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Recapitalization– The panacea to the woes of Ghana’s insurance market? – Mr. Justice Yaw Ofori -Commissioner of Insurance, Ghana

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In a bid to ensure a robust Ghanaian insurance industry, the National Insurance Commission, NIC, has initiated moves towards recapitalization. The initiative, yet to be officially announced, involves a planned increase in the Minimum Capital Requirement (MCR) for insurance and re-insurance companies by over three (3) fold. The industry regulator has engaged stakeholders to ensure smooth implementation of the exercise which has seen financial analysts draw a parallel with that witnessed in the banking industry last year.

This has prompted questions- some comparative analysis with the banking one as well as questions about its economic significance. The Insurance Commissioner, Justice Yaw Ofori, in an interview with the Vaultz Magazine, gave a detailed explanation of the exercise.

 

State of the Ghanaian insurance sector

Ghana’s insurance industry has in recent years witnessed a significant growth especially in terms of the number of new entrants recorded. The industry however continues to record low insurance penetration which still hovers around 3%.

The Insurance Commissioner believes this among other issues highlight the need for the industry recapitalization.

I would say Ghana’s insurance industry is strong despite the challenges with respect to recapitalization. The market is still virgin and there are a lot of areas which are untapped and that is why we see foreign companies coming into Ghana to do business. The oil sector is booming and so is agriculture as well as inclusive insurance and all we need to do is to make sure companies are well capitalized so far as they want to operate in Ghana” Mr. Ofori stated.

According to the NIC’s annual report, Return on Equity (ROE) for insurance companies has consistently been less than the corresponding year’s prevailing treasury-bill rate with the overall picture worsening year on year especially for life insurance companies. Mr. Ofori attributes this to the tendency for investors to choose high-yielding financial instruments over insurance which is a relatively long-term investment option.

MR. JUSTICE YAW OFORI -Commissioner of Insurance

“I think it’s all because people get more returns when they invest their monies in T-Bills and other non-banking financial instruments.  For instance, there was a time people were promised 25% to 35% on their investment which was more attractive so they didn’t see why they should invest in other assets like insurance. So some insurance companies were consequently recording underwriting losses” he explained.

The insurance industry has been contributing significantly to Ghana’s economic growth– albeit constantly at less than 2% of GDP through the provision of long-term investment finance to the economy whilst influencing production and consumption, internal and international trade among others.

“Insurance is a vital pillar of every economy. In Ghana for instance, it contributes about GH¢ 5billion in terms of business generated annually. About 12, 500 people earn a living directly from the industry and many more indirectly such as lawyers, doctors, carpenters, masons, and mechanics. Without insurance you can’t get bank loans because they need some kind of guarantee that they can recoup their money in the event of default”.

 

Insurance recapitalization– the facts and figures

Following its engagement with stakeholders including brokers and shareholders alike, the NIC has proposed an increase in the Minimum Capital Requirement (MCR) for life and non-life insurance companies from the current GH¢ 15million (approximately US$ 3million) to GH¢ 50million approximately US$ 10million).

Re-insurance companies will also see their MCR reviewed upwards from GH¢ 40million (approximately US$ 8million) to GH¢ 125million (approximately US$ 25 million) while that of brokers will be increased from GH¢ 300,000 (approximately US$ 60,000) to GH¢ 500,000 (approximately US$ 100,000).

“We came about these figures by taking into consideration how much a company would need to break even and stay profitable. We realized it will take 4 to 6 years for a newly established insurance company to break even with GH¢ 50 to GH¢ 60 million capital” the Commissioner noted.

The last time the market underwent recapitalisation was in 2015 and this was pegged against the dollar with an initial plan of an annual increment which after a considered review, was implemented differently.

“On an annual basis, the minimum capital was supposed to be adjusted to reflect inflation but it has not been done for about 4 or 5 years. But even if we had those increments, the current minimum capital would have been around GH¢ 25million which is about half what we are proposing now because Ghana’s economy is not like it was about 10-15 years ago; it’s bigger now” he stated.

In 2017, about three (3) companies reportedly had challenges meeting the then minimum capital requirement of GH¢ 15million. Mr. Ofori confirmed this as a normal industry development.

“It’s always been so in every insurance industry. There are times that companies will have challenges meeting the minimum capital but that does not mean that it’s time to shut them down. We, as regulators, try as much as possible to encourage the shareholders to recapitalize because shutting down an insurance company is not an easy thing and it is the last thing a regulator wants to go through,” he disclosed.

 

The ultimate goal

The Insurance Commissioner reiterated that the purpose of the recapitalisation was to ultimately grow the industry to the benefit of the economy by protecting the interest of the policy holder.

“Following our stakeholder engagements, we’ve done our concept paper which has been reviewed by the board. We’ve explained to stakeholders, the rationale behind the calculation and of course not everybody is going to like it but at the end of the day, we want the best for the industry. The Commission is not interested in closing any entity but rather building a strong market that takes care of the interest of the policy holder,” Mr. Ofori stated.

“Our economy has also grown. The GH¢ 15million was implemented some years ago. Now we have the oil boom and the country is losing so much revenue, we are actually sending money out because our companies are not financially strong to take much of the risks,” he added.

“Over 90% of our risks have to be insured on the international market and these are some of the reasons our cedi is always affected by the dollar. There is more demand for the dollar than the cedi and this actually arises because we are sending these risks out which demands paying insurance premium in dollars. So, what we are trying to do is, we want everyone to increase their intake. The more absorption they can take, the less flight of insurance premium,” the Commissioner asserted.

He also defended the proposed 300% increase in the capital requirement as crucial in stimulating the desired growth.

 

Correlation with the banking crisis and recapitalisation

The NIC has already indicated the banking crisis and recapitalisation somewhat delayed its planned exercise in the insurance sector. This, according to the Commission is because banks were already looking for capital from the same market the insurance companies will be considering to recapitalize.

A recapitalisation directive in the insurance sector would have thus led to competition between banks and insurers in raising capital– making it a lot more difficult for both entities.

With the bank recapitalisation now over, analysts believe the way has now been paved for a similar exercise in the insurance sector. The Insurance Commissioner confirmed this assertion citing the banking crisis as a major factor affecting insurance recapitalisation efforts in 2017 which almost led to the collapse of about three (3) companies.

 “When we assess an insurance company, we don’t look at only the minimum capital but the totality of the risk that it carries. So GH¢ 15million is the minimum but we have companies worth over GH¢ 200million. So if you are worth over GH¢ 200million and you have risk of let’s say GH¢ 600million and you cannot pay your claims on time, it is a challenge despite meeting the minimum requirement. And most of the challenges some of our companies are facing are linked to the banking crisis because they have monies with these banks and they cannot access these monies,” he added.

The Insurance Commissioner also dismissed assertions that the insurance recapitalisation is a mere replication of that witnessed in the banking sector and states that the two exercises are mutually exclusive.

 

“No it’s not a replication for the fun of it. Everything is interconnected. Even some individuals have lost their monies because some of these banks have been consolidated. When such entities go under, it affects everybody. When insurance companies make their monies, these monies are kept in the bank for investment in the economy. Insurance companies go for those monies when there are claims or a need for it. Now we have an insurance company going to the bank and the bank has no money. Although on paper they have monies, once it’s inaccessible, it cannot be considered– affecting their Capital Adequacy Ratio,” he revealed.

This, according to the Commissioner, only makes a stronger case for the recapitalisation.

Meanwhile, banking and insurance operations are distinctly different with diverse inherent risks. Some analysts thus insist recapitalization may not necessarily be the way forward for addressing the woes of the insurance industry. Mr. Ofori however asserts, insurance companies even need more capital than banks.

 

Risk-Based Capital requirement

The NIC’s current regulatory approach is geared towards the global trend of Risk-Based Supervision framework and the Commission is still pursuing this approach by way of a Risk-Based Capital (RBC) requirement.

 

“The minimum capital requirement is also part of the risk-based framework because, that means, so much assets to absorb more risks. Risk-based means we’re looking at the totality of your portfolio to see the inherent risks and how we can manage them. It is a complex thing. Even though we asking for minimum capital, risk-based provisions will also come from it. When you suffer from malaria you don’t take only chloroquine. You add multivitamins and some pain killers to make you survive,” he illustrated.

 

Recapitalisation has always been used as a regulatory tool to check the financial soundness of the industry.  There is, however, an emerging school of thought that this is not as crucial as the regulator focusing on ensuring effective management of the capital of the companies by ensuring they maintain capital levels commensurate with their respective risks.

 

Mr. Ofori says all these complement each other in strengthening an industry.

“Even new companies entering the market are not allowed to start up with the GH¢ 15million which was the minimum but at least GH¢ 25million. We couldn’t ask for the GH¢ 50million and even with that, they are investing more.”

 

Local versus International standards

Internationally, capital is not necessarily used as the basis for assessing the strength of an insurance company as opposed to the company’s net worth– an assertion Mr. Ofori confirmed.

“In advanced countries, their capital requirement could be like that of Ghana or even less.      That doesn’t mean that the companies that applied for the license to operate insurance don’t have the capital backing. These companies know that insurance business is risky. So if the minimum capital required is US$ 3million, that company comes into the business with US$ 500million by way of net-worth.

When we say minimum like the GH¢ 50million, that money is not going to sit down doing nothing. It could be your businesses, assets and other investments. Insurance monies have to be working. So if you have an insurance company that owns apartments, it’s part of their total worth. When we assess your worth, we look at both your liquid cash and assets because an insurance company can have a chain of hotels which means it can take as much risks and when there is a problem, it can fall on them. The Aon’s, Allianz and CGI’s have big investments all over the world and when they have challenges, they know where to draw money from. So when we say minimum capital requirement, it is not only liquid cash but also investments in T-Bills and so on,” he further explained.

The MCR in the Pan-European Solvency RBC regime is only € 3.2million (approximately GH¢ 19million) for life and reinsurance companies and € 2.3million (approximately GH¢ 14million) for non-life insurance companies. Some analysts have in this light predicted Ghana may only end up being one of the over-capitalised industries in the world by end of the recapitalisation.

But Mr. Ofori is challenging such views insisting that the local insurance industry which is still a burgeoning one cannot be placed on a level pegging with such developed regimes when it comes to capital requirement.

The dollar equivalent of GH¢ 50million is about $ 10million or less depending on the exchange rate and other factors. Don’t forget the financial strength of those companies operating in those markets. One company is even worth more than all companies put together in Ghana. When we make reference to other places, Ghana is different. When you come to Ghana, the way people respond to work is different. Minimum capital has nothing to do with international best practices,” he emphasized.

Ghana is not the country with the highest minimum capital requirement in the world. There are African countries such as Kenya whose was higher than Ghana. We’ve done a lot of research. Kenya is about US$ 8million or so and in Ghana the GH¢ 50million which was supposed to be $10 million will probably come low depending on exchange rate and other things. Insurance is international and transnational and each company must be worth its weight in gold on the international risk market otherwise businesses coming from outside Ghana will not consider Ghanaians,” he elaborated.

 

Expected Outcomes

The Insurance Commissioner is confident the industry will respond positively to the exercise – citing special provisions to facilitate the process.

“If we should introduce the minimum capital, almost 50% of companies will meet it per our analysis. Looking at their portfolio, some of them qualify already, some with a little push will be there and a few may have challenges. But we will encourage them; that’s why we have transitional provisions.”

According to Mr. Ofori, the recapitalization is ultimately expected to reposition the insurance industry and the economy as whole on a stronger footing by addressing issues like low insurance penetration and undercutting.

“If you have a lot of companies on the market that are not financially strong, you will definitely have problems like undercutting because some of them are ready to sell for cheap. They take low premiums and when there is a loss, they are unable to pay. Strong companies have bad days but their account is so big and they are able to pay claims. So I think we’ll have a much disciplined market because minimum capital is not going to be easy. Recapitalisation will help eliminate undercutting because the more you undercut, the more it affects your minimum capital. So you’re going to do prudent underwriting”

In terms of the bigger picture by way of economic impact, he stated “I believe all in all, the industry can also retain much of their underwriting income and probably create more jobs. The more money we can create, more employment can be created, less monies leaving the country, our cedi might be more stable and the economic benefits are numerous”.

He also revealed a new bill is currently under consideration to complement the recapitalisation in addressing the longstanding challenge of low insurance penetration in Ghana.

“We’re working on a bill to make sure we can have more compulsory insurances. We are trying to make sure that these compulsory insurances will help boost the interest in insurance. We’re also increasing market conduct supervision to enable companies pay their claims on time. We’re providing a lot of insurance education to the industry and the general public. This year for example the Commission out of its own budget, through the Ghana Insurance College will train 10,000 Ghanaian youth as insurance agents nationwide for free so that there will be a pool of agents from which the industry can always fall on to recruit. We’re also doing much with respect to the compulsory fire insurance; creating awareness that it is compulsory to have these kinds of insurances. So we’re doing all we can.”

Even though the recapitalisation in the banking industry led to consolidation of several banks and lay-offs, Mr. Ofori believes the final narrative in the insurance sector may not necessarily be the same– allaying such concerns of concomitant job losses as a result of companies failing to meet the capital requirement.

With the banking recapitalisation, some banks were affected. We don’t want to have those challenges. We don’t want the companies to go under. Much as we want the minimum capital to go up, we want to do it in such a way that we move along with everybody,” he concluded.

 

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Business Interview

AGI@60: A Persistent Private Sector Voice

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The AGI was established in 1958. Despite the country’s very young and unstable democracy, business leaders saw the need to have a stronger voice to represent their interest irrespective of who is in government.

As the adage goes: “Government has no business in running business”. This mean, businesses must focus on running business, creating jobs, paying taxes and sustaining economic growth. But to sustain business growth, businesses need a voice that cannot be suppressed.

Led by the iconic Dr Esther Ocloo, founder of Nkulenu Industries, the Association of Ghana Industries (AGI) was formed with only 10 local manufacturers with the initial name of Ghana Manufacturers Association. With time other manufacturers, including the multinationals, saw the essence of having a stronger production voice and within a couple of years, members soared.

In 1984, as though the membership was not enough, the association’s constitution was amended which opened to all registered companies engaged in manufacturing or the provision of services to the manufacturing sector and through associate memberships, other sectors including not-for-profit organisations have become members as well.

Such associate members include the Liquor Manufacturers’ Association of Ghana, Ghana Printers & Paper Converters’ Association, Furniture & Wood Products’ Association of Ghana, Ghana Timber Millers’ Organization, Advertising Association of Ghana, and others.

Today, the AGI now has over 1,500 members across over 20 sectors including advertising, agri-business, automotive & transportation services, beverages, business promotion & consultancy services, chemicals, construction, electricals & electronics, energy, exports, financial services, oil & gas, and food.

Others are hospitalities & tourism, information & communication technology, metals, building & construction products, pharmaceuticals & herbals, printing, stationery & packaging, rubber & plastics, toiletries & cosmetics, environmental and sanitation, garments, textiles and leather and wood processing.

With such a broad membership, the association has also increased its role in society beyond just the advocacy and advisory for policy and is now engaged in industrial sub-contracting and partnership, information gathering, analysis and dissemination, business plan preparation and development and trade promotion for members. Trade promotion, especially, has seen members, who hitherto would have struggled to enter particular markets are now operating on a global scale.

With the objective to contribute substantially to the growth and development of industries in Ghana and to create a supportive and competitive business climate, which will make Ghanaian companies internationally competitive, the AGI’s mission is to carry out proactive support services to the industrial sector with the view to contributing substantially to the growth and development of industry in Ghana.

Geographically, the AGI is physically represented all across the country with seven locations where members located in such areas report to the regional office and have their own sub groupings.

In an in-depth interview with Seth Twum-Akwaboah, Chief Executive Officer (CEO) of the AGI, issues such as relationship with government, industrial policy, local currency impact on businesses, power for operations, cost of credit, taxation, budget, trade, the AGI’s own Business Barometer and the future of the Association were extensively covered.

 

Relationship with Gov’t

Similar to any kind of relationship, Mr. Twum-Akwaboah, notes that there have been good and bad times. “The relationship with government has been good, but as every relationship it has challenges,” he says.

During the military regimes, he notes that, the AGI faced some of its most testing periods. While the AGI was pushing for and continues to push for a private sector led development, government was looking for state-led developments.

“At some point there was the tendency for the leadership of the association to be branded as anti-government. Most of the leaders of AGI were jailed or harassed by the military. Meanwhile all the AGI leaders wanted and continue to want is for the promotion of business at every point in time irrespective of who is leading the government,” he says.

Today, the AGI has become stronger for it and when it speaks through its regular statements, researches and the iconic Business Barometer, everyone listens. Since the commencement of the fourth republic, government has also recognised the significant role of the AGI in bringing in development to the country.

Significant roles played by the AGI now include making inputs in the national budget; by law and convention, the AGI is represented on several boards of public institutions, quasi government institutions and unions.

“If you want to influence policy, you do not wait till the end of year to make a statement. You need representation to influence policy at such levels. These are means of engaging. Due to our regional representatives, we engage policymakers such as regional ministers, district assemblies. There are some policies, at the local level, that have effect on businesses and industry,” he adds.

Despite the seeming strong power the AGI wields, Mr. Twum-Akwaboah, adds that not everything asked or requested of government is granted. Sometimes, he says, government blindsides the AGI with certain policies that could harm businesses especially in the areas of taxes, levies and laws.

“There are several government policies that have taken us by surprise and then we try to lobby for such policies to be reshaped to help businesses. We have such a regular working relationship with the government because it is needed to keep businesses growing,” he adds.

Budget Inputs

Touching on the AGI’s input on the annual and mid-year budget, Mr. Twum-Akwaboah, notes that the association presents inputs and afterwards holds a hearing with the finance ministry where individual AGI members speak about their views of the economy and what needs to be changed.

On the 2019 budget, the AGI presented a couple of inputs including the scrapping of the straight 5percent GETFund and NHIL on goods and services. “We thought its implementation was not the best and harmful to businesses because this is a cost happening across all levels of the value chain and has the potential to increase the cost of goods and services by as much as 20percent if the distribution chain is up to four,” he notes.

For big manufacturers with three distribution levels, he explains, the manufacturer will pass on the 5percent to the key distributor, who will now add another 5percent and move it to the wholesaler, who adds another 5percent to the retailer, who then adds 5percent to the consumer’s product.

“That is the cascading effect and will make the price of goods and services of local manufacturers very expensive,” he says, noting that for the importers, they just pay a flat rate of 3percent.

“For an agenda that seeks to promote local industries, this tax is inimical to local businesses. We engaged the minister and the tax policy unit with other stakeholders and we expected the 2019 budget to take it into consideration but it was not captured. We will continue to engage the minister,” he says.

But overall, the CEO of the AGI lauded the 2019 budget, describing it as “positive” but stressed that what matters is implementation. “A lot of the intentions are good including the making of US$1billion for industrial initiative, a stimulus package for struggling industries and industrial zones are good,” he says.

 

Industrial Policy Stutters

Government, in 2011, launched a comprehensive industrial policy to place industry at the centre of development.

The policy, which was started during President John Kufuor’s regime and completed when President Atta-Mills was in power, is a set of specific policy instruments and measures to be applied to increase access of the country’s manufacturing sector to competitive factors of production to enhance productivity, efficiency and competitiveness.

Key development objectives of the policy include expansion of productive employment in the manufacturing sector, promotion of agro-based industrial development and ensure spatial distribution of industries to achieve reduction in poverty and income inequalities. The implementation of the policy was expected to be done through an Industrial Sector Support Programme, which are time-bound interventions to speed up the rate of industrialization over a period of five-years.

The AGI, as the lead industry advocate, played a critical role in shaping the policy but since the launch of the policy nothing has come out of it and despite President Nana Akufo-Addo’s industrial agenda, led by the One District One Factory (1D1F) programme, the policy is still on the shelves.

When asked what is the current state of the policy, Mr. Twum-Akwaboah bluntly stated: “I do not think we have an industrial policy.” He notes that there was one, which was a good one, but implementation was poor and that led to the collapse of the policy.

To him, Ghana needs to incorporate the relevant aspects of the current government’s industrial agenda into the old policy and draw up a revised industrial policy and follow through. “Having a good policy and a plan is better than working on adhoc basis,” he says.

Does 1D1F fits into this policy?

He explains that what needs to be done for 1D1F to succeed is to allow the systems to work including using the 20percent of the District Assembly Common Fund, which is meant for district industrialization by law, to be used for its intended purpose.

“It was envisaged that, at the district level, you need industries to employ people and curtail rural-urban migration. That is why 20percent of the assembly’s common fund is dedicated to industrialization,” he says.

1D1F fits into the industrial policy because it envisaged the spreading of industries across the country and include locational tax incentives to push businesses into the other parts of the country and every location with specific raw materials. “That is an indication that we are encouraging industries,” he says.

But along the line, he notes, the AGI and businesses realized that such incentives were not enough due to the lack of markets, technology and infrastructure for businesses to thrive in such remote parts of the country.

1D1F requires patience

Asked about whether new members have joined the AGI as a result of 1D1F, Mr. Twum Akwaboah, advised that Ghanaians must be patient because 1D1F businesses will not just spring up overnight, especially when it is private-sector led.

Establishing an industry doesn’t happen overnight, especially sustainable private-sector led businesses. These businesses must be commercially viable, technically feasible and financially possible to get funding. To go through the process of acquiring technology, market assessment, right skills and have a proper corporate governance system does not happen overnight. The expectation that once you start, industries will spring overnight will not happen,” he says.

Secondly, he advised that one needs a very good funding arrangement to get the factories running, meanwhile, right from the beginning there was no funding for the programme.

To him, even though Finance Minister, Ken Ofori-Atta has made a pledge to mobilize US$1billion from various funding sources for small, medium and large scale enterprises to accelerate the industrial transformation agenda including the 1D1F programme, government should make a certain percentage for equity funding.

The AGI, he notes, tried to arrange funding to support the 1D1F, but he expects businesses interested in the venture to have some counterpart funding to attract investors. “We will love that the pace of the establishment of the 1D1F will be hastened so that we can all tell what is happening,” he adds.

 

The Business Barometer

One of the products of the AGI that any government is weary about is its Business Barometer. The Barometer is the true measure of business confidence in Ghana, spanning a period of over 11 years. It has consistently captured the views of 500 CEOs sampled from various sub-sectors of the Ghanaian economy.

Administered quarterly and largely through face-face interviews, the barometer touches several areas of economic activity across the 10 regions to ensure completeness of coverage. Assertions on the state of the business climate for the next quarter permit a ±5percent margin of error.

Often the Business Confidence index lies above or below the 100 base index with findings consistent with developments in the economy.

Starting as a Business Climate Survey, the survey was supported by the GIZ, a German development agency, as an annual report but when surveys were published which included key challenges faced by industry and businesses that were biting and needed quick interventions, the annual nature of it rendered it dud.

“We therefore converted it to a more frequent survey and allowed government and other stakeholders to quickly react to the needs of business,” he says, adding that it has helped a great deal in checking the policies being implemented by government in the short term.

 

The Thorny Issue of Power for Businesses

It is common knowledge that the AGI, for the best part of three decades, has been at the forefront of the campaign to not just reduce the cost of electricity or power for businesses, especially manufacturers to operate, but to overhaul the power sector to allow industries pay fairer prices which will allow them to compete especially against imports.

Earlier last year, government significantly reduced tariffs on electricity to as much as 25percent for big businesses but in the view of the AGI, the structure of the tariff regime is the problem not necessarily how much the reduction is.

Due to its squabbles with government over the cost of power, many believe the AGI is looking to run aground the power sector but Mr. Twum Akwaboah notes that that is not the case because power sector players such as the Volta River Authority (VRA), Electricity Company of Ghana (ECG) and Ghana Grid Company (GRIDCo) are all members of the association.

“How will we wish that our own members’ businesses collapse? We actually advocate for them as well. Power is a necessary input for production. What we have been asking for is simple: if you want Ghanaian industries to grow and be productive, they must have efficient power that can be given at competitive price,” he says.

The business principle of power

Apart from industry subsidizing residential users in Ghana, virtually the only country that still does this in the world, AGI’s main concern is the business principle of power being pursued by government which is killing industries.

“An instance is a company in Tema, with one metre, that pays GH¢3million in electricity bills per month. This business does not need a step down transformer because of the high volume of consumption and also does not need a lot of cables and poles to access power. To earn the same amount of GH¢3million from residential users, you need a whole community with several step down transformers, kilometres of cables and poles, hundreds of metres, and more manpower, all of which come at a cost.

That means it costs the service provider more to earn GH¢3million from residential communities than in industry for the same quantity or voltage of power. Also, the bigger the spread, the more leakages or waste occur and you are at a higher risk of illegal connections and other vices. Yet, the business, where the cost of service is cheaper, is paying more than residence where the cost of service is higher,” he says.

Ghana’s cost of producing power is too high

Another challenge the AGI has, when it comes to power, is the cost per kilowatt hour. In highly industrialised economies such as China and India, the cost per kilowatt hour hovers between 3 to 6cents but in the case of Ghana, it is near 20cents per kilowatt hour.

To Mr. Twum-Akwaboah, the Ghanaian industry cannot compete globally if it pays nearly four times the price in China and India, which are major industrial hubs. “It is important that we find ways and means to drive down the cost of electricity. We need to work hard, government and industry, because everybody is suffering when the price of electricity is high,” he adds.

‘Dumsor’

Touching briefly on the effect of the three-year power rationing, popularly called ‘dumsor’, he described its impact on industry as “devastating”.

To avert another power rationing and sustainably provide cheaper power for homes and businesses, he explains that what is needed is planning. “There is an eight-year cycle where the hydro source becomes inadequate and so you plan to get other sources in. unfortunately we did not plan in advance and that is what happened. In trying to solve it too, we signed countless Independent Power Purchasing (IPP) agreements that are not good for us.”

With the population growing, which is leading to sophisticated demands, the need for more energy is growing and so with efficient planning and regular investment in the sector, supply can stay ahead of demand so that Ghana will no longer experience the energy crisis we experienced between 2013 and 2015.

Renewables is the way forward

The AGI believes that with the advancement of technology in renewables, businesses and homes as well as government should aggressively consider the renewable option. “A few years ago it was very expensive to look into renewables but today the cost per production is getting cheaper and so government’s move in that direction is highly encouraged.”

With environmental protection in the face of climate change on the minds of the AGI, what the association wants to see is a flexible regulatory environment that will encourage a lot of private sector players into the space. “If you have a system that encourages the initial investment, then we can immensely benefit from renewables.”

 

Cost of credit, AGI’s bank and EXIM

With key macroeconomic indicators such as inflation, policy rate and Treasury Bill rate falling, AGI believes this should quickly translate into lower lending rates so that businesses can comfortably borrow and expand. “We welcome the consistent fall and we hope it continues to fall. Much as we want lending rates to fall quickly, we appreciate the gradual drops.”

The AGI, about four years ago, was pushing for the establishment of its own bank but not a word has been heard for the past year and a half. To Mr. Twum-Akwaboah, the establishment of the bank looked very good at the time it was being suggested but the economic climate and regulation makes it slightly challenging to run the bank in a manner that will be different from others.

“We wanted to create a scheme that will solve a major problem by providing medium to long term capital for industry. A lot of the banks today are not providing that, not even NIB and ADB, the development banks. With a universal banking license, you will have no choice but go by certain standards and that will make you no different from the others,” he says.

The AGI has repurposed the institution and has set up a fund, registered with the Securities and Exchange Commission (SEC) that can draw capital from government, development finance institutions and banks, and then AGI members can access this fund at much lower rates on medium to long term basis.

The ultimate aim, he explains, is to grow the fund to a level that AGI can secure a specialized license from the Bank of Ghana to operate as a specialized development bank.

Touching on the impact of recently established EXIM Bank, he notes that the AGI is very happy about its establishment but cautioned the business community to have patience for the institution since it is still early days yet.

“EXIM needs bigger capital and just the money coming from Import Levy is not enough. The whole idea of establishing an EXIM Bank is good because it can leverage its balance sheet to draw in capital from other institutions including other EXIM banks across the globe and create a bigger portfolio of funds and those moves do not happen in a day. We are monitoring and we can only be cautiously optimistic.”

 

Taxes and China’s US$2bn package

As businesses, paying taxes is unavoidable as taxes go a long way to develop economies and so with that the AGI wholeheartedly backs the government in pushing everyone to pay taxes. But AGI’s challenge is the implementation of some tax policies, especially the tax stamp, the frequent changing of the tax regime and the introduction of some new taxes.

The AGI, according to its CEO, has complained to government about some businesses that avoid taxes through under-invoicing and under-valuation and that led to the creation of a task force to monitor movements at the ports.

On the controversial tax stamp policy, which was welcomed by the AGI, the views of local manufacturers were not taken into account. The stamps, in the current format, will slow down high speed lines, especially for big beverage manufacturers such as Accra Breweries Ltd, Kasapreko, Cocacola, and Guinness Ghana Breweries Ltd.

But at the end, government and businesses have reached a compromise and now importers and local manufacturers are affixing the stamps and the Ghana Revenue Authority (GRA) is monitoring the situation aggressively. The textiles sector is the latest to start affixing the stamps, which is highly welcomed by players.

On the ECOWAS Common External Tariff, the AGI is still working on a comprehensive study to identify benefits and challenges but Mr. Twum-Akwaboah believes that being part of a common market is good for local businesses since the ECOWAS region is bigger than Ghana. “We just have to monitor how it is positively or negatively affecting our businesses.”

China’s US$2bn

The AGI truly secured a US$2billion credit facility with the China National Building Materials Company (CNBM) and so far several businesses have benefited. The whole idea, the AGI notes, is to use this to support the 1D1F.

The arrangement is such that businesses do not get direct financing but request for equipment when setting up factories and then repayment can be done till up to 10 years. The only challenges were guarantees from banks or government backing it with a sovereign guarantee but government is not prepared to do that.

So far, EXIM Bank and a few other banks have guaranteed projects for about 10 companies and construction is underway for some of the factories.

 

Future of AGI

For 60 years, AGI has become a stronger institution but the future is bigger and broader than one can imagine. Starting as a manufacturers association, it has moved beyond to encapsulate businesses. “As long as we continue to promote industry then AGI has a future but if we kill industry then there is no future for AGI. It is as simple as that.”

To Mr. Twum-Akwaboah, the current government has an eye for industry and a look at the 2019 budget leans heavily towards industry and initiatives such as 1D1F are industry focused and then there is the Ministry of Trade’s 10-point agenda. “As long as government itself has industry at heart, then AGI can only be smiling into the future and our core interest is to see members’ businesses grow.”

Therefore, the AGI will not relent in its efforts to engage with government to formulate business-friendly policies to see businesses grow. So far, the trend, he notes, is that global actions such as the ECOWAS Common Tariff and the Continental Free Trade Agreement are signs that the future looks promising for Ghana’s businesses.

“I am very positive that the future looks good but we need to advocate for the right policies and we need to have good entrepreneurs that are forward-thinking, committed and dedicated to doing businesses in a transparent manner,” he says.

 

Advice to members

To the members of AGI, over 1,500 of them including small, medium and large businesses, the association’s CEO believes that internally, implementing best corporate governance systems, good management style, recruiting the right talent, making sure efficiency is key and developing financial modules to survive during times of crisis, and prudent resource management will see businesses grow.

As the business grows, Mr. Twum-Akwaboah notes that there is the need for professional engagement. He further stresses “business leaders should not shy away from bringing in such help to develop and sustain their businesses. To go beyond generations, succession planning is key”.

For external factors such as inflation, interest rates, policies from government are not in members’ domain and so they should not be bothered about such actions. “Leave that to the association to handle.”

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