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HPL_Group I Case Analysis_Nutrifix Ghana_26.03.15.v1.0

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Nutrifix Ghana Inc Case Analysis - Fertilizer Investment Decision

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HPL_Group I Case Analysis_Nutrifix Ghana_26.03.15.v1.0

  1. 1. 3/26/2015 1 CaseAnalysis-NitrofixGhana,Inc. Binus Business School, MM Executive Batch 20 Presented by Group I Alexander Christian Dina Sandri Fani Ridwan Martawidjaja Jenna Widyawati Case Study Analysis Nitrofix Ghana, Inc.
  2. 2. About the Case Investmentopportunity offered by the Ghanaian government to Nitrofix to establish a fertilizer plant in Ghana 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 2  Firstly approached in 1981 in Limann’s regime  Negotiations had proceeded fitfully as the Limann government was overthrown during military coup took place on Dec 31, 1981  Nitrofix was hesitant to enter into the agreement due to Ghana’s past political instability and economic chaos  Bawol Cabiri recontacted Craig Michael Lee in mid-1982 with more favorable terms and condition  Form joint venture plant to be operated in Ghana with the following options:  Either with private Ghanaian entrepreneurs  Either with the government
  3. 3. About the Case Investmentopportunity offered by the Ghanaian government to Nitrofix to establish a fertilizer plant in Ghana 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 3  Impressed by Calibri’s knowledge and understanding and by the potential profits of the project  Recommendation on investment decision must be made by Lee by considering the following aspects:  The conditions of the Ghanaian economy  The political climate in Ghana & West Africa  The existence of a Ghanaian and/or African market for fertilizer  Ghana’s policies toward foreign investment  The financial arrangements
  4. 4. About Ghana The 1st country in sub-SaharanAfrica to gain independence with no luck in economy 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 4  Received independence from Great Britain in 6 March 1957  This status of Ghana as a Commonwealth realm would continue until 1960, when after a national referendum, Ghana was declared a republic  Dr. Kwame Nkrumah was the 1st Prime Minister  The richest country in Africa at the time of independence; thanks to its position as the world’s largest cocoa exporter  Invested a substantial part of its revenues in education at all levels resulted to high level of literacy  Basic ambiguity took place at the beginning years of independence: capitalist vs. socialist
  5. 5. About Ghana Ghana at the time the investment was planned 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 5 Political Situation Political instability triggered by coup 01 Economy Situation Doomed day for Ghana as the fallen economy 02 Investment Policy Encouraged foreign investment however deemed as a rigid policy 03 Market for fertilizer The use of fertilizers was growing; however investment cost was so high 04
  6. 6. About Ghana Ghana at the time the investment was planned 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 6 Political Situation Political instability triggered by coup 01 Crises on the political leadership  Incapability of envisioning the future of Ghana  Lack of vision  Hesitation in taking most necessary but politically risky steps  Lead to major economic crises 1966 1st military coup. Overthrew Nkrumah as the president 1969 Military stepped aside. Dr. Kofi Busia was elected president 1972 Another military coup. Bringing to power a group the National Reconciliation Council (NRC) 1979 Coup conducted by a group of junior air force officers, Jerry Rawlings served as a new president. Stepped aside 3 months later after the election of Hilla Limann 1979 - 1982 Reconstituted Ghana’s Parliament. Limann’s regime. Institutionalized a program of economic reforms 1982 Another coup. Rawling served as a President for the 2nd time.
  7. 7. About Ghana Ghana at the time the investment was planned 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 7 1966 • Overthrew Nkrumah • Attempted to liberalize the economy • Create more attractive climate for foreign investment 1969 • World cocoa prices fell • Inflation heated up • The balance-of payments deficit worsened 1972 - 1979 • Ballooned in inflation, the government deficit, the money supply, & the balance-of- payment deficit • Clamped on wage & price controls • Nationalization High idle capacity due to raw materials & spare parts scarcity Limman’s regime • Institutionalized an economic reforms program • Enabled the country to meet its obligations on its foreign debts • Enacted a new Investment Code: assured protection & a fair RoI for foreign investors Economy Situation Doomed day for Ghana as the fallen economy 02 Major economic crises took place  Country was deeply in debt  Currency vastly overvalued  Foreign exchange reserves close to zero  High dependency to the vagaries of the world cocoa market  Borrowing power from the IMF
  8. 8. About Ghana Ghana at the time the investment was planned 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 8 Post-independence • Tried to control private investment • 4 categories of enterprises, i.e. state enterprises, private enterprises, joint state/private enterprises, and cooperatives 1963 • Passed the Capital Investments Act • Set up a scheme of priorities & incentives to attract foreign investor • Mostly capital-intensive & high- tech plants 1972 - 1979 • The cumbersome administrative procedures prevented from utilizing the foreign aid • Proliferation of controls and hindrances for foreign companies continued • Some foreign companies pulled out of the country Post 1979 • Dismantled regulatory & admin barriers to investment • Establishment of special incentives program, e.g. certain tax exemptions, custom duties exemptions, guaranteed manufacturing or establishment licensees • Agriculture would be the 1st priority for development & investment Tried to create friendly environment for foreign investors  Establishment of special incentives program  However, not consistent as hindrance and economic barriers to investment still exist Investment Policy Encouraged foreign investment however deemed as a rigid policy 03
  9. 9. About Ghana Ghana at the time the investment was planned 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 9 Agriculture: a way of life of Ghana • Employing 60% of the labor force • Produced 42% of the GDP in 1980 • Only 13% of suitable for farming were under cultivation From traditional into mechanization • Shifted from traditional, labor- intensive into use of mechanization • Lead to increased need of fertilizer as mechanization lead to rapid deterioration of the depletion of soil nutrients Declined on cocoa production • Main source of Ghana’s foreign exchange earnings, accounting for 65% in an average year • Employed 11% of the nation’s labor force • Was believed to account for a large part of its fertilizer usage • Had declined steadily since 1960 Fertilizer consumption tend to be decreasing • Institutionalized an economic reforms program • Enabled the country to meet its obligations on its foreign debts • Enacted a new Investment Code: assured protection & a fair RoI for foreign investors • Dismantled regulatory & admin barriers to investment Gloomy outlook for fertilizer  Many imponderables factors in estimating the growth potential of the Ghanaian fertilizer market  The use of fertilizers was growing; however another source revealed the consumption of nitrogenous fertilizers had declined somewhat after 1976 Market for fertilizer Doomed day for Ghana as the fallen economy 04
  10. 10. About Nitrofix, Inc. Well known, medium-sized U.S. manufacturerof nitrogenous fertilizers 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 10  Specialized in setting up plants to serve the local market in smaller countries overseas  1st international ventures in 1960 in the smaller countries of Western Europe  Expansion operation in 1970’s into friendly 3rd World countries such as the Philippines, Indonesia, and Venezuela  Shifted in international operations expansion strategy:  100% ownership in each overseas subsidiary in 1960s  JV with local partners by establishing more suitable terms and conditions
  11. 11. About Craig Michael Lee 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 11 Craig Michael Lee Project Advisor Hired by the VP of Nitrofix Inc. as the Project Advisor to the VP for its international division 01 Responsibility Responsible for conducting deep pre- analysis in exploring Ghana investment opportunity 02 Analysis Factors Condition of the Ghanaian economy, political climate in Ghana & West Africa, the potential market of fertilizer, & Ghana’s FDIs policies 03 Recommendation Invest/not invest decision; financial & ownership arrangements, & plant type and size decision 04
  12. 12. DeepAnalysis Problem faced by the company in making this investment 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 12 Political instability Fast changing decision in regulation making that may impact to future operations 01 Poor economic situation Scarcity in raw materials & spare parts; high inflation, skilled labor shortage, reserves close to zero 02 Uncertainty in fertilizer market Growth potential of the Ghanaian fertilizer market is hard to predict; declining trend in nitrogenous fertilizer consumption 03 Complex Financial & Ownership Arrangements Difficulties of having loan financing due to high interest rates Nitrofix did not have lot of money available for soft loans High overhead expenses and taxes 04
  13. 13. DeepAnalysis Leadership question faced by Lee 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 13 Commitment towards foreign investment Do the Ghanaian government really have the commitment toward foreign investment? 01 Capability of envisioning the future of Ghana Was the Ghanaian government being able to envision the future of Ghana? 02 Courage to make politically risky decision Do the government have the courage to make politically risky decision 03
  14. 14. DeepAnalysis Our thoughts about the investment 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 14 Investment options Private Investment Full investment by Nitrofix 01 Joint State Enterprise Nitrofix and Ghana bear share of investment 02 Operator Government provide full investment in physical asset, Nitrofix provide technology and management 03
  15. 15. Private Enterprise Full investment by Nitrofix 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 15 • Full control on operation • Maximize profit • Prone to political change • High risk investment • Might not have full support from government Point of negotiations: 1. Government to provide incentives in the form of relief on tariff and fees 2. Government to provide support to dismantle regulatory and administrative regulation 3. Government will receive lower price of fertilizer with steady supply that will support government program in agriculture 4. Nitrofix will provide employment to locals and absorbing educated workers which will prevent them from working at another country 5. Government will benefit from knowledge transfer in fertilizer manufacturing
  16. 16. Joint State Enterprise Nitrofix and Ghana bear share of investment 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 16 • Potential support from government • More flexible to political change  Medium risk and still at some degree prone to political change  Potentially have unwanted government intervention in operation Point of negotiations: 1. Government provide 60% investment and Nitrofix provide another 40% 2. Profit sharing will be 50-50 3. Both partner have equal involvement in operation and control 4. Pushing for taking 20,000-ton plant employing steam- reforming technology at first 5. Nitrofix will only be responsible for equipment and skilled labor provision 6. Government will benefit from knowledge transfer in fertilizer manufacturing
  17. 17. Operator Government provide full investment in physical asset, Nitrofix provide technology and management 3/26/2015CaseAnalysis-NitrofixGhana,Inc. 17 • Lowest risk • Resistant to political change • No government intervention on operation  Government might not have enough financial capability to support this option Point of negotiations: 1. Ghanaian government will bear 100% overhead cost especially for equipment, raw material, and machinery 2. Nitrofix will bear the responsibility of skilled labor, technical knowledge and management provision 3. Nitrofix will get certain fee percentage from the nett profit 4. The Ghanaian government must provide guaranteed immigration of necessary expatriate personnel and certain tax exemptions & remittance guarantees for such personnel
  18. 18. 18 CaseAnalysis-NitrofixGhana,Inc.3/26/2015

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