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Opinions of Wednesday, 10 February 2010

Columnist: Apau, Nana

Ghana Oil II - Transforming the Ghanaian Economy

Ever since commercial oil discovery was made in Ghana, there have been several suggestions urging the government to use the oil and gas resources of the country for the economic transformation of the country. The combined manifestos of the NPP, NDC and CPP running for presidential elections in late 2008 expressed intentions to apply oil revenue to priority areas of infrastructure, agriculture and food processing, ICT, education, health, rural development, housing, water and sanitation, among others.

We need to ask the question: Will Ghana use the oil and gas revenue in order to achieve the structural transformation of the country’s economy away from over-reliance on primary production, and the reduction of the massive size of the informal sector?

At the time of self-government in 1951, 82% of the labour force in the country was engaged subsistence agriculture/cocoa farming or petty trading while 18% was employed on a wage/salary basis. Two-fifths of those in wage/salary employment were in the public sector. After short-lived attempts by the CPP administration under Kwame Nkrumah to transform the economy through industrialization, the structure of the economy is no different from what it was in the pre-independence years. After over 25 years of World Bank/IMF prescribed programmes of ERP, SAP and HIPC, one of the over-riding consequences of these programmes in Ghana has been a shrinking of the formal sector and the expansion of the informal sector.

Between 1991 and 2002, the informal sector including agriculture accounted for 83.6% of total employment. By 2005/2006 the informal sector employment reached 86.7%. In these informal sector employment opportunities, poverty levels have remained high, productivity levels low, and decent work deficits are widespread. Under SAP and HIPC programmes persistent unemployment, under-employment, and growth in precarious forms of employment have remained the central features of the Ghanaian economy. How might the oil and gas revenues help reverse such trends?

The NDC administration of Prof. J. E. Atta-Mills has proposed through the 2010 budget that “the vision of the Government with respect to oil and gas is to channel the resources to support the development of petrochemical industries.” The Atta-Mills administration envisages that the “oil and gas reserves [will] serve as catalyst for the commercial exploitation of our other natural resources that have either not been exploited, or exploited but not processed into high value products for domestic use and exports. The gas resources will be used to support energy-based industries, such as glass bottles, steel mills, aluminum smelting and rolling mill operations which have faced serious challenges from the high cost and irregular power supply.” The budget statement further indicates that the “Government also plans to include the exploitation of sea salt, iron ore, bauxite, limestone and silica sand potential in the country for processing once the energy supply and value-added constraints are dealt with using gas as the main source of energy.”

Furthermore, the NDC administration plans “to develop gas turbines with higher energy efficiency, thereby, bringing the currently high energy tariffs under control. Methanol, ethanol, ammonia, urea, etc., will be processed out of the gas to produce fertilizers locally to enhance agricultural production and boost exports.” The Atta-Mills administration proposes to develop an industrial development plan. As indicated in the budget, “it is expected that through such strategic oil and gas driven industrialization program, the manufacturing sector of the country will receive a significant boost, which in turn will contribute to a rapid and sustainable growth of the economy.”

Who will set up and run these industries – the state, private companies, or a combination of the two? If private companies will set up and run these industries, will they be Ghanaian-owned or foreign-owned? What have been our experiences with state run corporations, and why have foreign companies not invested in our manufacturing sector? What have been our experiences with the few foreign-owned companies – Valco, Firestone, Unilever, Starkist, Basel Trading Company (UTC), and British Tobacco that once operated in Ghana?

As Ebow Idun notes in his article, Lessons for the Oil Rich Ghana: 2010 and Beyond, “the discovery of oil in itself is not enough to promote development in any given economy. Rather, it is the strategies, the economic framework and policy decisions that the government institutes, that creates the environment for investment. Hence, the discovery of oil reserves in Ghana should now enable the government to create economic policies that can help the economy to improve. It is incumbent on the government to provide the security, infrastructure and a tax regime that encourages investment as well as entrepreneurship.”

We hope the industries that will be set up will have more backward and forward linkages to other sectors of the Ghanaian economy, particularly the agricultural sector. The agricultural sector is the major source of employment in the country and it also has more backward and forward linkages to the other sectors of the economy. We focus on the agricultural sector because agricultural goods are important inputs for some manufacturing industries directly (e.g., food processing, textiles, rubber) and indirectly through their impact on real wages. Also agricultural productivity growth creates surpluses and releases workers for other activities, and increases savings and investments. It also creates demand for industrial products.

The agricultural sector should be the focus for reliable energy supply. For example, agricultural production in the country relies on the use of solar energy for drying of various crops – cocoa, groundnuts, gari, peppers and corn drying. We need to expand solar and other renewable energy resources to be used in running these small-scale and medium-sized enterprises (SMEs), as well as to power the homes in the rural areas.

More hydro-electric projects on the western rivers – Pra, Tano and Ankobra – and their tributaries should provide rural electrification for SMEs for food processing and food packaging in the rural areas. The electric power, as well as diesel and gas should also serve to pump water for irrigation for year-round farming. We hereby, suggest the revisiting of the irrigation scheme for the Komenda area using water from the Pra River. Similarly, the irrigation of the Afram and Accra Plains and irrigation schemes in the north should be given top priority to grow cotton, rice, sugar cane, soya beans, fruits and vegetables, and to support fish farming in order to boost local agro-industries, particularly textile and sugar industries.

The SMEs in the rural areas ought to be labor-intensive to provide more job opportunities in the rural areas. By generating employment opportunities in the rural areas, the SME industries will reduce rural-urban migration and the associated social problems. It is estimated that about 50% of perishable food commodities including fruits, vegetables, roots and tubers and about 30% of food grains including maize, sorghum, millet, rice and cowpeas are lost after harvest in Ghana. Thus SME food processing and food packaging industries are vital to reducing post-harvest food losses and increasing food availability.

Regrettably, the current SMEs in Ghana are hampered by adoption of inefficient and inappropriate technologies, poor management, inadequate working capital, limited access to banks and other financial institutions, high interest rates and low profit margins. A 2009 World Bank report – The Economy-wide Impact of Oil Discovery in Ghana - indicates that “Ghana has its worst rankings in the sectors which are most important for a low-income country (those related to starting a business, labor regulation and gaining access to finance).” It is hoped that appropriate institutional, extension services, and technical support will be provided to sustain the rural industries to ensure national food and nutrition security. Some of the processed and packed foods may be exported to earn foreign currency for the country.

Also, the food processing and food packaging and other SMEs to be set up in the rural areas will serve as the basis for local capacity building in skills development for further industrialization. We envisage that food processing and food packaging industries should include but not limited to the following: • Fruits & Vegetable processing Industry (including freezing and dehydration) • Food grain milling and packaging industry • Processing and refrigeration of poultry and eggs, meat and meat products and leather tanning • Planning, development and control of, and assistance to industries relating to bread, oilseeds, meals (edible), breakfast foods, biscuits, confectionery (including cocoa processing and chocolate making), malt extract, protein isolate, high protein food, weaning food and extruded food products (including other ready-to-eat foods)

We hold the view that rural industrialization will help raise productivity in the agricultural sector and help reduce regional disparities.

These large-scale manufacturing industries have a tendency to be capital intensive and thus will offer few employment opportunities. Similarly, the oil and gas related industries will also be capital intensive and will thus have limited employment opportunities. The 2009 World Bank report points that “an estimated two-thirds of Ghanaian manufacturing depends on agricultural inputs, so an uncompetitive and stagnating agricultural sector would also undermine the competitiveness of manufacturing.” Also, as the recent World Development 2008 Report, Agriculture for Development, has emphasized, “inclusive agricultural growth is particularly effective in reducing poverty, especially when large numbers of the poor depend on farming.”

If the large-scale industries envisaged the 2010 budget are linked with the small-scale rural industries which are more labor intensive, then there will be not just more employment opportunities, but also the possibility of complementary roles for skills development to serve both the small-scale and the large-scale industries. We shall deal with skills and human capital development for transforming the Ghanaian economy in another paper in the series

Other Industries The other industries mentioned in the 2010 budget are meant to exploit local resources of bauxite, iron, limestone and salt. The bauxite and iron industries will have to be large scale and we need to look to integrating these industries in the West African region. Ghana should seek to join the other West African countries in harnessing the energy (electric power and natural gas) and iron and bauxite resources of the region for integrated iron/steel and aluminum industries. In the aluminum industry Guinea, Ghana, Nigeria and Cameroon already have the various components – mining, refinery, smelting and fabricating – to serve as basis for an integrated aluminum industry in the region.

The regional approach will allow the countries to take advantage of economies of scale to serve the interests of the West African region. For example, the 200,000 ton per year capacity of the smelter at Tema is too big for the Ghanaian market. When the smelter is linked backward with the mining and refinery in Guinea and Sierra Leone and forward with fabricating plants in Ghana (Aluworks) and Nigeria, we will be cementing closer economic links in the region for sustainable development.

With regards to salt we should not just be interested only in its export earnings potential, but more importantly in its overall contribution to the economy. Salt is made up of two chemical components: sodium and chloride. The chloride component gives rise to the manufacturing of bleaching compounds and other intermediate compounds used in crude oil refining; in dry cleaning in the laundry industry, and in the production of insecticides and certain types of plastics.

From the sodium component, salt gives rise to several chemical compounds used extensively in the manufacture of pulp and paper. Other sodium compounds are used in making synthetic fiber and dyes for the textile industry. Caustic soda finds use in the making of soap and detergents and in refining bauxite into alumina.

A carefully planned strategy to utilize our salt resources will create several linkages to agriculture, good drinking water, and petro-chemical industries.

Limestone must be exploited to boost the housing industry in the country. Housing is vital tool for economic development. Planned housing schemes such as the Efiakuma and Adiembra Housing Estates in Sekondi-Takoradi area and Tema (Communities 1, 2, 4-8) built in the 1950s and 1960s served to improve human health, labor productivity, social harmony, safety and security. Recent housing schemes such as Tema Community 18, 19, and 20 and the gated communities have tended to cater to the more affluent members of the country. They have failed to incorporate neighborhood schools, markets/shopping areas and police stations and other public conveniences. These new housing developments have tended to heighten traffic congestion and the proliferation of road side kiosks, and thus created the semblance of “slums” in some of these new housing schemes. The limestone deposits must be combined with new low cost housing technologies that utilize local building materials to make housing affordable to the wage laborer.

Recent media reports indicate that the government has plans to expand the TOR capacity from the current 45,000 bpd to 145,000 bpd. When this expansion will occur has not been indicated. Currently, the country’s total crude consumption is in the region of 60,000 bpd. What is not clear is how the crude from the Jubilee Field would be transported to the existing and the proposed refineries. Since, there is no plan currently to construct pipelines from the production platform to the refinery in Tema, one would assume that the crude would be transported as usual by tankers, raising questions about cost efficiency, possible environmental problems, and security. We suggest a new refinery be built in Takoradi to be close to the oil and gas fields as well as the Aboadze thermal electricity generation plant.

If the oil and natural gas resources are to help transform the Ghanaian economy for sustainable growth and development, there needs to be a transparency regime that ensures that every pesewa or penny from the oil and gas resources will be put on the table and accounted for. Meanwhile we welcome President Mills’ intention to establish an independent body to manage the revenue expected from the country’s oil resource to ensure transparency and effective management. We will discuss the revenue aspects of the oil and gas resources in the next paper in our series.

Nana Apau

This is second part of a project of the CPP Global Forum