ATTRACTING PRIVATE INVESTMENT TO GHANA
My presentation is about attracting private investment to Ghana’s rail
infrastructure. I shall give some general background on private investment in
infrastructure and discuss the position in Ghana. I shall detail the concerns of
private investors that must be addressed before they will invest.
Infrastructure projects with private participation are usually financed with a
mix of equity and nonrecourse debt (debt contracted by the project company
without recourse to the sponsors, also called project finance). Limited access
to such debt can severely damage an economy’s ability to attract private
investment in infrastructure. Project sponsors will rarely finance infrastructure
projects with equity only, or take the project debt fully on their balance
Africa has attracted less nonrecourse bank debt relative to private investment
in infrastructure than other developing regions. It has been even less
successful in raising project finance in capital markets through project bonds.
And most of what bond financing there has been was raised for South African
projects through local currency issues in that country’s capital markets.
For African economies to grow and prosper, quot;capital markets are essential,quot;
said Ghanaian Minister of Finance Yaw Osafo-Maafo at an April forum of
African business executives and stock market officials. quot;The lack of capital is
one of Africa's major stumbling blocks.quot; That view is increasingly common
among African leaders. Until just a few years ago, when they spoke of
financing for Africa's development, they usually meant government spending,
donor assistance, official lending or other sources of public funds. But the
New Partnership for Africa's Development (NEPAD), adopted in 2001 as the
main development framework for the continent, has added a strong emphasis
on increasing private flows to Africa as one way to help overcome the
region's resource gap.
Mr. Osafo-Maafo also noted that Ghana is now considered a relatively
attractive destination for foreign investment in Africa, not only because of the
high rates of return that are possible there, but also because of the country's
political reforms, measures to combat corruption and improvements in the
way the private sector is able to conduct business.
However, from the perspective of the foreign investor, most African countries
continue to present enormous hurdles, Mr. Alan Patricof, vice-chairman of
Apax Partners investment house in the US, told the participants at the New
York forum. He highlighted numerous difficulties, including:
• corruption and bureaucratic red-tape
• weak legal systems
• poor infrastructure
• shortages of skilled labour.
Many participants observed that conflict and political instability tend to
discourage investors from coming to Africa. Even countries far from current
conflict zones are affected by this negative image, since investors often view
an entire region, and even the continent as a whole, through a single lens.
So, what does this mean for Ghana? The key areas of concern for private
investors are financial viability, the distribution of revenues, and, as Mr
Patricof said, assessment of risks.
Key considerations for investors
To test financial viability, cash inflows and cash outflows for a project are
separately added up. Thus, a project is financially viable if the former are
greater than the latter. Since the main interest of private sector actors is
return on investment, despite assuming a certain level of risks, the project
must have clear and defined revenues. These revenues should be sufficient to
service principal and interest payments on the project debt over the term of
the loans and provide a return on equity which is commensurate with the
development and long term project risk taken by equity investors.
In the case of rail transport, this leads to the question: who will bear the
burden of financing a possible gap between revenue and the expected rate of
return? In order to bridge the gap by increasing the revenues and/or
decreasing the costs for the private investor, one can either increase the
revenues for the private investor (e.g. through direct government
contributions, or the creation of additional revenues), take on part of the risk
(thus decreasing the required rate of return on investment for the private
investor), or decrease the expenditure of the project (through an increased
efficiency or direct government subsidy). Policy decisions on this point would
be needed before private investors would even consider investing.
As far as the assessment of risks is concerned I will set out the classification
of risks in a “partnership” infrastructure project. These are common to all
projects and have to be added to any local risks such as bad governance or
weak legal systems:
• Procedural risk. Public Policy may change or public consents or licenses
may not be obtained for a project. The public sector usually bears the
• Design Risk. Here, the private sector tends to be responsible, say, for
the design of a process or design of an asset such as a building or
• Construction risk involves the risk of time or cost overruns or defective
construction. These tend to be the responsibility of the private sector
in commercial deals.
• Maintenance risks are important where the private sector is responsible
for maintenance of an asset over time.
• Operating risk is shared between the public and private sector partners
where an asset may not operate effectively and fails to meet its
• Financing risk exists where government expects the private sector to
carry risks arising from changing economic conditions. These can
produce substantial benefits for the private sector if the local or
regional economy performs well enough to favour private investors.
• Revenue risk involves the performance of the assets and the
generation of income.
If a government wants to attract private investment it has to ensure a stable,
market oriented political system as well as macroeconomic stability and
provide investment opportunities for the private sector by either (partially)
privatizing public enterprises or enabling private sector involvement in
Key constraints on project finance
Three related sets of factors limit Africa’s ability to tap both foreign and local
currency markets to raise private finance for infrastructure, especially long-
term debt finance.
First, most African countries have low or nonexistent sovereign credit ratings.
On March 16 this year Standard & Poor's cut its outlook for Ghana to negative
on a deteriorating macroeconomic picture. Fellow ratings agency Fitch took
the same step with Ghana earlier in the month. Foreign commercial lending
will therefore become more difficult to access and will typically be limited to
Second, the local financial market in Ghana has limited capacity to finance
infrastructure projects. It doesn’t yet have sufficient domestic banking and a
local capital market capable of consistently providing local currency
financing for infrastructure projects on suitable terms and in significant
amounts. In virtually all other African countries local long-term financing has
been limited, and the financing plan for viable infrastructure projects involves
usually a co-financing led by the IFC (the World Bank private sector arm)
and/or the African Development Bank (ADB) with a major participation, with
the financing co-financed with export credit agencies and international banks.
This is attractive to the international banks and the export credit agencies, as
in the current circumstances it considerably improves the credit support and
security for the required financing. Other options are donor supported
financial institutions and the Emerging Africa Infrastructure Fund if private
investment is involved.
Competition for IFC and ADB financing is tough, so a larger share of local
currency financing would be desirable. Progress in financial sector reform
could make this feasible, as local banks build capacity for project finance and
capital markets become more liquid. In recent years local banks in Africa have
shown interest in providing local currency loans to infrastructure projects. But
these loans have required significant risk mitigation. The biggest constraint on
the ability of African banks (except those in South Africa) to increase funding
for infrastructure projects is their difficulty in reliably funding themselves over
the long term. But as experience in such countries as Cameroon, Nigeria, and
Tanzania shows, macroeconomic and institutional changes and financial
sector reforms can increase longer-term local currency financing for banks
and thus slowly increase local bank financing for infrastructure projects.
Third, as compared with projects in many other sectors, those in
infrastructure tend to have longer payback and build-out periods and to be
more susceptible to political and regulatory interference, which increases the
regulatory risk such investments may be facing. Investors choose countries
with stable political and economic environments. Open markets, minimal
regulation, good infrastructure facilities, and low production costs are also key
factors in attracting and holding foreign investment. Bringing these factors
together has proven difficult for many countries in sub-Saharan Africa.
Specifically, they suffer from
• Civil strife. On the one hand, during the past 15 years, a relatively
large number of countries in the region have been affected by civil
strife, which, in the most extreme cases (Liberia, Rwanda, Somalia,
Sudan, and Zaïre), brought FDI inflows to a standstill. On the other
hand, several countries that have seen an end to civil conflicts (such as
Angola, Mozambique, Namibia, South Africa, and Uganda) have
benefited from significant increases in FDI inflows during the 1990s.
The Chief Justice, Her Ladyship Mrs. Justice Georgina Wood, has noted
that the existence of civil strife in Africa, for the past decade, has
affected institutions of governance throughout the continent.
(Ghanaian Chronicle July 2008).
• Macroeconomic instability. Large structural fiscal deficits, erratic
monetary and exchange rate policies, and weaknesses in financial
systems in many sub-Saharan countries have contributed to high and
variable inflation and interest rates and a high degree of volatility in
real exchange rates. These factors have all worsened the general
investment climate. Countries that have made progress in reducing
macroeconomic instability have, however, enjoyed some success in
attracting FDI inflows. President John Evans Atta Mills has pledged
Government’s commitment to ensure that Ghana’s economy regains
macroeconomic stability. In connection with that, he said that the
Government has taken a holistic view of the economy, and is looking at
everything possible to ensure that things are put right.
• Slow economic growth and small domestic markets. Although
FDI investments in the primary sectors (notably, agriculture and
mining) in Africa have, on average, earned high rates of return, the
poor growth performance of sub-Saharan Africa and the limited size of
its domestic markets have deterred broader-based FDI. The World
Bank were recently reported in Bloomberg as saying that African
economic growth will slow to 3.5 percent this year and may fall to 2.5
percent or less in 2010 unless industrialized nations fund a stimulus
package for the continent. The global slump has put better-performing
economies such as Ghana and Zambia in danger of failing to meet anti-
poverty targets. Both countries were expected to cut the number of
citizens living in poverty by 50 percent by 2015, a cornerstone of
United Nation’s Millennium Development Goals. (Bloomberg 2.2.2009)
• Inward orientation and burdensome regulations. Compared with
other developing regions, which have seen dramatic shifts to more
outward-oriented and market-based investment regimes since the mid-
1980s, sub-Saharan Africa has remained relatively inward-oriented,
with foreign investment often subject to excessive and discriminatory
regulation. An analysis of the connection between FDI inflows and
economic growth in Ghana concluded that “it is very important to pay
increased attention to the overall role and the quality of growth as a
vital determinant of FDI along with the quality of human capital,
infrastructure, institutions, governance, legal framework, ICT, tax
systems, etc. in Ghana. In consequence, the provision of an enabling
environment that captures the above listed parameters would provide
a better incentive to attract FDI inflows than the usual piecemeal
approaches such as petitioning via investment tours, organization of
trade-expos and myriad special initiatives aimed at attracting specific
investments into the country”. (Frimpong, Joseph Magnus and Oteng-
Abayie, Eric Fosu Bivariate causality analysis between 26 August 2006)
• Slow progress on privatization. In contrast to many Latin American
and Eastern European countries, which have used aggressive
privatization programmes to boost FDI, progress in privatizing state-
owned enterprises has been slow in sub-Saharan Africa. Although there
has been considerable progress in Ghana, privatisation is still politically
contentious (witness the opposition to rail and water privatisation).
• Poor infrastructure. Sub-Saharan Africa’s physical, financial, human,
and institutional infrastructure are all generally less developed than in
other regions and, in many cases, have actually deteriorated since the
early 1980s. This has reflected sub-Saharan countries’ low and
declining investments in all areas of infrastructure, heavy state
intervention coupled with poor implementation capacity, and limited
success thus far in expanding private provision of basic infrastructure.
Two years ago at the Global Policy Forum, Grassroots Africa, an
international non-governmental organisation working on food security
issues and nutrition, referred to a container ship docked at Ghana's
Tema port, full frozen food products, including thousands of metric
tonnes of poultry parts, recently arrived from Brazil. These are
unloaded into cold storage facilities until they can be transported to the
capital of Accra or elsewhere in the country. And then the electricity
goes out! In several West African countries, like Ghana, electricity isn't
constantly provided. The US Department of State background note of
March 2009 for Ghana states that key economic challenges include:
overcoming infrastructure bottlenecks, especially in energy and water;
poor management of natural resources; improving human resource
capacity and development; establishing a business and investment
climate that encourages and allows private sector-led growth, and
privatizing remaining state-owned enterprises, several of which are
significant budget liabilities.
• High wage and production costs. As a result of the macroeconomic
and microeconomic factors listed above and, in some cases, countries’
labour market policies, wage costs in the region tend to be high
relative to productivity levels. Overall costs of production are also
generally higher than elsewhere - for example, almost double those
prevailing in low income Asian countries. An example in Ghana is in the
textile industry where competitiveness suffers from high cost of local
cotton, obsolete plants and machinery, high cost of utilities,
overstaffing, and the high cost of finance.
With many Asian and Latin American countries growing rapidly and far ahead
of most African countries in terms of putting in place the financial
infrastructure needed to efficiently absorb foreign capital, Ghana and most
African countries will have to undertake speedy policy and structural reform to
attract private flows. Market discipline is likely to be severe in the initial
stages, and countries that backtrack on reform will find their access to
international capital limited and what is available to them will be provided on
Although in sub-Saharan Africa, economic characteristics like output growth,
openness, relative stability of real effective exchange rates, low external debt,
and high investment rates have encouraged private capital flows, there is a
need for coherent action on a number of fronts to:
• improve infrastructure;
• strengthen banking systems;
• develop capital markets by accelerating the pace of privatization and
broadening the domestic investor base;
• formulate an appropriate regulatory framework and a more liberal
• introduce competitive labour market policies while creating and
maintaining institutions for upgrading human capital; and
• reform the judiciary system and contain corruption.
I must emphasise that a piecemeal approach, even one including tax holidays
and other investment incentives, is unlikely to sway investor decisions and
attract significant international resources on a sustainable basis.
And, even if these microeconomic issues are addressed, there remains the
problem (seen in the current financial crisis and that of the late 1990s) of
exchange rate volatility. This poses a big risk for foreign currency financing of
infrastructure projects that earn mainly local currency revenues. Mechanisms
used in the 1990s to mitigate this risk, such as exchange rate-indexed
contracts, often proved ineffective under macroeconomic instability. And in
many cases they triggered adverse regulatory changes, such as arbitrary tariff
reductions that made projects financially unsustainable. Moreover, nothing
can insure against the risk of devaluation, and targeted mitigation
instruments, such as contingent loans, are rarely available.
So, mitigating regulatory risk related to changes in exchange rates could help
improve access to foreign financing for projects that earn mainly local
currency revenues and are subject to tariff regulation (such as rail transport
and electricity projects). Mitigating such risk means protecting projects
against arbitrary interference by regulatory agencies that would prevent tariff
adjustments commensurate with cost increases caused by exchange rate
movements. The partial risk guarantee against regulatory default that the
World Bank granted for the concession of Uganda’s electricity distribution
company, for example, played a key part in attracting private investors (see
Mazhar 2005 and Nyirinkinda 2005).
Ghana is competing for a reduced supply of foreign investment. Investors are
looking for infrastructure projects and programmes that are financially viable,
with fair and manageable distribution of revenues, with external risks being
mitigated. They will be looking very carefully at Ghana’s progress towards a
market-oriented environment that is not over-regulated or regulated in a
biased fashion. If the environment is right, and the financial and risk analyses
indicate a “bankable” project, investors will come to the table. It is largely in
the hands of the Government as to whether this happens or not in Ghana.
Thank you for your attention.