Although Ghana has witnessed some impressive growth in recent times, past experiences with industrialization have not been as expected.

1. EminentPanelConference,Accra,August7th -9th,2020
Cost Benefit Analysis of
Interventions in the Industrial
Sector
Prof. Peter Quartey & Dr. Festus Ebo Turkson
ISSER, University of Ghana
Ghana Priorities Eminent Panel Conference, Accra, August 7 – 9, 2020

2. Introduction
• Ghana has witnessed impressive growth in recent times
- the experience with industrialization has been disappointing.
• There are several reasons for this disappointing performance:
- poor infrastructure, lack of skilled labour, poor management
practices, and inadequate technological innovation.
• The industrial sector that is supposed to be an important
source of employment and economic growth
- lags behind the services sector in terms of contribution to GDP and
employment.

3. Introduction
• industrial transformation: source of growth and employment
creation
- In advanced economies and especially the Asian Tigers.
• Ghana needs to structurally transform its industrial sector to
enhance its growth and employment prospects.
• The paper undertakes a cost-benefit analysis of 6
interventions designed to improve upon profitability in the
industrial sector

4. Intervention descriptions
Interventions
• Management training for small, medium and large firms
- Hire consultants to help large and small firms improve their management
practices
• Small scale capital grants for micro-enterprises
- Grants of GHS 750 for goods (or cash) to ease liquidity constraints
• Credit reference bureau expansion
- Include more information from utilities and telcos into existing CRBs so lenders
can make better decisions

5. Intervention descriptions
Interventions
• Increased R&D Spending
- Increase R&D spending by 0.4% of GDP
• Electricity Subsidy to SLT
- 10% reduction in electricity tariffs

6. Management Training for large
manufacturing enterprises
(1st of 6)

7. Management Training for large manufacturing enterprises
• Overview
 Management practices in
developing countries (i.e.
scores) considerably lag behind
those in advanced economies.
 There is the need to improve
such practices to enhance
industrial growth.
 This intervention seeks to
provide management training
to local (non-multinational)
industries that relatively have
large turnovers (large firms).

8. Management Training for large manufacturing enterprises
Implementation Considerations
Draws deeply on an RCT of large Textile firms in India (Bloom et al,
2013)
Bloom et al (2013) showed how variations in managerial practices
accounts for differences in productivity across firms and countries
• We estimate that this would require a cost of GHS 1.59m per factory.
- Some additional costs would, however, be borne by the firms as
investments to enable recommendations.
Target Population = 20 Large local manufacturing firms
form of a consultancy service on various management practices:
factory operations, quality control, inventory, human resources
management and sales and order management

9. Management Training for large manufacturing enterprises- Costs
and Benefits
• Target population = 20 large, local manufacturing firms
• Costs = GHS1.62m per firm
- direct training costs for 6 months
- Based on high quality studies from India (Bloom et al. 2013; Bloom et al. 2018)
- Indian firms poorly managed as in Ghana (Seker et al, 2018): Same TFP=1.2
• Benefits = GHS9.6m per firm (6yrs)
- Increase in firm productivity by 17%
- Mostly due to avoided wastage and better inventory management
- Sustained for 6 years
- Spill-over effects to other local firms
- Based on studies from India

10. Management Training for large manufacturing enterprises- Costs
and Benefits
• Management training is critical in enhancing the
profitability of enterprises in Ghana.
• Our estimations suggest that the large firms are likely to
benefit from the training.
Interventions Benefits
(GHS)
Costs
(GHS)
BCR Quality of
Evidence
Management Training for large
manufacturing enterprises
9,581,108 1,613,393 5.9 Limited

11. Management training for Medium-
sized firms
(2nd of 6)

12. Management training for Medium-sized firms
Overview
• SMEs have been the backbone of Ghana’s industrial sector
- yet poorly managed and not productive (Teal, 1999).
• Key concerns include
- dysfunctional government policy, informality, poor
infrastructure, lack of skilled labour, poor management
practices, financial constraints and poor economic
performances
• This intervention seeks to provide management training for
medium-sized firms.
- Intervention is conceptually the same as Intervention 1,
- Different training component.

13. Management training for Medium-sized firms
Implementation Considerations
• Paper relies on the work of Mano, Iddrisu and Yoshino (2011)
- an RCT conducted as Suame Magazine in Kumasi
- Other comparable papers (Karlan and Valdivia, 2011 for Peru; Bruhn,
Karlan and Schoar, 2010 for Mexico; and Drexler, Fischer and Schoar,
2010 in India)
• This intervention will require hiring a consultant to train the
owners of medium-sized firms some specific management
modules. We estimate that this would require a cost of GHS
4,355 per factory. Some additional costs would, however, be
borne by the firms as investments to enable the full realization
of the training program.

14. Management training for Medium-sized firms (Costs and
Benefits)
Costs
• The total cost of the intervention is estimated at GHS
6,876 per year (training cost and time cost).
Benefits
• It is expected that the total profit for the first year will be
GHS 65,726 (at 8% discount rate).
• We anticipate some spillover effects of this intervention for
other firms, especially local firms.

15. Management training for Medium-sized firms (Costs and
Benefits)
• Management training is critical in enhancing the
profitability of SMEs in Ghana.
• medium-sized firms are also likely to benefit from the
training, but not as much as the large firms.
Interventions Benefit per
year
(GHS)
Cost per
year
(GHS)
BCR Quality of
Evidence
Management training for Medium-sized
firms
65,726 6,876 9.6 Medium

16. Capital grant for microenterprises
(3rd of 6)

17. Capital grant for microenterprises
Overview
• The role of microenterprises in economic development.
- Some studies suggest that poverty reduction can more effectively be
attained by household investment into micro-enterprises (Shepher and
Diwakar, 2019)
• The main constraint to the expansion of firms is capital (Masakure,
Henson, & Cranfield, 2009; McKenzie & Woodruff, 2008)
• This intervention seeks to provide a capital grant to some selected
microenterprises within the manufacturing sector in Ghana.
- The capital grant could be in the form of cash or in-kind grant.

18. Capital grant for microenterprises
Implementation Considerations
• Some evidence that returns to capital can be very high for
microenterprises
- Mckenzie and Woodruff (2006) in Mexico; De Mel et al. (2008) in Sri
Lanka
- Fafchamps et al (2013) finds strong effect of capital grants to
enterprises, unlike the other studies
• We propose that firms should be given either a cash payment
or in-kind payment worth GHS683 each and will be
distributed to some selected 100,000 microenterprises
• Beneficiaries shall be selected at two levels: (1) based on tax
compliance (2) randomization

19. Capital grant for microenterprises
(Costs and Benefits)
Costs
• The total cost for this intervention per each enterprise is GH
752
- capital grant=GHS683 and administrative cost=GHS69.
Benefits
• Boost to profit (20-25%)
• The benefit is assumed to last for 3 years
• Total profit for 3 years is GHS 5,263 (at a discount rate of
8%).

20. Capital grant for microenterprises
(Costs and Benefits)
- The provision of capital grants is another important way of
increasing the profitability of enterprises. This is particularly
important for local microenterprises.
Interventions Benefits per
firm (GHS)
Cost per
firm
(GHS)
BCR Quality of
Evidence
Capital grant for micro enterprises 5,263 752 7.0 Medium

21. Increased General R&D Spending
(4th solution of 6)

22. Increased General R&D Spending
Overview
• Low Income countries have low returns to R&D
- supporting infrastructure (good management practices, rule of law,
financial market sophistication etc.) is absent,
• we argue that some productivity improvements are still envisaged.
- This intervention appraised the returns of doubling the current R&D
spending of 0.4 percent.
Why the need to enhance R&D Spending?
• Sluggish growth in firms
• Productivity amongst SMEs is low
• Potential for firm growth and employment creation
• National Industrial Revitalization Programme

23. Increased General R&D Spending
Rate of Return to R&D relative
to the technological Frontier
• Paper relies on Goni and
Maloney (2017) who mapped
out rate of return to R&D for
different countries based on
distance from the
technological frontier
• Based on this, we expect
Ghana’s distance from the
technological frontier to be in
the neighbourhood of Kenya

24. Increased General R&D Spending
(Costs and Benefits)
Costs
• Increase R&D spending by 0.4 percent of GDP per capita
(double of the spending to 0.8%)
Benefits
• An estimated rate of return of R&D spending between 0.5 –
0.7
• Assuming Ghana’s GDP is GHS 300 billion, an investment of
GHS 1.2 billion (0.4% of GDP) would yield a benefit of 1.8
billion for net benefit of GHS 0.6 billion.
- Example net benefit GHS 0.6 billion can be equivalent to training or
providing capital grant for 20 large firms, 10,000 medium firms and
100,000 microenterprises

25. Increased General R&D Spending
(Costs and Benefits)
- An increase in research and development expenditure by 0.4
percent of GDP will generate an estimated rate of return between
0.5 to 0.7 of GDP.
Interventions Benefit per year
(GHS)
Cost per year
(GHS)
BCR Quality of
Evidence
Increase General R&D Spending 1800
(Rate of Return 0.5 –
0.7)
1200
(0.4% of GDP)
1.5 and 1.75 Limited

26. Credit Reference Bureau
(5th of 6)

27. Credit Reference Bureau
Overview
• Overwhelming evidence that development of inclusive
financial systems promote investment, spurs growth and
reduces poverty and inequality
- Allen et al, 2013; Ayyagari et al, 2013; Beck et al, 2007; Aghion,
et al, 2005.
• The proposed intervention involves
- building the capacity of the regulator to ensure effective
surveillance of the credit referencing system
• to improve upon the quality of the information in circulation while enforcing
an appropriate rewards and sanctions regime per the CRB ACT.
A reliable credit reference reporting
system provides accurate credit
reports with sources from financial
institutions and others such as
courts, telecom firms, Fintechs,
insurance firms, retailers etc.

28. Credit Reference Bureau
16.58
31.14
37.31 37.31
29.37
38.76
42.79
59.67
48.21
18.05 17.52
29.16
39.30
28.58
42.59
24.52
14.43
12.79
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
0
2
4
6
8
10
12
14
16
18
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Percentage
growth
As
a
percentage
of
GDP
Year
Credit to the private sector: as percentage of GDP and year-on-year growth
Private Sector Credit as percentage of GDP Growth In Private Sector Credit (December Y-O-Y)
Credit Access and Financial
Sector Performance in
Ghana
• Ghana’s credit to the
private sector as a
percentage of GDP has
hovered around an average
of 14 percent.
• Meanwhile, y-o-y private
sector credit growth has
been relatively volatile,
peaking just before the
global financial crisis to
about 60 percent in 2008.
• Can CRBs enhance access
to credit with improved data
sources?

29. Credit Reference Bureau
(Costs and Benefits)
Implementation Considerations
• The intervention facilitates the inclusion of additional information into the
credit referencing system. These include data from Fintechs (some of whom are
aligned to Telecommunication companies), mining companies, wholesalers,
court records and tax records.
• Drawing from work by Kusi, Agbloyor, Ansah-Adu & Gyeke Dako, (2017)
Costs
• The overall undiscounted cost is approximately GHS 5.9m (expansion of credit
reporting office, additional costs by incurred by the three private CRBs and
Costs to be incurred by three telecommunication companies and two Fintechs)
Benefits
• A change in consumer surplus is estimated as GHS 69m.

30. Credit Reference Bureau - (Costs and Benefits)
Main takeaway: The inclusion of additional information
into the credit referencing system will generate a consumer
surplus estimated at GHS 69m
Interventions Benefit per year
(GHS)
Cost per year
(GHS)
BCR Quality of
Evidence
Credit Reference Bureau 69,131,668 5,911,143 11.7 Limited

31. Reduce Electricity Tariff for Industry
(6th of 6)

32. Reduce Electricity Tariff for Industry
• Electricity access rate in Ghana today stands at about 84
percent (World Bank, 2018).
• Despite excess capacity in the supply of electricity, firms face
an uphill task in paying huge tariffs.
• The concerns about electricity stability and difficulties firms
have with meeting tariff obligations are features in various
rounds of business and industrial surveys in Ghana.
- These difficulties have been found to undermine firm productivity (see,
for example, Abebrese, 2020).
- Jewell (2006) suggests that electricity tariffs could take up about 30
percent of the operational costs of an average firm.

33. Reduce Electricity Tariff for Industry
• There is co-movement
between change in
electricity usage and change
in manufacturing value-
added.
- 10% reduction in price ->
2.6% increase in electricity
used -> 2.0% increase in
output
• Based on historical data
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2010 2011 2012 2013 2014 2015 2016 2017
Relationship between electricity used by SLT and
Manufacturing value-added
% Change Electricity usage % Change in MVA

34. Reduce Electricity Tariff for Industry
Overview
• This intervention aims at providing subsidies or reducing
the electricity tariffs payable by manufacturing firms .
• Implementation Considerations
• There are four categories of consumers in Ghana. These
are residential, non-residential (commercial), Special Load
Tariff (SLTs) for industry and street lighting. We focus on
SLTs.

35. Reduce Electricity Tariff for Industry
Assumptions
- 10% reduction in average price of electricity for SLT
- For every 1% reduction in electricity prices, demand for electricity
by manufacturing firms increases by 0.26%
- For every 1% increase in electricity usage, manufacturing output
increases by 0.8%
Costs
• The total cost of the intervention is obtained by adding the value of
transfer (that is subsidy paid by the government) to the value of
additional electricity. This becomes GHS 534m
Benefits
• The total welfare estimate for the intervention is GHS 987m

36. Reduce Electricity Tariff for Industry
• Providing subsidies or reducing the electricity tariffs payable
by manufacturing firms and industry will generate total
welfare of about GHS 987m
Interventions Benefit per
year
(GHS)
Cost per year
(GHS)
BCR Quality of
Evidence
Reduce Electricity Tariff for
Industry
987,698,278 534,118,968 1.8 Medium

37. SUMMARY BCR TABLE
Interventions Benefit per year
(GHS)
Cost per year
(GHS)
BCR Quality of
Evidence
Management Training for large
manufacturing enterprises
9,581,108 1,613,393 5.9 Limited
Management training for Medium-
sized firms
65,726 6,876 9.6 Medium
Capital grant for micro enterprises 5,263 752 7.0 Medium
Increase General R&D Spending 1800
(Rate of Return
0.5 – 0.7)
1200
(0.4% of GDP)
1.5
and
1.75
Limited
Credit Reference Bureau 69,131,668 5,911,143 11.7 Limited
Reduce Electricity Tariff for Industry 987,698,278 534,118,968 1.8 Medium

38. Headline Recommendations
• The interventions can structurally transform the industrial
sector by increasing the profitability of local firms, creating
avenues for employment generation and complimenting the
efforts at increasing economic growth.
• While some considerable costs are expected in the first few
years, this paper has shown that the subsequent estimated
rate of return is again significantly higher.
• More importantly, these interventions will require strong
institutional support both at the national and local levels to
ensure its sustainability and success.

39. References
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40. References
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41. References
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