This Selected Issues paper and Statistical Annex examines the impact of cocoa taxation on cocoa supply in Ghana. The paper describes historical developments in cocoa production. The effects of the taxation of cocoa in Ghana are evaluated and a dynamic model of cocoa supply is estimated and used for simulations. The paper concludes that the most important factors adversely affecting the cocoa sector were government policies. Specifically, in the late 1960s and the 1970s, the effective cocoa duty rates were punitive and the cocoa sector was further hit by policies of overvalued exchange rate.


This Selected Issues paper and Statistical Annex examines the impact of cocoa taxation on cocoa supply in Ghana. The paper describes historical developments in cocoa production. The effects of the taxation of cocoa in Ghana are evaluated and a dynamic model of cocoa supply is estimated and used for simulations. The paper concludes that the most important factors adversely affecting the cocoa sector were government policies. Specifically, in the late 1960s and the 1970s, the effective cocoa duty rates were punitive and the cocoa sector was further hit by policies of overvalued exchange rate.

II. Ghana: Divestiture of State-Owned Enterprises in Ghana 1/

A. Introduction

The program for the divestiture of state-owned enterprises (SOEs) in Ghana was launched in 1988. By that time the Government’s Economic Recovery Program (ERP) which started in 1983, has been well underway, and the Government wanted to strengthen the basis for private sector activity. A Divestiture Implementation Committee (DIC) was established and charged with prioritizing the divestiture of those SOEs that were not competitive in a liberalized economy.

From the beginning, the Fund and the World Bank provided impetus to the divestiture program. Under the ESAF program, the Government expressed its strong commitment to the divestiture program in the policy framework papers (PFPs), and specific World Bank projects were targeted towards divestiture. 2/

B. Background

The public enterprise sector in Ghana has been an important provider of essential services and employment. In 1988, there were some 350 SOEs owned directly by the Government as well as indirectly through public institutions; these included banks, where the Government was a majority shareholder. Public enterprises have provided all utility services, and they have been dominant in the financial, manufacturing, and primary sectors, the latter including notably mining and the external marketing of cocoa. The influence of public enterprises on employment has been commensurate with these wide -ranging activities: in the mid-1980s, SOEs employed some 240,000 persons, equivalent to 51 percent of formal employment, and about 5 percent of the total labor force.

The public enterprise sector’s performance in terms of its contribution to productivity and government revenues has been far below expectations. It is estimated that in the mid-1980s average capacity utilization in the public industrial sector was only 18 percent. The associated poor financial performance led to the accumulation of tax arrears and requests for government subsidies and loans. At the same time, the SOEs accounted for 50 percent of nonperforming assets of the banking system. 1/

This poor showing has been due to institutional weaknesses in the administration of SOEs, notably in the form of multiple supervisory agencies, inefficient managers, and low motivation of staff. Just as importantly, prices were generally set at levels unrelated to the costs of production, the work force was bloated, and decision-making was sluggish, owing to excessive bureaucracy. Furthermore, there was little accountability of managers, which also led to the Government incurring arrears to these enterprises.

C. The Divestiture Process

The Government’s strategy in implementing its divestiture program has hinged on reducing the budgetary burden in the form of subventions and tax exemptions. At the same time, the divestiture program was used to create an environment conducive to active private sector initiative and investment.

Three institutions were given primary responsibility for implementing these policies. The DIC, which is the most important among them, covers most nonfinancial SOEs; the FINSAP--Financial Sector Adjustment Program--Implementation Secretariat, which was established for the divestiture of the financial SOEs; and the Ministries of Mining and Energy and of Finance have been overseeing the divestiture of shares in the Ashanti Goldfields Company Limited (AGC). In addition, in order to invigorate the privatization process, the Law for the Divestiture of State Interests was adopted by Parliament in 1993 (1993 P.N.D.C. Law 326), authorizing the divestiture of enterprises through the sale of shares. It was supplemented in 1994 by an Investment Act aimed at improving the investment climate for the private sector.

1. Activities of the DIC

The DIC makes recommendations to the President of the Republic on various divestiture issues, in particular, criteria for enterprise selection, consistent valuation across enterprises, efficient management of the bidding process, and the public relations aspect. 2/ It is made up of 11 representatives of the Government, private sector, unions, and SOE sector. In 1996, the Chairman of the DIC has been the Minister of Finance. In principle, members meet once a month to review pending cases and prepare new enterprises for divestiture. Emphasis is placed on a due diligence process (gathering information in a timely manner), preparing the necessary documentation to attract potential investors, engaging in a competitive bidding process, and quickly finalizing negotiations.

2. Activities of FINSAP

The FINSAP Implementation Secretariat, which is headed by an Executive Director and backed up by a consultant, is in charge of preparing selected financial institutions for divestiture. A particular feature of the divestiture of these SOEs is that at least 30 percent of their capital is offered for sale as shares, and at least another 30 percent is offered to a strategic investor; the remainder may be held by the Government or its institutions (notably the Social Security and National Insurance Trust, SSNIT, a holding company). The Secretariat helps prepare the prospectus for domestic and foreign investors, working closely with brokers marketing the offers.

3. Divestiture of AGC shares

The Ministries of Mining and Energy and of Finance administered the divestiture of shares in AGC, the most profitable gold mining company. The reduction of the Government’s holdings in AGC during 1994-96 was meant to send a strong message to foreign and domestic investors that Ghana’s economic strategy had firmly shifted in favor of privatization of the economy and reduction of the role of the public sector. Divestiture proceeds were to be managed by an investment trust fund, which was to look for the best use of funds, given the nonrecurring nature of these proceeds. Among the options to be considered were paying off expensive commercial debt or undertaking investments that would yield higher rates of return.

4. Involvement of the World Bank

The initial efforts of the World Bank were aimed at providing technical assistance to SOEs. In order to provide the proper framework for private sector activities, special emphasis had to be placed on the financial sector. To this end, the first Financial Sector Adjustment Credit (FINSAC I, making available US$100 million) became effective in 1988 and addressed urgent structural and institutional problems facing the financial sector. A major focus of FINSAC II (making available an additional US$100 million as of 1995) is to complete the restructuring of distressed banks; pursue the recovery of the nonperforming assets taken over by the Nonperforming Assets Recovery Trust (NPART); and increase competition of the banking sector through divestiture of public ownership in all banks.

Regarding the nonfinancial SOEs, the focus shifted during the 1990s away from technical assistance toward helping the divestiture process itself and thereby accelerating private sector development. These efforts have received a considerable boost from the PSAC (making available US$70 million), which became effective in mid-1995. Its three components cover 46 medium-sized SOEs, 64 small SOEs, and four strategic SOEs, for a total of 114 enterprises encompassing some 42,000 employees (see Table 1). Of special relevance is the group of strategic enterprises, covering almost 10,000 employees and including the Ghana Telecom (which employs 4,000 persons). 1/

D. The Impact of Divestiture

1. The nonfinancial sector

The divestiture program for nonfinancial SOEs in Ghana has made significant headway. By December 1994, 132 SOEs, with a total value of ¢ 511 billion (US$485 million), 2/ had been approved for divestiture (Table II.2). Divestiture of an additional 63 nonfinancial enterprises and one financial enterprise was approved in 1995, which represented an annual peak in processed SOEs. There were 79 fully completed divestitures at end- 1995, while 31 enterprises had been taken over by private owners and partly paid for and 85 enterprises were still awaiting purchase. About half of the transactions involved foreign investors.

During 1988-92, divesture was mainly in the form of liquidation of enterprises, and in 1990 accounted for 64 percent of the number of firms divested (Table II.3). However, by 1994, liquidations amounted to only 21 percent, while outright sales, at 49 percent of total divestment, predominated. Joint ventures, leases, and sales of shares represented the remainder of the transactions in that year.

Outright sales and joint ventures brought about the most dramatic changes in the enterprises’ rehabilitation. New owners could apply their know-how and operate on a market basis, revamping the management and production structure in the process. 3/ In contrast, divestiture through the sale of shares did not result in any major changes in operating the enterprises, as the Government in most cases had been a minority owner. Liquidations, while accounting for the largest number of enterprises, have contributed only a small amount of government revenue, since these enterprises typically had high liabilities in relation to their assets.

Divestiture allowed both the Government and the enterprises to optimize the use of resources. In fact, one of the most significant results has been the freeing up of government resources. In addition to sales proceeds, there was also a reduction in subsidies and net lending to public enterprises. As a result, overall subventions and net lending fell from 19 percent of current expenditure in 1990 to 13 percent in 1995.

Furthermore, the attraction of direct foreign investment and technology transfer, helped enterprises operate more competitively. Most of the divested enterprises streamlined staff as new management took over. 1/ Divested enterprises were also subjected to market forces, so that, as government protection was withdrawn, the enterprises bore the full brunt of competition, including that from imported products. Thus, while increased production efficiency improved products or services and boosted selection, prices were raised to market levels.

The direct impact of divestiture on wages and employment has been mixed. On the one hand, employees benefited by generally receiving higher wages, owing to lower staffing levels. In most instances productivity- driven incentive packages were adopted, such as profit-sharing bonuses, and training was stepped up. On the other hand, rough estimates indicate that some 40,000 workers were retrenched during the period 1989-93. 2/ The Government’s stated objective was that such workers would be retrained for jobs in other fields. However, these retraining programs proved inadequate, and most retrenched workers did not find employment. In recent years, retrenchment has declined noticeably, as fewer SOEs were liquidated. During the period 1994-95, only 5,000 workers were laid off, with generous severance pay.

In April 1994, the Government reduced its holdings of AGC shares to 25 percent, from 55 percent. This divestiture yielded net proceeds of US$316 million, equivalent to (¢ 379 billion. However, contrary to intentions, most of the proceeds from the sale of AGC shares were used to cover budgetary expenditure in 1993-94, instead of being allocated to the envisaged investment trust fund. Only some ¢ 10 billion of the ¢ 379 billion were allotted for investment diversification. The bulk of the sale of shares took place on the London Stock Exchange, but about 20 percent was set aside for flotation domestically on the Ghana Stock Exchange (GSE). This had the added positive side effect of attracting domestic and foreign investors for other Ghanaian companies listed on the stock exchange, and led to increased support for divestiture among diverse groups, such as AGC workers, farmers, civil servants, and local companies--all of which bought AGC shares.

2. The financial sector

Divestiture of financial SOEs, in contrast to that of nonfinancial SOEs, progressed rather slowly, owing in large part to the need for complex groundwork in this sector. During the initial stage of FINSAC I (1988-91), emphasis was placed on the progressive liberalization of the financial sector in tandem with the liberalization of the overall economy--sectoral credit allocation targets were phased out, interest rates were liberalized, and bank charges and fees were decontrolled. Open market operations (OMO), in the form of Bank of Ghana (BoG) bills, replaced credit ceilings as the main instrument for controlling monetary expansion. Nonperforming loans, amounting to ¢ 31 billion (35 percent of net domestic credit), were removed from the banks’ balance sheets in 1989. Some ¢ 22 billion was converted into bonds, while the remainder was to be recovered by NPART.

Since 1995, the focus of FINSAC II has been on the implementation of restructuring plans for six distressed banks (Table II.4). 1/ The divestiture process under FINSAC II calls for the selling of capital to the private sector; at least 30 percent in the form of shares, with at least another 30 percent to be acquired by a strategic investor. At the end of the process, the Government, including public institutions, would own no more than 40 percent of a bank’s capital.

Under FINSAC II, priority has recently been given to the divestiture of the largest state-owned bank, namely, the Ghana Commercial Bank (GCB), as well as two small banks, the National Investment Bank (NIB), and the Social Security Bank (SSB). The next phase envisages divestment of the Agricultural Development Bank (ADB), the Cooperative Bank (COOP), and the Bank for Housing and Construction (BHC).

Although FINSAC II was initiated in 1992, the actual divestiture process for the first three banks did not begin until 1995. In part, this was due to unexpected problems in determining ownership of bank real estate, especially in the rural areas. Land titles were not properly legalized or were nonexistent, and these problems needed to be worked out before a prospectus could be prepared consistent with international standards.

The SSB was the first of the three banks offered to the private sector. In March 1995, 30 percent of its shares were placed on the Ghanaian Stock Exchange (GSE); however, only 21 percent could be sold. Also, negotiations with potential strategic investors have not yet culminated in an agreement. Results have been more encouraging regarding the GCB, whose shares were offered in February 1996. In fact, more shares were sold than offered, owing to delays in centralizing information of sales from all over the country. The Government decided to honor all sales, which increased the total divested so far to 42 percent. The search for a strategic investor is also proceeding in this case. Finally, divestiture of the last bank under the first phase, the NIB, is being approached somewhat differently: the Government wants to first bring on board a strategic investor before offering shares to the public. 1/

E. The Outlook for Future Action

Ghana’s divestiture effort is still affected by lingering concerns about the pace and magnitude of the program, the process of selection and sale of divestiture candidates (particularly in regard to privatization of strategic enterprises), the impact of the program on government finances and, perhaps most importantly, the effect on employment. The pace has been slower than initially planned, owing to a lack of clarity in the Government’s objectives and, at times, lack of transparency. Other shortcomings have included lack of up-to-date financial information on enterprises; irregular meetings of the DIC, in part because of lack of manpower; inadequate coordination of the divestiture process owing to insufficient skills; high liabilities of enterprises, notably severance pay; and depressed interest on the part of domestic investors because of difficulties in obtaining financing to run divested enterprises. This latter point has also led to a failure to meet the agreed terms of payment by some domestic investors.

In recognition of the Government’s accomplishments under the divestiture process, the World Bank is readying another private sector project to divest the remaining SOEs. About 150 SOEs are still to be divested, accounting for roughly 20 percent of formal sector employment. This project will focus on using newly approved divestiture procedures and addressing labor redundancies created by divestiture. In order to further streamline the divestiture process, the DIC has begun to contract consultants to handle various divestiture services. By tapping private sector expertise, the DIC can concentrate on the broader policy aspects of divestiture. Furthermore, transparency is being enhanced by obtaining cabinet approval of the procedures for divestiture.

Regarding labor redundancy, it is expected that the project will help the Government devise a coherent policy, in coordination with representatives from all the parties involved, to mitigate the social impact. The project will also aim at improving enterprises before offering them for privatization and providing better information to potential investors and the public. It envisages completing divestiture in the aviation, cocoa, petroleum, and nonbank financial sectors, and addresses the issue of debt owed by SOEs to the Government.

In order to continue to benefit from divestiture, the Government will target improved performance in several areas:

  • Promoting private sector development and reducing the burden on the government budget will be given more prominence, supporting the overriding objective of increased economic growth.

  • The regulatory infrastructure will be further reformed to allow more freedom of operation for the private sector. Some regulations inadvertently favor imported products over locally produced ones, while other regulations prevent a fair competition in a liberalized economy.

  • Post-divestiture financing arrangements will be tightened by intensifying the investor evaluation process, requiring a guarantee by the investor, and ensuring that financial implications are fully spelled out before investors commit themselves.

Table II. 1.

Ghana: State-Owned Enterprises Covered by the PSAC

(As of April 1995)

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Source: World Bank, Private Sector Adjustment Credit (Report No. P - 6543-GH, April 17, 1995).

v = viable; pv = potentially viable; nv = not viable.

pp = private placement; po = public offer; a = public auction; 1 = liquidation.

Central Government and public sector institutions.

Table II.2.

Ghana: Number of State-Owned Enterprises Divested

(As of end-1995)

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Sources: Data provided by DIC; World Bank; and staff calculations.

1 = Approved for divestiture, negotiation in progress; 2 = part payment; 3 = full payment and take-over.

Includes ¢ 379 billion of divestiture of AGC shares.

Differs from Table 4 because it includes the divestiture of enterprises not foreseen under the PSAC.

Excluding 1995 owing to lack of information.


Table II.3.

Ghana: Sectoral Classification of Divested Enterprises 1/

(In millions of cedis, as of December 1994)

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Source: Divestiture Implementation Committee; and staff calculation.

1 = Approved for divestiture, negotiation in progress; 2 = part payment; 3 = full payment and take-over.

Table II.4.

Ghana: Ownership of Financial Institutions

(In percent: as of end-April 1996)

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Sources: Data provided by the FINSAP Implementation Secretariat; and staff calculations.

BoG = Bank of Ghana; GCB = Ghana Commercial Bank; GRC = Ghana Reinsurance Company; NIB = National Investment Bank; SIC = State Insurance Corporation; SSNIT = Social Security and National Insurance Trust.

Part of second group of banks to be divested.

Part of first group of banks being divested.

At least an additional 39 percent has to be acquired by the private sector to meet requirements for divestiture under the FINSAC.

At least an additional 30 percent has to be acquired by the private sector to meet requirements for divestiture under the FINSAC.

Table II.5.

Ghana: Status of PSAC Implementation

(As of end-February 1996)

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Source: World Bank.

Prepared by Joachim Harnack.


The first project, the Public Enterprise Technical Assistance Project, became effective in 1987. More recently, two more World Bank projects, namely the second Financial Sector Adjustment Credit (FINSAC II) and the Private Sector Adjustment Credit (PSAC) which became effective in 1993 and 1995, respectively, set the stage for an acceleration of the divestiture process.


As of end-1994, the stock of domestic debt of the SOEs was equivalent to some US$1.5 billion. Of this amount, 75 percent was owed by five enterprises (Volta River Authority, Ghana Telecom, Ghana Ports and Harbor Authority, Electricity Corporation of Ghana, and Volta Lake Transport Company).


In preparing enterprises for divestiture, the DIC is assisted by the State Enterprise Commission (SEC), which aims at making enterprises more viable and efficient prior to offering them to the private sector. There is also a private sector advisory group (PSAG), which transmits its opinions through the two private sector representatives at the DIC.


It is expected that Ghana Telecom will be divested by end-1996.


This includes ¢ 379 billion of sales of AGC shares.


The most dramatic impact was in the tourism sector, with major and rapid rehabilitation of hotels and restaurants.


A case in point is the GIHOC Metals Company, which currently employs 45 workers and produces 1,200 metric tons of steel annually. Before divestiture, the company had been employing 125 workers whose annual production did not exceed 500 metric tons.


This compares with 60,000 civil servants retrenched during the period 1987-93, and some 100,000 workers laid off by the Cocoa Board during the period 1989-91. Overall, public sector employment shrank by more than 50 percent between 1985 and 1991.


Originally there were seven banks, but one of the banks, the National Savings and Credit Bank (NSCB), was merged with the Social Security Bank (SSB).


It is expected that this process will begin in mid-1996.