Download Overall the performance of companies on the GSE

AN ASSESSMENT OF CORPORATE SECTOR PERFORMANCE AND
CONTRIBUTION TO GROWTH IN THE GHANAIAN ECONOMY
1. Introduction
1.1
Background
The corporate sector is receiving increasing attention in many countries since
the Asian crisis. The increasing attention stems from the importance of the
sector in the links that it has with economic performance. The development of
a viable private sector requires a stable macroeconomic environment. An
unstable macroeconomic environment characterized by high inflation, rapid
depreciation of the currency and high interest rates do not promote sound
corporate growth. Macroeconomic instability, with rapidly depreciating local
currency, can increase the debt-servicing costs of firms with large foreign
currency obligations, destabilize the corporate sector and even threaten the
financial viability of many firms. Conversely, the corporate sector can affect
macroeconomic performance if the sector does not have access to adequate
capital for new investment. This generally will impair growth in the economy.
Ghana has over the past two decades pursued policies aimed at restoring
macroeconomic stability. The initial successes made bought about appreciable
amount of progress in the activities of the private sector. Although some of
the constraints and bottlenecks that confronted the sector in the past were
removed during the reforms, others still remain and new problems have
emerged. The major problems facing the private sector include lack of
adequate working capital, which may be attributed to the rather rigid banking
requirements of equity, collateral security, and financial reporting standards
that most entrepreneurs are not able to comply with. Secondly,
macroeconomic instability that is characterized by high rates of inflation and
exchange rate depreciation has resulted in high cost of credit and rendered
business planning very difficult. Also the smallness of the Ghanaian economy
coupled with low-income levels results in low level of aggregate demand for
industrial products. The other factors include inadequate and high cost of
physical infrastructure and high cost of inputs.
On assumption of power at the beginning of the year 2001, the current
government declared a “GOLDEN AGE OF BUSINESS” and began
implementing corrective policies and measures to ensure the growth and
development of private enterprises. The government’s fiscal measures since
2001 were aimed at achieving domestic primary surplus (above 4.0 per cent
of GDP). This was to minimize the government’s domestic borrowing
requirements in order to reduce interest rates as well as halt the crowding out
of the private sector from the credit market.
Since the inception of the Economic Recovery Programme (ERP) Ghana’s
macroeconomic policy measures have been directed at transforming the
economy from a controlled to a liberalised market economy. The process of
transformation has seen the private sector increasingly become the driving
force of the economy. The government continued to pursue polices with the
goal of creating an enabling environment for the achievement of these
objectives. The policies include appropriate monetary and fiscal policies,
financial sector reforms, industrial policies and policies aimed at attracting
investments into the country. Also the Ghana Poverty Reduction Strategy
(GPRS 2003-2005) identifies acceleration of the rate of economic growth as
the key ingredient for creating jobs and meeting poverty reduction targets. As
appropriately identified by the strategy accelerated growth can only be
achieved with “the active involvement of the private sector as the
main engine of growth and partner in nation building”.
Accordingly Ghana, in partnership with other development agencies, defined
her medium-term economic growth strategic objective as to “increase
competitiveness of Ghana’s private sector in the global marketplace of goods
and services, as measured by Ghana’s share of world trade”. The purpose of
this objective is to increase employment opportunities and income levels for
poor Ghanaians, which requires that Ghana accelerates the rate of her
economic growth. The symbiotic relationship between corporate sector
growth and the development of the entire economy underscores the
importance of an analysis of the performance of the corporate sector in
Ghana.
1.2
Terms of reference
The objective of this study is to undertake an assessment of the corporate
sector performance in Ghana and its contribution to economic growth. The
rest of the document is organized as follows: Section two is an overview of
the corporate sector in Ghana. Section three is devoted to analyzing the
performance of the corporate sector and its contribution to the economy while
section four highlights the problems confronting the corporate sector in
Ghana. The conclusions and recommendations are in Section five. For the
purpose of this document, the analysis of the Corporate Sector performance
will be based primarily on the companies listed on the Ghana Stock Exchange
(GSE). This is due to the unavailability of adequate financial information on
the businesses not listed on the exchange.
2. Overview
2.1
The Corporate sector
Chart 1
Number of Busineses Registered by Registrar Generals Department
Limited Liability
22%
Limited by Guarantee
2%
Partnerships
3%
Sole Proprietorship
73%
External Companies
0%
Source: Registrar General’s Department
Corporate bodies in Ghana are either companies registered under the
Companies Code 1963 (Act 179) or established by an Act of Parliament. They
must be public limited liability entities existing as bodies separate from their
owners. Of the 478,360 registered companies as at April 15, 2003, 346,442
were sole proprietorships, 105,794 were limited liability companies (private
and public), 11,273 were limited by guarantee and 13,980 partnerships.
There are also 871 external companies, which are offshore companies with
offices in Ghana.
The data shows that sole proprietorship businesses constituted the largest of
organizational form, followed by limited liability businesses. The country has
only 25 publicly listed companies on the Ghana Stock Exchange.
The corporate sector has an obvious government presence but the current
divestiture programme taking place will change the face and structure of the
sector. The difficulty in obtaining information on firms not listed on the Ghana
Stock Exchange makes it difficult to assess the entire corporate sector and
this limitation implies that this assessment does not present a complete
picture of corporate performance and its contribution to growth.
Nevertheless, we should note that the corporate sector in Ghana is small in
terms of total employment. A USAID study (Manual for Actions in the private
sector – 1989) noted that total employment in the private sector was
represented as follows: Self- employed enterprises accounted for about 90
per cent; Rural/informal entities 4 per cent, while Limited liability companies
accounted for only 6 per cent of total employment. Suffice it to say that
though not corporate by definition, the majority of operators in the private
sector are self-employed family enterprises.
2.2
Activities of Corporate Sector
Corporate institutions in Ghana operate in several sectors of the economy.
The dominance of the agricultural sector in economic activity also reflects
somewhat in corporate sector activity as the sector is involved in all activities
in the food chain - from the point of production (farm gate) to the final
consumer.
Agricultural sector activities are handled by private operators, some of whom
operate as corporate entities (e.g. British–American Tobacco (BAT) Co. Ltd,
UNILEVER etc.). BAT is involved in Tobacco farming whilst UNILEVER has Oil
Palm plantations, thereby producing the raw materials needed in their final
products.
In the mining sector, corporate activity is stronger with many foreign
companies operating in the sector. However, only one mining company is
listed on the Ghana Stock Exchange; Ashanti Goldfields Company (AGC). The
sector accounted for 5.3 per cent of GDP in 2001 and 5.2 per cent in 2002.
In 2001, total manufacturing accounted for about 10 per cent of GDP with
GSE registered/listed companies representing over 40 per cent of the total.
Areas in which there is medium to large scale corporate activity include food
processing, beverages, wood products and textiles.
The tertiary sector in the Ghanaian economy is large, accounting for 33 per
cent of GDP. Corporate sector activity is fairly large in all the sub sectors. In
the Wholesale and Retail trade sub-sector large trading houses such as
Unilever, PZ and CFAO dominate in terms of market shares, although the
majority of businesses in this sector are operated on a small scale. Corporate
activity is also significant in the bank and non-bank financial sub-sector.
Other businesses operate on a small-scale basis in the areas of transport,
construction (building and roads) and provision of consultancy services. It is
worthy of note that over the past decade the services sector has been a
consistent growth segment of the economy.
3. PERFORMANCE OF THE CORPORATE SECTOR
3.1 Global Developments
The defining image of corporate performance between 2001 and 2002 in the
industrialised economies was the bankruptcy of several ‘Blue Chip’ companies
(e.g. World Com, Enron etc). Corporate performance was also exacerbated
by a depressed stock market with hardly any growth in the major global
bourses. The stock market in the US has experienced three consecutive years
of declining return. The last time the market saw three years of down turn
was during the Second World War. On the New York Stock Exchange (NYSE)
alone, market value was estimated to have fallen by US$2.6 billion in 2001
(Ned Davis Research, FT 02/2003) during the same period. Standard and
Poors 500 Index estimated that the market was down by 22 per cent, while
the Dow Jones Industrial Average and NASDAQ Composite recorded declines
of 16 per cent and 30 per cent respectively.
The consensus was that corporate performance in 2001/2002 was seen to be
positively correlated among other things with governance and transparency.
Since the latter half of 2001, much introspective soul searching among listed
companies has directly attributed poor performance to a lack of transparency
in their financial statements as well as to deficiencies in the structure and
diversity of top management – with particular reference to the composition of
corporate boards and the need for more non- executive board members.
Concentration of ownership of corporations and the lack of transparency in
their management led to the corporate scandals mentioned in the preceding
paragraph. The prevalence of conditions of bad governance and weak
controls in an economy gives a clear signal to agents in corporations to abuse
their ability to influence legislation thus making it easy to massively ‘book
cook’ – so to speak.
In response to these corporate scandals, Governments in the industrialised
countries instituted commissions of inquiry tasked with the responsibility of
drawing up new corporate governance laws. The consensus of varied
commissions is for a two-tier system of supervisory boards overseeing a
management board as a way of restoring good corporate governance and
performance.
Corporations in the industrialised economies have over the years managed to
offset the agency problems created by the separation of ownership and
control by:
 Putting in place the right incentives for management, particularly by
tying compensation to changes in earnings and stock price;
 Enjoining/Requiring managers and directors to act in shareholders’
interest, backed up by monitoring by auditors, lenders, security
analysts and large institutional investors; and
 The threat of a takeover, either by another public company or a private
investment partnership.
It is however necessary for one not to assume that ownership and control are
always separated.
The conclusion from the experiences of corporations in the industrialised
economies in the aftermath of the corporate scandals was that improvements
in financial transparency and good corporate governance practices were key
to holding corporate executives in check. In this regard, the boards of
companies listed on NYSE and NASDAQ will in 2004 be required to have a
majority of independent directors and auditors made up of entirely nonexecutives in order to control Top Management greed and to protect
shareholders interest. Additional evidence shows that companies with a high
proportion of non-executive members on their boards are very unlikely to
condone doubtful accounting practices so as to present a wrong impression of
corporate performance.
3.2 Corporate sector performance in Ghana
Corporate sector performance in Ghana shows an improvement between 2001
and 2002. The GSE All Share index recorded an increase of 45.96 per cent.
Unlike developments in the industrial world with a low level of
shareholder/investor confidence due to governance and transparency
problems, investor /shareholder confidence in Ghana improved over the
period reflecting partly the improved macroeconomic conditions.
The next section discusses the performance of the corporate sector in Ghana
in terms of economic contribution to the economy and financial performance.
3.2.1 Economic Criteria
The contribution of the corporate sector to the economy can be assessed in
terms of the revenues they generate for government through taxes and the
employment they create. Attainment of employment and tax targets are
useful gauges of performance although such information is not usually readily
available.
In assessing the contribution of the corporate sector to the economy in terms
of their contribution to the social security an national insurance trust (SSNIT)
scheme, information on the 100 largest corporate contributors to the SSNIT
scheme was obtained and analysed (See Appendix 2).
Chart 2
Total Contribution to SSNIT by 100 top Regular paying Establishments and
Implied Total Salaries
1600
1400
1200
1000
Billions of cedis
800
600
400
200
0
2001
2002
Years
Total Contribution to SSNIT
Total Salaries
Source: Social Security & National Insurance Trust
The data suggests that the 100 top regular corporate contributors to the
SSNIT paid ¢221.34 billion cedis in 2001 and ¢276.68 billion cedis in 2002.
These represent 17.5 per cent of their gross salaries implying that total
salaries paid by this group in 2001 and 2002 amounted to ¢1,264.81 billion
¢1,581.023 billion respectively. The increase in salaries paid over the period
was 25 per cent.
Data was also obtained from the Revenue Agencies Governing Board (RAGB)
on tax revenue collection of Government by tax type. Of the total tax
collection of ¢814.69 billion for first quarter of 2003, company taxes
accounted for ¢382.45 billion (46.9%).
Chart 3
Revenue collection byTax Type (First Quarter 2003)
Other Taxes
4%
Airport Tax
1%
NRL
2%
Min Royalties
6%
PAYE
35%
Companies
47%
Self Employed
5%
Source: Internal Revenue Service
The data from the RAGB also show that company taxes amounted to ¢1,161.5
billion in 2002 compared to ¢966.6 billion in 2001 and ¢696.7 billion in 2000.
Chart 4
Company Taxes As Proportion of Income & Property Taxes
(2000-2002)
2500
2000
1500
1000
500
0
1997
1998
1999
Company Tax
Source: Internal Revenue Service
2000
Incone & Property Taxes
2001
2002
On employment contribution of the corporate sector, data from the RAGB
suggests that majority of tax payers are on Pay As You Earn (PAYE) basis
numbering about 1,159,242 at the end of March 2003. Self employed persons
numbered 108,552, while companies were 44,938.
Chart 5
Number of Taxpayers
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
PAYE
Self Employed
Mar-03
Companies
Dec-03
Source: Internal Revenue Service
3.2.2 Financial Performance
In assessing the financial performance of the corporate sector in this
document, two approaches were used. The first was to assess the
performance of the shares of the companies listed on the stock exchange in
terms of returns on investments; e.g.- earnings growth, capital gain or losses,
dividend yield, nominal returns etc. The second approach was to analyse
financial statements of individual companies to assess their leverage ratio,
liquidity ratios and profitability ratios. Suffice it to say that despite the
convenience of using ratios as a way of summarising financial data to
determine performance, it does not necessarily answer most implicit
questions, even though it helps in asking the right ones.
In terms of the performance of corporate sector shares on the Ghana Stock
Exchange, the companies that recorded the highest earnings growth between
2001 and 2002 were ABL, AGC, FML, GBL, GGL, HFC1.
Chart 6
Earnings of GSE Listed Companies (2001-2002)
700000
600000
500000
400000
300000
200000
100000
0
-100000
AGC+
ALW
BAT*
CFAO
CMLT
EIC
FML
GBL**
GCB
HFC
Companies
2001 Earnings (¢’m )
2002 Earnings (¢’m)
Source: Ghana Stock Exchange
Chart 7
Earnings of GSE Listed Companies
160,000.00
140,000.00
120,000.00
100,000.00
80,000.00
60,000.00
40,000.00
20,000.00
0.00
-20,000.00
MLC
MOGL
PAF
SCB
SPPC
SSB
UNIL
SWL
Companies
2001 Earnings (¢’m )
2002 Earnings (¢’m)
Source: Ghana Stock Exchange
The companies that experienced the biggest downturn in earnings growth
were CFAO, CMLT and SPPC.
1
See Appendix 1 for for the name of listed companies
In terms of capital gains, the companies that registered the highest gains
during the period were GCB, NIB, UNILEVER, PZ and FML.
Chart 8
Capital Gain/ Loss (%)
140
120
100
80
60
40
20
0
-20
-40
-60
ABL
AGC+
ALW
BAT*
CFAO
CMLT
EIC
FML
GBL**
GCB
GGL
Company
Capital Gain/ Loss (%)
Source: Ghana Stock Exchange
Chart 9
Capital Gain/ Loss (%)
120
100
80
60
40
20
0
-20
HFC
MGL
MLC
MOGL
PAF
PBC
PZ
SCB
SPPC
SSB
UNIL
SWL
TBL***
CPC
Companies
Capital Gain/ Loss (%)
Source: Ghana Stock Exchange
**
***
Overall the performance of companies on the GSE improved between
2001/2002. BAT, GCB, SCB, SSB and UNILEVER, recorded higher dividend
yields for their shares during the period. Earnings per share was also high for
AGC, BAT, EIC, GCB, MOGL and SCB (See table 1 in Appendix). In nominal
terms, the exchange as a whole performed creditably well.
3.2.3 Financial Analysis
A corporate body may be considered as a team effort in which all the players2
have a stake in the company’s success and therefore need to monitor its
progress. The stakeholders rely mainly on the company’s financial statements
for this role. To summarise the rather huge amount of data that actual
financial statements contain into a manageable form requires the calculation
of a small number of key financial ratios, three of which are considered in this
section of the paper.
a. Leverage Ratios
The most commonly used measure of the degree to which a company is
exposed to debt is the debt/equity ratio. This ratio is often used by lenders in
setting a firm’s borrowing limits.
Financial stocks, by the nature of their operations rely greatly on borrowed
funds. Hence debt/equity ratio for the sector grew progressively from 2.11 in
1997 to 3.44 in 2001. An examination of the manufacturing sector’s ratio
however revealed the contrary. It recorded on the average a ratio of less
than 1 except in 1999 when an average of 1.02 was registered. The average
ratio declined from 0.61 in 1997 to 0.39 in 2001. The declining debt/equity
ratio showed a gradual shift in the policy of manufacturing companies to rely
more on equity capital rather than the more expensive use of borrowed
capital, a fact underpinned by existing high interest rates. The trend in the
distribution sector follows that of the manufacturing sector. The average ratio
of the sector declined from 0.99 recorded in1998 to 0.21 in 2001.
The mining sector, represented by a single company AGC depicted a much
different picture. AGC’s debt/equity ratio averaged above 1, showing a
relatively higher dependence on borrowed funds.
Overall, regarding the use of debt, the financial sector maintained a high
debt/equity ratio, due to the nature of their business. The mining sector due
to its capital intensity has also had to borrow to supplement equity capital.
The significance of this is high interest payments, which undermine profits.
Generally the analysis of the debt/equity ratio of listed companies showed
that they have been able to reduce their leverage to manageable levels.
2
The shareholders, lenders, director, managers, and employees.
b. Liquidity Ratios
This is the broad indication of the safety margin available to companies in
terms of their ability to meet maturing obligations. A company can be forced
into liquidation if it is not able to meet its short-term debts as they fall due.
One of these measures is comparing current assets to current liabilities.
(Current Ratio) The situation presumed ideal is for current assets to exceed
current liabilities. Fortunately, the financial and manufacturing companies
registered ratios above 1, meaning there were more current assets than
current liabilities and therefore had most of their short-term debts covered.
The ratio in the distribution sector continuously stayed below 1 from 1998 to
2001. This does not signify any danger for the sector because of its reliance
on suppliers’ credit for its operations.
The mining sector’s ratio was also below 1, a situation hugely influenced by a
preponderance of short term bank financing.
c. Profitability Ratios
This is a key test of how companies use their resources to generate revenue.
The measures, namely: net profit margin; asset turnover; and financial
coverage can all be rolled into one as the Return on Equity (ROE).
The financial stocks out-performed all other sectors in this regard. The sector
consistently averaged above 35 from the year 1997 to 2001.The financial
sector’s high profits as a result of high interest income was due largely to high
interest rates. The manufacturing sector registered a lower Return on Equity,
ranging between 17.91 and 21.5 for 2000 and 2001 respectively. Negative
ROE of –9.7 and –0.6 were recorded in 1998 and 1999 respectively. The year
1999 was particularly difficult for businesses in Ghana as the Asian crises and
a huge slide in the domestic currency affected companies.
The distribution sector’s performance on this scale was mixed. The sector
was not spared the effect of the macroeconomic shock in 1999 when –124
ROE was recorded. It, however, rebounded back in 2000 and 2001.
4.
PROBLEMS CONFRONTING THE CORPORATE SECTOR
The operations of the corporate sector has at different times during the
review period been constrained by all or some of the following factors;
unstable macroeconomic environment, high cost of capital, poor services of
utility companies and unfavourable international environment. A recent survey
conducted by Bruks Associates suggested that the business environment in
Ghana is affected mainly by micro and macroeconomic factors as well as the
availability and quality of infrastructure, governance, labour laws and the
environment.
4.1 Investment Financing
The single largest constraint to corporate sector development is the problem
of access to long–term credit or rather the lack of it. This is attributed to
unsatisfactory business plans, which are now considered as a prerequisite by
lending institutions to companies in order to determine solvency of borrowers.
Unfortunately, local banks are risk averse when it comes to term lending
because of their past experiences of being saddled with over half their assets
classified as non-performing. Therefore, banks are not sufficiently motivated
to encourage the funding of companies. The absence of a local credit rating
agency for corporate borrowers also remains a problem.
On the borrowers side, a recent survey conducted by Bruks Associates is very
revealing. The most common source of investment financing used by
businesses sampled was internal funds or retained earnings. Sixty three
percent (63%) of the 391 sampled businesses3 reported using internal
funds/retained earnings to support growth and any other financing needs.
The second leading source of financing used was loans from local commercial
banks (23%) followed by equity sale or sale of stocks (15%). Foreign
banks/investors and companies were not very active in the credit business in
the country. For instance, only 9 per cent of the companies interviewed
indicated that they sourced investment funds from foreign banks, investors or
companies, see figure below. Fifteen percent of the respondents indicated
that they sourced investment funding from informal sources such as
traditional moneylenders and family or friends. Ten percent of businesses
claimed that they used suppliers’ credit.
3
Of the total sample of 391 business 82% constituted limited liability companies, 9% were sole
proprietorships and 3% partnerships. Only 20% were companies listed on the Ghana Stock Exchange.
Chart 10
Sources of Investment Financing, N = 391
10%
Supplier credit
6%
Money lenders
Family friends
9%
Foreign
banks \inves tors \companies
9%
23%
Local commercial banks
15%
Equity s ale of s tock
Internal funds \retained
earnings
63%
0%
10%
20%
30%
40%
50%
60%
70%
Source: Bruks Associates
4.1.1 Loan Facilities
According to their survey, thirty-eight (38%) out of 387 firms sampled said
they have taken loans from the bank during the last 12 months. Most of the
loans (75%) acquired by business were short-term in nature, i.e., repayment
due in one year or less. On the other hand, only a quarter of the loans (25%)
obtained by the firms were long-term loans, these were loan facilities that had
tenures of more than one year. The shortage of long-term credit has been a
hindrance to further growth in business over a long time in the country, since
long-term funds required for capital investment is not readily available. See
the pie chart below.
Chart 11
Tenure of Loans to Business
Long term
(more than 1
year)
25%
Short term(up
to1 year)
75%
Source: Bruks Associates
Eighty four percent (84%) out of 147 firms that responded to questions on
collateral claimed they provided collateral for their loans. Of those who
indicated they were required to provide collateral, 114 (78%) indicated the
value of collateral to the loans contracted, the rest were not able or willing to
declare the collateral to loan ratio that was applied.
Chart 12
Collateral to Loan Ratio, N = 114
Over 100%
15%
91-100%
19%
Collateral/Loan
81-90%
4%
71-80%
1%
61-70%
1%
51-60%
1%
41-50%
18%
31-40%
21%
21-30%
11%
11-20%
8%
Up to 10%
2%
0%
5%
10%
15%
20%
25%
Re s pons e
Source: Bruks Associates
Considering the value of collateral to loans, it was also found that about 32
per cent of the loans that were sourced by businesses had collateral to loan
ratios of 40 per cent or less with the other 68 per cent of loans attracting
collateral to loan ratios of more than 40 per cent.
4.1.2 Interest Rates
The survey by Bruks Associates also showed that the cost of funds in Ghana
is still relatively expensives, 42 per cent of companies that contracted loans
over the past 12 months paid interest rates ranging between 41-100 per cent.
Another 31 per cent had their loans rates varying from 31-40 per cent. Yet
there are some businesses that have had to borrow at usurious rates of over
60 per cent, see figure below. Whilst over 40 per cent of the borrowers paid
interest in excess of 40 per cent, about 13 per cent of the companies are
strangely paying interest below the level of inflation. These may probably be
concessional loans for particular sectors of the economy.
The businesses that borrowed at interest rates beyond 60 per cent may have
borrowed from the informal sector especially from moneylenders; these are
known to charge exorbitant rates.
Chart 13
Interest Rates
Interest Rates on Loans accessed, N = 144
91-100%
1%
61-70%
1%
9%
51-60%
41-50%
31%
31-40%
31%
21-30%
6%
9%
11-20%
13%
Up to 10%
0%
5%
10%
15%
20%
25%
30%
35%
Responses (%)
Source: Bruks Associates
4.2 Infrastructure
The country’s transport system has been rehabilitated and expanded at great
cost. Roads, being the principal means of transportation are considered to be
indispensable for the economic advancement of the country. Feeder roads
account for about 60 per cent of the total road network but still considered to
be in an unsatisfactory condition.
As part of government’s policy of
encouraging the private sector, national budgets have often made provision
for the re-tarring, spot improvement, surfacing, rehabilitation and upgrading
of roads nationwide. In order to encourage the relocation of the corporate
entities to agricultural areas, government emphasis is on opening up such
areas.
There is also the apparent lack of adequate and efficient storage facilities at
the ports for exports. The lack of refrigerated trucks and inland port facilities
are problems for companies, which produce perishable goods especially
where the alternative is to airfreight. Agricultural post harvest losses
estimated at 30 per cent could be reduced if storage facilities are provided
nationwide to enhance corporate growth.
The installed hydro/thermal capacity of 1200 MW is not reliable for corporate
development and growth. The resort to expensive alternative means of
energy (importing from neighboring countries) will reflect in high cost and
therefore render it more difficult for Ghanaian firms to compete
internationally.
Ghana’s
telecommunication
system
is
presently
underdeveloped although some improvements have indeed taken place.
Safe water delivery is unavailable to much of the country especially in the
rural areas. Sewerage systems are in dire need of rehabilitation. A further
constraint within the corporate sector is the cumbersome procedure and
uncertainty involved in the acquisition of land in the urban areas especially in
Accra.
To sum up, the unsatisfactory and inadequate level of infrastructural support
for corporate development and growth may be attributed to the lack of a
comprehensive infrastructure strategy defining priority areas of development.
Moreover, the dominance of the public sector and inadequate representation
of the corporate sector in key (telecommunications, transport and water) subsectors coupled with problems caused by bureaucratic indifference only goes
to exacerbate the sector’s development and growth.
4.3 Legal and Regulatory
Corporate sector development and growth is also constrained by a legal and
regulatory environment characterised by a weak and cumbersome legal
process. Dissemination of business law is poor. There is a need for
expeditious passage of laws relating to bankruptcy and insolvency. The need
for greater confidence in the banks must commence with the revision of
obsolete and ineffective laws. Other areas that the Bruks survey covered
included the quality of regulations, administrative requirements and
bureaucracy in setting up a business. The survey noted that respondents
were generally dissatisfied with regulatory and administrative procedures in
setting up a business.
4.4
Professional/Technical and Management Skills
The curriculum of education (in particular tertiary) will need to be structured
to meet the needs of the corporate sector. In the past, tertiary education
distorted the flow of skilled workers to the labour market. This situation
inevitably demands manpower retraining.
4.5
Institutional Support
Institutions which are relevant to corporate sector growth may be classified
into three categories. Public sector institutions such as: Ghana Investment
Promotion Council (GIPC), Ghana Export Promotion Council (GEPC), CEPS,
and NBSSI. Private sector institutions such as: Association of Ghana
Industries (AGI), Ghana National Chamber of Commerce (GNCC), Federation
of Ghanaian Exporters, Private Enterprise Foundation (PEF), Enterprise
Networking (Ghana) and other categories of smaller trade associations linked
to furniture, timber, horticulture, kola nuts, batik. tie and dye etc.
G.I.P.C. ought to concentrate more on promotion and not regulatory work.
Direct foreign investment in the country is still not very significant. More can
be done if the G.I.P.C. is really made autonomous.
The unsatisfactory pace of the divestiture process is also a constraint to
corporate development. It is conceded by government that the divestiture of
public companies is best done through GSE. This is like killing two birds with
one stone.
4.6
Government attitude towards the Corporate Sector
Until two years ago, when a Golden Age of Business was declared by
government and various presidential special initiatives (cassava, salt, palm oil)
geared towards private sector development were implemented, the
perception of Government for a period of about two decades was that the
corporate sector was exploitative, subversive and above all politically
incorrect. This situation was aggravated by utterances from very senior
government officials that sent a bad/wrong signal to confuse and intimidate
the sector. Recent developments suggest that governments attitude towards
business has improved significantly under the current administration. Indeed
the survey by Bruks revealed that most businesses felt that the central
government has been more helpful than local governments in promoting
business.
4.7
Unfavourable International Environment
The indigenous industrialist faces stiff competition from subsidised imports.
The high level of subsidies and other government supports industries in other
countries receive coupled with the high domestic production cost renders
most of the local industries uncompetitive.
4.8
Research and Development
Research and development (R & D) is weak in the public and private sectors.
In the latter, it is virtually absent. Government financing of R & D is
estimated at about 1 per cent of GDP. This is low when compared to other
developing countries. The modest level of research work in the country is
characterised by weaknesses in administration and management, poor
linkages between research institutions and industry, poor information
dissemination and transfer of technology to companies. The absence of
design centres to display and market research findings and the lack of
packaged research results for commercialization purposes also limits the
usefulness of the research undertaken.
It is worth noting however that of all the bottlenecks that impede the
operation and growth of business in Ghana i.e. availability and state of
infrastructure, governance, and regulatory and administrative issues, a
severity index which was used by the Bruks survey saw the most severe
bottleneck as interest rates. This attracted a severity index score of more than
70 per cent. Again, 60 per cent of the respondents indicated that, interest
rates were either a major problem or very severe problem that hinders the
operations and growth of their businesses.
High interest rates can therefore be said to be the one single most chronic
macroeconomic difficulty that militates against the operations and growth of
business in Ghana. And, to the extent that it is underlined by excessive fiscal
deficits and public debt the finding underscores the urgent need for fiscal
consolidation and sustainable macro stability and low inflation.
5.0
CONCLUSION AND RECOMMENDATIONS
The impact of the corporate sector on the Ghanaian economy exhibits a
symbiotic relationship as evident in the positive correlation between the
Ghana Stock Exchange (GSE) All Share Index and growth in real Gross
Domestic Product (GDP). Since the Economic Recovery Programme over two
decades ago, several programmes of structural adjustment and stabilisation
have been implemented – the results of which have been mixed in terms of
the attainment of macroeconomic targets. The declaration of a GOLDEN AGE
OF BUSINESS by government has brought to the fore the role of the
corporate sector as a catalyst in accelerating economic growth.
For the business sector to play effectively its role as the engine of economic
growth, not only must Government create and maintain a business friendly
policy environment but the quality of corporate governance will have to
improve substantially. Improving corporate governance in Ghana is therefore
an important mechanism of enhancing the country’s international
competitiveness in attracting foreign investment.
Ghana’s corporate sector though overwhelmingly of small-scale, still offers a
lot of hope to the country particularly if the problems of capital formation,
governance ability and taxation are addressed. The high interest rates that
prevail currently in the economy has been identified as the single most
important macroeconomic issue militating against corporate sector growth.
The persistence and the severity of the problem is underlined by the
excessive fiscal deficits and public debt levels posted by the Government over
the years. The situation therefore underscores the urgent need for fiscal
consolidation and sustainable macroeconomic stability and low inflation.
Corporate performance enhancement will demand new legislation to protect
shareholder and investors. More attention should be focused on the ability of
companies to practise transparent ethics. The experiences of the developed
countries are a point in case. The United States of America (USA) AGOA, EEC
Lome Convention and ECOWAS have given the Ghanaian corporate sector a
ready market for most products. What is needed now is to effectively solve
several of the problems impeding the growth of the sector.
Finally, it is clear beyond reasonable doubt that the scarcity of medium to
long-term capital remains a hindrance to the sector’s development and
growth. Companies can be listed on the GSE under 3 categories. Despite
some publicity given to the merits on being on the bourse, many companies
can meet the requirements for listing but are skeptical. Meanwhile the
exchange offers the hope for efficient companies to obtain long-term funds.
The monetary authorities on their part can at best complement the role of
other sectors of the economy by minimizing all financial risk factors in the
economy to ensure that there is an enabling environment for business to
thrive. Again, the Bank will continue to formulate and implement sound
financial and monetary policy that would ensure favourable macroeconomic
variables necessary for economic growth.
In the light of the positive interest rate policy being pursued by the monetary
authorities, there is the need for concerted effort to reduce the level of
inflation. With this achieved, banks could mobilise savings at lower interest
rates and lend at rates which are lower than those currently prevailing. This
would imply a reduction in the cost of credit, which would give some relief to
private sector enterprises, which borrow from the banks.
It is worthy of note that foreign direct investment (FDI) is very essential to
Ghana’s growth and development efforts. FDI does not only bring financial
resources, it also brings with it changes in technology and prospects for
human capital development. FDI can also be instrumental in opening up
markets for host economies. The government must therefore do what ever it
takes to get FDI flowing into the industrial sector.
There is also the need to sustain the restraint on public sector borrowing
(Government’s borrowing from the banking system) so that loanable funds
would be available for lending to the private sector. The rate of development
of the country’s infrastructural base also has to be accelerated.
Finally, it is recommended that the government take a closer look at the
nation’s trade liberalisation by using the tariff system to prevent unfair
competition, especially in clear cases of dumping.
References:
Asiedu-Mante E, (2002): The Golden Age of Business: The Role of the
Banking
Sector – ISSER/Merchant Bank Annual Lecture and Roundtable Discussion,
2002.
Brealey R. A. & Myers S. C: Principles of Corporate Finance, Sixth Edition
Irwin McGraw-Hill
BRUKS ASSOCIATES (forthcoming 2003) “Cost of doing business in Ghana”
Ghana Centre for Democratic development briefing paper. Vol. 3 No. 4.
Prempeh K (2002): Reforming Corporate Governance in Ghana Part 1: Private
Sector
Manual on Corporate Governance in Ghana.
USAID (1989), Manual for Action for the Private Sector
APPENDIX 1
LISTED COMPANIES ON THE GHANA STOCK EXCHANGE
ABL
- Accra Brewery Company Ltd
AGC
- Ashanti Goldfields Co. Ltd.
ALW
- Aluworks
CFAO - CFAO Ghana Ltd.
EIC
- Enterprise Insurance Co. Ltd.
FML
- Fan Milk Ltd.
GBL
- Ghana Breweries Ltd.
GCB
- Ghana Commercial Bank Ltd.
GGL
- Guinness Ghana Ltd
HFC
- Home Finance Company ltd.
MGL
- Metalloplastica Ghana Ltd.
MLC
- Mechanical Lloyd
MOGL
- Mobil Oil Ghana Ltd.
PAF
- Pioneer Aluminium Factory Ltd.
BAT
- British America Tobacco Co.
PZ
- PZ Ghana Ltd.
SCB
- Standard Chartered Bank Ltd.
SPPC
- Super Paper Product Ghana Ltd.
SSB
- SSB Bank Ltd.
SWL
- Sam Woode Ltd.
UNIL
- Unilever Ghana Ltd.
PBC
- Produce Buying Company Ltd.
CMLT
- Camelot Ghana Ltd.
CMC
- Cocoa Marketing Company
TBL
- Trust Bank Ltd. (The Gambia)
APPENDIX 2
Financial Analysis
These set of ratios are employed to judge how efficiently companies are using their assets.
(1.)
Leverage Ratio: These ratios show how heavily the company is in debt.
This may be determined by the Debt-Equity ratio and
the Interest Cover, among others.
(a) Debt-Equity ratio = Long-Term debt + value of leases
Equity
(b) Interest Cover4
= Earning Before Int. & Tax + depreciation
Interest
Liquidity ratios: Provides an idea of the total asset coverage of a firm’s
debt, thus showing inability to repay short-term debt
(2)
(a) Current ratio
= Current Assets
(CA)
Current Liabilities (CL)
(b)Net Working Capital -Total Assets ratio
=
CA-CL
Total Assets
This roughly measures a company's potential reservoir of cash.
(c) Cash ratio = Cash + Short-term Securities
Current Liabilities
The essence of this ratio is that Cash and short-term Securities are a company’s most liquid asset.
However, if a firm can borrow on short notice the use of this ratio is redundant.
Profitability Ratios: Ratios under this section are used more as a guide in
asking questions rather than to help answer them.
(i)
Net profit Margin:
=
Earnings After Tax
Sales
4
This is also known a Times Interest Earned.
This margin shows the percentage of sales that finds its way into profits.
(ii)
Return on Equity: Often used to measure a firm's performance
Return on Equity ratio
= Earnings Before Int. & Tax
Average Equity
Efficiency ratios: Financial analysts employ another set of ratios to judge how
efficiently the firm is using its assets. One of such ratios is;
i)
Sales to Total Assets or Working Capital =
Sale
Average Total assets
It indicates how hard the firm's assets (WC) are being put to use.
A high ratio is indicative of a high load factor (Capacity Utilization).
(3) Market Value Ratio: - It is often helpful to combine accounting and stock market data. There is
no law that prohibits this practices and at the same time allow one additional information on a
company’s performance.
Price – Earning ratio (P/E)
This ratio is a common measure of the esteem in which a company is held by
investors.
Price-Earnings ratio
= Stock Price
Earning per share
A high P/E ratio indicates :

Expectation of high dividend,

Stock has low risk, and

Company is expected to achieve growth while paying out a high proportion of its income.
APPENDIX 3
Table 1
Year
2001
2002 Earnings
Capitaliza-
Share
Share
Capital
Dividend
Dividend
Nominal
No of
End
Earnings
Pay Out
Per Share
Ratio
P/E
Shares
Earnings
Earnings
Growth
tion
Price
Price
(¢’billion)
01/02
Gain/
Per Shar
Yield
Return
(cedis)
(%)
(%)
Outstndg.
(%)
(¢’m )
(¢’m)
30/12/2002 Loss
(cedis)
ABL
Mar
1209
2910.25
140.72
68.18
320
410
AGC+
ALW
BAT*
CFAO
CMLT
EIC
FML
GBL**
GCB
GGL
HFC
MGL
MLC
MOGL
PAF
PBC
PZ
SCB
SPPC
SSB
UNIL
SWL
TBL***
Dec
454902.921
655685.52
44.14
3434.91
18800
27000
43.62
Dec
38567
29580.71
-22.3
154.21
4,300
3700
-13.95
Dec
23702
33781.07
42.52
69.2
627
1001
59.65
Dec
2091
-864.08
-141.32
3.75
60
67
11.67
28.13
10
3.13
31.25
166.3
17.5
0
0
43.62
127.22
5153.95
500
11.63
-2.33
41.68
709.71
235
37.48
97.13
69.13
488.66
0
0
11.67
56
-15.43
57.14
-
23.43
5.24
70.45
48.09
-
5.21
2.05
-4.34
Dec
611.22
38.72
-93.67
3.01
430
460
6.98
23.5
5.47
12.44
6.54
5.92
396.93
77.7
Dec
4,093.88
6365.1
55.48
23
3,050
4600
50.82
120
3.93
54.75
5
1273.02
9.43
3.61
Dec
6268
14600.01
132.37
35.31
950
1785
87.89
100
10.53
98.42
19.78
738.12
Dec
-10633
-19185.24
80.43
14.46
1,000
500
-50
0
0
-50
28.92
-663.39
Dec
169346
168572.25
-0.46
580.14
1570
3516
123.95
400
25.48
149.43
165
1021.65
39.15
3.44
June
18358.79
35189.96
91.68
123.14
901
1050
16.54
175
19.42
35.96
117.48
299.54
58.42
3.51
Dec
7,584.41
14598.24
92.48
76.17
952
955
0.32
45
4.73
5.04
79.75
183.05
24.58
5.22
13.55
-
2.42
-0.75
Mar
531
347.4
-34.58
4.57
241
254
5.39
0
0
5.39
18
19.3
Dec
3,614.65
2381.95
-34.1
10.82
145
270
86.21
22.5
15.52
101.72
40.08
59.43
Dec
13694
14419.98
5.3
79.91
18,500
19730
6.65
2536
13.71
20.36
4.05
3560.49
Dec
415
128.04
-69.15
12.38
800
750
-6.25
0
0
-6.25
16.5
7.76
-
96.65
Mar
5581
11107.2
99.02
187.2
450
390
-13.33
0
0
-13.33
480
23.14
-
16.85
May
-
13.16
37.86
71.23
4.54
5.54
11966.46
12356.12
3.26
56.14
1010
2005
98.51
57.57
5.7
104.21
28
441.29
13.05
4.54
Dec
108107
143864.34
33.08
505.01
20500
28,700
40
4200
20.49
60.49
17.6
8174.11
51.38
3.51
Dec
773.48
-181.96
-123.52
7.52
341
387
10.09
20
5.87
19.35
19.44
-9.36
-213.67
-41.35
Dec
91452
48921.68
-46.51
282.58
2200
3,966
80.27
600
27.27
107.55
71.25
686.62
87.38
5.78
Dec
55725
61788.13
10.88
300.31
2300
4,805
108.91
512
22.26
131.17
62.5
988.61
108.06
-
6.22
250
285
14
0
0
14
21.83
4.95
37766.7
-
145.5
4100
4850
18.29
627.8
15.31
33.6
30
1258.89
51.79
-
4.86
57.57
49.87
3.85
Table 2: PERFORMANCE OF THE GHANA STOCK EXCHANGE
1998
Volume of shares traded (‘mn)
Value of shares traded
¢’b
GSE – All Share Index
Market Capitalisation
¢’b
US$’b
Change in GSE Index
(%)
Change in Market. Capitalisation (%)
“
“
“ $’m
Turnover Ratio (%)
Liquidity Ratio (%)
91-day T-bill Discount Rate (%)
Inflation rate (%)
Exchange rate depreciation (%)
1999
2000
2001
91.4
134.01
868.35
3245.6
1.4
49.57
69.61
736.16
3206.39
1.21
30.72
50.62
857.93
3655.04
0.53
55.3
92.23
955.95
3904.03
69.7
27.1
12.6
4.1
0.8
26.7
15.7
4.8
-15.2
-1.2
-13.6
2.2
0.3
31.5
13.8
48.0
16.5
14.0
-56.2
1.4
0.2
38.0
40.5
98.2
11.4
6.8
1.5
2.4
0.2
27.7
21.3
5.2
28
Table 4: : 100 TOP REGULAR PAYING ESTABLISHMENTS
COMPANY
NUMBER
1
11011
AGC
2,520
ANNUAL
2001
¢ M
30,240
2
06203
BANK OF GHANA
930
11,163
13,953
3
08751
SSNIT
919
11,024
13,780
4
06190
GCB
889
10,670
13,337
5
02072
GHANA TELECOM
718
8,618
10,772
6
3087
VALCO
700
8,401
10,501
7
08514
VRA
557
6,687
8,359
8
05000
ELECTRICITY CORPORATION
495
5,936
7,420
9
0F579
SSB BANK
451
5,412
6,766
10
00086
COCOA SERVICES DIV
402
4,820
6,025
11
06377
UNILEVER GHANA LTD
391
4,690
5,862
12
06772
SCB
388
4,659
5,824
13
07014
GHANA AIRWAYS
327
3,922
4,902
14
08388
INTERNAL REVENUE SERVICES
266
3,187
3,984
15
08395
C.E.P.S.
257
3,085
3,856
16
063914
BARCLAYS BANK GH LTD
244
2,924
3,654
17
08445
GH. CIVIL AVIATION AUTHORITY
239
2,867
3,583
PRESTEA GOLD
236
2,833
3,542
18
503B0219
ESTABLISHMENT
MONTHLY 2001
¢ M
ESTIMATE 2003
¢ M
37,800
19
02074
GHANA POSTAL SERVICES CO.
223
2,670
3,338
20
06905
STATE INSURANCE CORPORATION
221
2,655
3,319
21
065462
ECOBANK (GH) LTD
208
2,498
3,122
22
00088
QUALITY CONTROL DIVISION
201
2,414
3,018
23
08327
GHANA INTERNATIONAL SCH.
194
2,332
2,915
24
971027
G.P.H.A.
193
2,316
2,895
25
06364
SHELL (GH) SERVICES
183
2,194
2,743
26
02514
PIONEER GOOD CANNERY LTD
164
1,971
2,464
27
03901
TEMA OIL REFINERY
154
1,846
2,307
28
06789
MARCHANT BANK GH. LTD
148
1,775
2,218
29
408B003
ASHANTI GOLDFIELDS
147
1,769
2,211
30
201J381
INTER CON SECURITY SYST. GH
144
1,732
2,165
31
081148
WORLD VISION INT.
140
1,680
2,100
32
48387
COCOA RESEARCH INST.
134
1,610
2,012
33
011011
BONTE GOLD MINES LTD
130
1,562
1,952
34
031046
ALUWORKS CO. LTD
126
1,518
1,897
35
141156
MBC. LTD
126
1,516
1,895
36
06211
NATIONAL INVESTMENT BANK
121
1,458
1,822
37
00078
PBC LTD
121
1,448
1,810
38
302C026
THE COCA-COLA BOTTLING CO
117
1,400
1,750
39
0H033
USAID MISSION
115
1,384
1,730
40
0H038
AMERCIAN EMBASSY
112
1,343
1,679
41
00052
GHANA COCOA MARKETING BD.
112
1,341
1,676
42
201B002
BAYSWATER CONTRACT MINING
102
1,226
1,532
43
06106
NESTLE GHANA LIMITED
97
1,164
1,454
44
201j641
LA-PALM ROYAL BEACH HOTEL
96
1,151
1,439
45
06106
NESTLE GHANA LIMITED
95
1,135
1,419
46
38164
UCC
95
1,135
1,419
29
47
02176
AKOSOMBO TEXTLES LTD
94
1,126
1,408
48
021153
LEVER BROTHERS GHA LTD
93
1,118
1,397
49
05002
GHANA WATER AND SEWERAGE CORP
92
1,105
1,381
50
202H003
AFGO
92
1,102
1,377
51
02365
COCOA PROCESSING CO
89
1,072
1,340
52
02126
G.T.P.
87
1,042
1,303
53
06596
DEWEGER GRUTHER BROWN
85
1,018
1,272
54
063135
GOLDEN TULIP HOTEL
84
1,010
1,262
55
06569
COCOA MARKETING COMPANY
84
1,008
1,260
56
08009
GHANA BAUXITE CO LTD
82
985
1,232
57
08417
STC VANEF
78
941
1,176
58
02114
ACCRA BREWERY LIMITED
77
922
1,153
59
08501
REGIONAL MARITIME CADEMY
75
898
1,122
60
02068
GRAPHIC COMMUNICATIONS
74
890
1,112
61
302J003
MILICOM (GH) LTD
73
880
1,100
62
065485
CAL MERCHANT BANK
72
868
1,085
63
06507
MOBIL OIL (GH) LTD
72
868
1,085
64
08505
CATHOLIC RELIEF SERVICES
72
866
1,083
65
82042
BRITISH AMERICAN TOBACCO
71
850
1,063
66
302G112
THE TRUST BANK
70
845
1,057
67
205C011
GHANA AGRO-FOOD CO. LTD
68
821
1,027
68
03331
CROCODILE MATCHET
68
818
1,023
69
73000
JUAPONG TEXTILES LTD
68
816
1,020
70
202J263
PRUICEWATER HOUSE & COOPERS
68
816
1,020
71
206E018
STEEL AFRICAN MAINT. & CONST.
65
781
976
72
302j556
WESTERN TELESYSTEMS (GH) LTD
65
778
972
73
201J003
HOTEL INVEST. GH LTD
64
764
955
74
12085
A G TIMBERS
63
754
943
75
12093
NAJA DAVID VENNER & PLYWOOD
63
751
938
76
201J809
ACP-BPS (GHANA) LTD
61
729
911
77
302J433
WESTEC SECURITY SYSTEM GH.
59
704
880
78
202G030
CASHPRO
58
695
868
79
06004
GHANA OIL CO. LTD
58
693
866
80
08735
PLANNED PARENTHOOD
57
687
859
81
41007
G C D LIMITED
57
686
857
82
02025
FAN MILK LTD
57
685
857
83
06494
ELF OIL GHANA LTD
57
682
853
84
201J302
VAT PROJECT
57
681
851
85
401C181
OMEGA WOOD PROCESSING
54
654
86
041009
TAYSEC CONSTRUCTION LTD
54
646
807
817
87
08753
LINCOLN COMMUNITY SCHOOL
53
636
795
88
0F155
TRACTOR AND EQUIPMENT GH LTD
50
601
752
89
0301J311
SCANCOM LTD
50
599
748
90
206G015
GATEWAY SERVICES LTD
49
583
729
91
931009
WAHOME STEEL LIMITED
48
580
725
92
03225
GHACEM LTD
48
574
717
93
201C008
CARSON PRODUCTS W. AFRICAN LTD
47
566
707
94
408C008
SUHUMA TIMBER COMPANY LTD
47
559
698
95
302J150
WEST COAST ALLED SERVICE
46
556
695
96
081279
ADVENTIST DEV. RELIEF
46
549
686
30
97
07129
P.S.C. TEMA SHIPYARD
44
533
666
98
03338
ASSOCIATED CONSTANTS
44
533
666
99
08599
ACCRA METROPOLITAN ASSEMBLY
43
520
650
100
0H041
TECHNOSERVE
43
519
649
31