Industrialisation and diversification efforts in Ghana target value-added exports

Industry is at the centre of government plans to transform the economy from one reliant on its resource base to one driven by value-added exports. The current administration – which, among other things, is seeking to establish a factory in every one of the country’s more than 200 districts – has discussed moving away from a dependence on cocoa and gold towards a future in which the country can export automobiles and other high-value products.

“Ghana has a number of competitive advantages, including an abundant and well-qualified human resource base and easy access to ECOWAS member states,” Michael Okyere Baafi, executive-secretary of the Ghana Free Zones Board (GFZB), told OBG. As a result, Accra has laid out a number of plans to achieve these goals and build strong value chains around key industries. However, while this is good news for investors, there are a number of obstacles – including access to feedstock, currency volatility and high overheads – that must still be overcome.

Performance

In line with overall economic performance, the industrial sector has grappled with a number of challenges in recent years. The sector experienced negative growth in 2016, contracting by 0.5%. However, the overall decline was mitigated by the beginnings of a recovery in the second half of the year, with the sector posting positive growth of 3.9% and 3% in the last two quarters of 2016, respectively. This positive trend continued in the first half of 2017, with industry expanding by 19.3% in the second quarter of the year, driving overall GDP growth to 9% year-on-year, according to the Ghana Statistical Service’s second-quarter GDP report.

Similar to other countries on the continent, the industrial base – and manufacturing in particular – has begun to see slower growth than the services sector. In the second half of 2011 the industrial base was growing at a rate of over 50%, and it was the largest economic contributor. As of mid-2017 the sector represented just over one-quarter of GDP (26.5%), while the services sector had grown to account for more than half of GDP (62%). Manufacturing represented the third-largest industrial segment, at GHS671.1m ($160.7m), up 6.6% on the previous year.

Government Strategy

Accra announced a number of both immediate and long-term policies designed to support the industrial agenda and expand production. In the short term President Nana Akufo-Addo’s administration plans to help distressed companies with a stimulus package funded by the national budget. This will include technical and financial support for companies that have struggled in the face of power outages, but have viable business models. The budget has allocated $50m as seed funding to the initiative, with a further $150m earmarked to help companies deal with their debt.

By July 2017, 285 businesses applied for these funds, of which the government approved 80. “The government wants to help companies that have suffered shocks as a result of the power crisis which severely affected the country’s productive sector leading to scores of people being made redundant,” Carlos Kingsley Ahenkorah, deputy minister of trade and industry, told local press in May 2017.

Transformation Agenda

The government has dubbed this stimulus package the National Institutional Renewal Programme. It is part of a wider 10-point programme of reform, known as the Industrial Transformation Agenda. The strategy is overseen by the Ministry of Trade and Industry (MoTI) and includes plans for decentralisation of industrial growth through the One District, One Factory policy; diversification through the development of strategic anchor industries; the rollout of industrial parks; regulatory reform to improve the business environment; support for small and medium-sized enterprises (SMEs); the development of domestic retail infrastructure to support local consumption of industrial production; and an industrial subcontracting exchange that will help to involve local SMEs in large-scale industrial projects. “Once institutional challenges are overcome, the industrial sector should grow at a more accelerated pace,” Kojo Brompong-Mensah, managing director of BM Construction, told OBG. “In that regard, the new administration is moving in the right direction to increase public sector efficiency and responsiveness.”

The One District, One Factory initiative has perhaps garnered the most attention from this wide-ranging agenda (see analysis). This marks a significant departure from traditional strategies for industrial development, and the government has also made ambitious claims for the initiative. The plan – which calls for the development of a factory in each of the 216 districts – has an approved budget of GHS456m ($109.2m) and will generate as many as 350,000 jobs, according to Ken Ofori-Atta, the minister of finance. Gifty Ohene-Konadu, the national coordinator for the One District, One Factory secretariat, told local press in March 2017 that the plan had already received investment pledges totalling $3bn and that 40 business plans were under review.

Free Zones

Efforts to decentralise development is also evident in plans to create industrial zones across the country. As part of the 10-point agenda, the government hopes to develop an industrial park in each of Ghana’s 10 regions (see analysis). This will build on the work of the GFZB, which is establishing export processing zones around the country. The GFZB already has a land bank in Tema – located in Greater Accra – as well as in Sekondi and Shama, both in the Western Region.

The Shama facility, located on the seafront, will serve the downstream oil and gas industry, providing opportunities for refineries. Meanwhile, supply chain and logistics firms will serve chemicals and downstream activity. In Sekondi the GFZB has signed a memorandum of understanding with Hassan Investment, a Chinese firm, to develop the zone. The company has already reached an agreement with Bosai Mineral Group, Dazhon Iron and Steel Group, and First Sunergy as anchor tenants for the new zone.

In the two decades between the start of the free zones programme in 1996 and 2016, companies operating in such areas made investments totalling $3.4bn and generated $30.9bn worth of exports. In 2016 capital investments were valued at $270.7m, while exports reached $2.3bn. By the end of 2016, 201 companies were operating in Ghanaian free zones and were employing just over 30,000 workers.

The GFZB, however, is continuing to acquire land to create more export processing zones. Beyond basic infrastructure, firms operating in these enclaves get a 10-year corporate tax holiday; exemptions from import duty for production materials and export duty for finished products; and no restrictions on the repatriation of net profits or dividends. Tenants are required to export 70% of goods and services produced in the zones. The government hopes such initiatives will help the country change its reputation from that of a simple exporter of raw materials and commodities. “Most districts have resources that can be utilised as part of the One District, One Factory initiative,” Gifty Klenam, CEO of the Ghana Export Promotion Authority, told OBG. “The goal should be to produce commodity-based value-added goods that are demanded by international markets.”

Exports

The export processing zones are part of wider efforts to boost industrial exports. The implementation of the national single window – a programme to automate and consolidate all trade processes – is a critical part of this, and includes an e-payment system as well as a single paperless system for meeting documentation requirements. The initiative should improve transparency, reduce irregularities, and cut both time and costs of importing and exporting. Authorities began the second phase in 2015, which is integrating the process across all public and private sector entities. This is set to reduce the time and cost of trade by as much as 50% and lead to annual savings of more than $120m.

The country recently concluded an interim economic partnership agreement with the EU that will improve access to that trading bloc. Ratified by Ghana in August 2016 and by the EU Parliament in December 2016, the agreement will give Ghana-based companies duty-free and quota-free access to the EU market. While this will be constrained by EU import standards, the economic partnership agreement provides an important opportunity to domestic exporters. Trade with the EU is worth €5.3bn annually, of which exports reached €2.3bn in 2016.

Infrastructure Challenges

These efforts are likely to substantially improve the potential of the industrial base. However, challenges remain and there are ongoing efforts to minimise constraints imposed by existing bottlenecks. “Export costs in Ghana are high, due to ageing road infrastructure, which drives up the price of transport and logistics. If the country is to make value addition a priority, this needs to be addressed,” Charity A Sackitey, managing director of Barry Callebaut Ghana, a subsidiary of the Swiss cocoa producer, told OBG. Another obstacle is power outages, known locally as dumsor (see analysis). “The real constraints are related to the availability and cost of power, as well as the financing options available for investing in additional capacity,” Kwame Philips, CEO of Bragha Group, an Accra-based plastics manufacturer, told OBG.

Power generation has struggled to keep up with demand and has subsequently regularly instituted load shedding. Indeed, following the discovery of hydrocarbons in 2010, demand for power surged. In 2013 alone non-residential demand rose by 33%, while residential demand increased by 15.4% (see Energy & Utilities chapter). This has had a notable impact: the Institute of Statistical, Social and Economic Research estimated that the power crisis caused losses in productivity and economic performance of between $320m and $924m in 2014.

Gas Feedstock

The push to boost power is tied to upstream hydrocarbons production. The discovery of oil and gas in commercial quantities in 2007 – with 660m barrels of proven crude oil reserves and 22.7bn cu metres of proven gas reserves – initially prompted talk about using hydrocarbons to drive industrialisation, with provisional plans for fertiliser and petrochemicals plants. There is good reason for this, as domestic gas production is expected to ramp up in coming years. According to Kofi Armah-Buah, the former minister of petroleum, production will reach 9.91m cu metres per day by 2019.

However, given the difficulties with domestic power supply since 2012, this significant increase in gas supply is likely to be absorbed by electricity generation (see Energy & Utilities chapter). The Atuabo Gas Processing Plant in the Western Region supplies 4.25m cu metres per day for power generation. This may constrain the ability of gas production to support the petrochemicals or fertiliser segments, but it does lay the foundation for supporting a broader industrial base by ensuring an ample power supply.

This was highlighted in the latest Gas Master Plan, produced by the Ministry of Energy in 2016. On an assumed gas price of $9-12 per million British thermal units, the report notes: “Strategic capital-intensive industries such as urea, methanol and aluminium are a high-risk option due to their high capital investment requirements, requirement for low gas prices and strong level of competition in globalised markets with volatile prices.” The report finds the best gas utilisation options are in power generation, the cement industry, and substitution for fuel oil in industrial heating and co-generation.

This shift in priorities has led to some cancelled capital commitments. In 2010, for example, the India-based petrochemicals firm, Rashtriya Chemicals and Fertilisers, signed an agreement with the government to construct a $1bn urea plant with an annual capacity of 1.2m tonnes. In 2014 the firm pulled out because of uncertainty of the supply of natural gas feedstock to the project. A source for Rashtriya told the Indian press that the deal collapsed because Ghana’s government was prioritising power generation over fertiliser production for the allocation of gas. Nevertheless, as the addition of a domestic gas supply is likely to improve the power situation, it should provide a stronger, more stable and more affordable platform for industrial development.

Mining

The MoTI has also laid out a plan for industrial development that would create a value chain around the domestic metals industry. In May 2017 Alan Kyerematen, the minister of trade and industry, told local press, “Hopefully, within the next five years, we will be diversifying our economy away from cocoa and gold and we will be looking at the petrochemicals industry and integrated iron and steel industry, aluminium and bauxite industry which then leads us on to a new vehicle assembly and automotive industry.”

This is part of the wider plan to add value to domestic mineral wealth – which is already one of the most valuable in Africa – by developing industrial clusters, known as strategic anchor industries. There are 2bn tonnes of iron ore and 700m tonnes of bauxite deposits near Kumasi, which could advance the domestic steel and aluminium industries.

The government announced plans to develop the aluminium market in March 2017. At the budget presentation Ofori-Atta reported the authorities plan to develop an integrated aluminium industry through a six-phase process. This will include developing bauxite mines, establishing a bauxite refinery, allocating a reliable power supply, developing rail infrastructure, rejuvenating the existing Volta Aluminium Company smelter and creating an industrial park for the manufacture of aluminium products.

The plan is ambitious, with Ofori-Atta noting that the country has been undertaking efforts to integrate the domestic aluminium industry since 1962. The state-owned Volta Aluminium Company produces 36,000 tonnes per year at its hydroelectric-powered smelter. This is considerably lower than its annual capacity of 200,000 tonnes.

Cement

As of March 2016 local cement manufacturers installed capacities of some 7.4m tonnes per annum, while annual domestic cement consumption stood at around 5m tonnes. Annual cement imports amounted to about 1m tonnes. In recent years the Cement Manufacturers Association of Ghana – which is composed of a number of local companies, including Ghana Cement, Diamond Cement Ghana, Savannah Diamond Cement and Western Diamond Cement – has repeatedly protested against the effects that cement imports have on local production, calling on the government to adopt protective measures.

In 2016 the government took action, placing a ceiling on cement imports. However, in October 2017 local manufacturers argued that these actions were not sufficient. The country produces more than enough cement to meet demand, yet cheap imports have meant local producers face the risk that their prices will make them uncompetitive. Samuel Atta Akyea, the minister of works and housing, told local press that the issue was a result of inefficient laws in Ghana, and promised to strengthen regulations.

Despite the risk of a supply glut, some cement firms embarked on expansion plans in 2017. In August 2017 President Akufo-Addo laid the foundation stone for a new $55m cement-grinding plant in the Tema Free Zone. Local firm CBI Ghana will operate the facility, which is expected to be completed by summer 2018. The plant will employ 400 people when complete and supply premium cement. Another premium cement factory is set to open in 2019 in the Dawa Industrial Enclave. Iran will finance the $30m facility, which is expected to produce 600,000 tonnes of cement per year, and act as the majority shareholder.

Steel Manufacturers

The most influential domestic steel producers include Sentuo Steel, which is held in part by China-based owners and partly by the Ghanaian government, with an annual capacity of 25,000 tonnes; the Lebanese company United Steel with a capacity of 25,000 tonnes; Jordanian-owned Rider Steel, with a 5000-tonne capacity; India’s Tema Steel with 4500 tonnes; China’s Ferro Fabrik with 4000; and local firms Special Steels and Western Castings with 3500 and 2000, respectively. Local steel factories employ some 9000 workers, of which 3000 are direct employees in the mills and 6000 are indirect workers, including scrap collectors, dealers, transporters and a variety of other supporting jobs.

In March 2016 the Steel Manufactures Association of Ghana questioned the government’s decision to allow the importation of steel. The association argued that local firms have an installed capacity of 450,000 tonnes per year, which is more than the 300,000 tonnes of annual domestic demand. It has called for a 25% levy on imported steel products, in addition to a 20% import duty on finished products. Without these tariffs, local manufacturers fear the domestic industry could be in danger of collapse. Over time, this situation has caused a series of cost-cutting efforts, including staff lay-offs.

Despite the challenges, some companies are weathering the storm, taking the time to invest in boosting production capacity and improving productivity to satisfy both local and regional demand. Sentuo Steel, for instance, initiated the second development phase of its Tema wire coils and sections manufacturing facility in June 2015. Following a $53m investment, the company is expected to add 500,000 tonnes to its existing 300,000-tonne annual production capacity. The limited availability of scrap metal in Ghana has forced Sentuo Steel’s plant to work at 40% capacity. Following the completion of its expansion project, the company plans to return to full capacity by importing steel billets from Europe and the US, which is reported to be more cost-effective than buying scrap metal in Ghana.

In addition, in January 2016 Western Steel and Forging, a local steel company, announced it would be undertaking restructuring efforts to modernise its operations, including the installation of continuous casting machines. With this expansion programme, the firm was preparing to shift its primary focus from the production of forged balls for the mining industry to the faster manufacture of wire rods, binding wire, nails and other products.

The outlook for the steel industry appears positive over the coming years. “Demand for steel will rise in the medium term, driven by increased construction and improved business sentiment,” Mukesh Thakwani, chairman of B5 Plus, told OBG. “However, its long-term performance is uncertain.”

FMCG

The fast-moving consumer goods (FMCG) industry is often noted as a potential high-growth industry throughout Africa. Based on large volume and often low value, the industry can penetrate far down the income scale and build a massive market. With a young and growing population, an expanding middle class and developing retail infrastructure, Ghana offers a number of opportunities for local FMCG manufacturers and international investors.

Ghana is well placed for FMCG growth, due to its very young population, with well over half its citizens under the age of 25. While the dependency ratio is 73%, the working-age population is set to expand rapidly through 2030, bolstering the consumer base. Furthermore, the total population is just over 28m and is growing at 2.2% per year. The domestic population is joined with 14 other West African countries in the ECOWAS economic bloc, a massive single market of more than 200m consumers. Ghana also compares well with the region in terms of income: it is one of only six countries in sub-Saharan Africa with a 1m-strong middle class – defined as the group of individuals with an income of at least $8.44 per day.

This poises the country for substantial retail and consumer growth. It ranks eighth on the Consumer Demand Potential Index of NKC Research, based on a favourable business environment, strong demographic characteristics and good medium- to long-term economic potential. A number of local and international FMCG companies have already recognised and established a presence in the local market. These include Unilever, Nestlé, PZ Cussons and Fan Milk. The latter was established in 1960 and was bought up by Danone and the private equity Abraaj Group in 2013. In May 2017 Danone announced that, along with the Abraaj Group, it invested $25m to fund three new production lines at its Accra factory. This will allow the company to roll out new products in the local market and create 200 new jobs. Fan Milk has a presence across West Africa with operations in Nigeria, Côte d’Ivoire, Burkina Faso, Benin and Togo. Africa is increasingly important for Danone, generating €1.4bn, or 6.4% of its global turnover, in 2016.

Other FMCG multinationals, particularly in the beverage segment, have had beneficial knock-on effects down the value chain. For example, Guinness Ghana Breweries, a subsidiary of Diageo, has been operating in the country for more than 50 years and has a significant influence on the economy. In 2016 the company invested more than GHS1m ($239,400) in sourcing sorghum from the agriculture sector.

Outlook

Ghana is developing industrial exports and high-value manufacturing, and if the bottlenecks can be cleared, government initiatives could deliver strong growth. Efforts to decentralise and build industrial clusters close to raw materials sites could also prove successful if the supporting infrastructure is established to transport goods to market.

Current policies may still have to overcome a number of hurdles. For example, an emphasis on heavy and energy-intensive industry under the strategic anchor programme could prove challenging amidst energy-supply struggles. However, prioritisation of the sector and establishment of policies to boost investment are beginning to yield positive results.