision making. 28 In particular, there is an urgent need to clearly define and coordinate the activities of the secretariat to improve decision making even during the executive secretary’s absence.
Third, the strategy currently followed to prepare enterprises for divestiture may have to be reconsidered. The preparation of enterprises through, for example, financial restructuring or rehabilitation through infusion of new investment has often been the source of long delays. Such delays should be avoided in most cases, as they could lead to a substantial financial loss for the government when the enterprise is eventually divested. Such losses could materialize in a situation where the new investments or restructuring may not fit the interests of new owners, who would have preferred a different approach to correcting the enterprise’s deficiencies.
The experience of Ghana shows that divestiture can be a source of growth and employment to the economy. Many of the privatized companies are also now major taxpayers. Therefore the government should move ahead expeditiously to advance the divestiture process, while taking care to ensure that it is fully transparent.