Ghana - Public Enterprise Sector Review

Doonnot of The World Bank FOR OFFICIAL USE ONLY mmovic coPYCONFIDENTIAL Report No. 10048"GH CONF1" IDE 'AL1 Repor~'t No. I04 ( GH'l T.C~'ype (SEC) )DRTM, 12 X ".,45 / :13 AFTAJM REPUBLIC OF GHANA PUBLIC ENTERPRISE SECTOR REVIEW OCTOBER 25, 1991 Africa Region Western Africa Department Industry and Energy Division This document has a rstdcted distribution and may be used by recipients only in the performance of their officia dutie. Its contents my not otherwise be disclosed without World BAnk authorization. REPUIC OF GHANA PUBLIC ENTERPRISE SECTOR REVIEW I CURRENCY EQUIVALENTS (as of August 12, 1991) Currency Unit = Cedi US$1 = C 371 Cl = US$0.0027 LIST OF ABBREVIATIONS BOG Bank of Ghana CAG Controller and Auditor General (MFEP) CBA Collective Bargaining Agreement COCOBOD Ghana Cocoa Marketing Board CPJ Consumer Price Index DIC Divestiture Implementation Committee ECO Electricity Corporation of Ghana ERP Economic Recovery Program ESB End of Service Benefits GAC Ghana Airways Corporation GFDC Ghana Food Distribution Corporation GHACEM Ghana Cement Company Limited GHAIP Ghana Italian Petroleum GIHOC Ghana Industrial Holdings Corporation GNPA Ghana National Procurement Agency GNPC Ghana National Petroleum Corporation GNTC Ghana National Trading Corporation GOIL Ghana Oil Company GPC Ghana Publishing Corporation GPHA Ghana Ports and Harbours Authority GPTC Ghana Post and Telecommunications Corporation GRC Ghana Railways Corporation GSC Ghana Supply Commission GWSC Ghana Water and Sewage Corporation IAP Investment and Projects Analysis Division (MFEP) ILO International Labor Office IMF International Monetary Fund IRS Internal Revenue Service (MFEP) LVB Land Valuation Board MFEP Ministry of Finance and Economic Planning MIS Management Information System MRS Manpower Redeployment Study NEB National Energy Board PAB Public Agreements Board PE Public Enterprise PIB Prices and Incomes Board PNDC Provisional National Defence Council SAC Structural Adjustment Credit SEC State Enterprises Commission SSC State Shipping Corporation SSNIT Social Security and National Insurance Trust TA Technical Assistancp . TCS Terms and Conditions of Service TFCC Tema Food Complex Corporation TUC Trades Union Congress UNDP United Nations Development Program URADEP Upper Region Area Development Project VORADEP Volta Region Area Development Project VRA Volta River Authority FISCAL YEAR January 1 - December 31 REPUBLIC OF GHANA PUBLIC ENTERPRISE SECTOR REVIEW TABLE OF CONTENTS EXECUTIVE SUMMARY ......................................... v I. INTRODUCTION ......................................... II. SECTOR OVERVIEW AND PERFORMANCE ....................... 2 Macroeconomic Background .............................. Historical Perspective................................... 3 Government Monitoring and Control ......................... 3 Recent Trends in Sector Performance ......................... 4 III. BUDGETARY BURDEN OFTHESECTOR......................... 9 Direct Flows from Government to PEs ........................ 9 Direct Flows from PEs to Government ........................ 12 Indirect Flows from Government to PEs ....................... 13 IV. RECENT REFORMMEASURES................................ 16 Economic Recovery Program .............................. 16 Bank Support for PE Reform under the Structural Adjustment Program .................................. 16 Public Enterprises Project ................................ 17 V. MAJOR ISSUES .......................................... 19 Budgetary Burden and Financial Discipline ..................... 19 Classification of PEs forAction ............................ 20 Pricing Policy ....................................... 20 Procurement Policy .................................... 21 The main mission was in the field from March 1-22, 1991, and consisted of Bernard Drum (Mission Chief, AFTIM), Samuel Paul (CECPS), and consultants Tait Davis, Richard Wilson and Syed Mahmood. Richard Wilson's contribution to the mission was financed by the UK Overseas Development Administration. The main mission also benefitted from the work of a preparatory mission in October 1990 led by Shahla Torabi (AFTIM) and including Mark Sundberg (AF4CO), and consultants Tait Davis and Franz Kok. Secretarial support for preparation of the final report was provided by Therese Cruz and Mary Abuzeid. iv Employment and Compensation Policy ........................ 22 Legal and Institutional Framework ........................... 24 Performance Contracts .................................. 25 Privatization ......................................... 26 VI. AGENDA FOR FURTHERREFORM ............................. 29 Reform Strategy ...................................... 29 Budgetary Burden and Financial Discipline ..................... 29 Pricing and ProcurementPolicy ............................ 31 Employment and Compensation Policy ........................ 31 Legal and Institutional Framework ........................... 32 Performance Contracts .................................. 33 Privatization ...... .................................. 34 Annexes I. GOVERNMENT'S PROPOSED CLASSIFICATION OF THE PUBLIC ENTERPRISES II. FINANCIAL DATA ON THE PE SECTOR III. FINANCIAL FLOWS BETWEEN GOVERNMENT AND THE SECTOR, CONCEPTUAL ISSUES AND DATA AVAILABILITY IV. PRICING AND PROCUREMENT POLICY V. EMPLOYMENT AND COMPENSATION VI. LEGAL AND INSTITUTIONAL FRAMEWORK VII. THE USE OF PERFORMANCE CONTRACTS VIII. PRIVATIZATION EXECUTIVE SUMMARY Sector Overview The philosophy of State intervention in the economy dominated Ghana's policies with respect to public enterprises (PEs) from independence to the mid-1980s. Most of the PEs were created during this period, either as new entities or by the nationalization of private enterprises. Employment in the PE sector increased from 11,000 at independence to 240,000 in 1984. With the coming of the Economic Recovery Program (ERP) in 1983 there was a change in policy direction but the legacy of State intervention is still very evident. PEs continue to play an important role in virtually all sectors of the economy: agriculture, mining, manufacturing, transport, power, trade, the financial sector and tourism. All major exports are still produced and/or marketed by PEs. Despite the ERP the sector still accounts for roughly 200,000 employees and, in terms of numbers of PEs, is one of the largest in Africa, second only to Tanzania which has 400 PEs. The recently prepared classification of PEs prepared by the State Enterprises Commission (SEC) lists some 329 PEs in Ghana, of which the Government has majority interest in about 150, either through direct ownership or indirectly through wholly-owned banks or other PEs. The dominant position of PEs in Ghana has its roots in the early 1960's, the period following independence. It was during this period (1961-1966) that many of Ghana's major PEs were created. The subsequent government (1966-1972) had a more liberal economic policy with greater emphasis on the role of the private sector; some PEs were privatized during this period. But in 1972, another change of Government signalled a return to the state-oriented development strategy and Government took a majority interest in all large mining and timber companies which, after cocoa, were the principal source of export earnings. This was followed by an Investment Policy Decree in 1975 which required all foreign-owned enterprises to become joint ventures with either private Ghanaians or Government. Finally, in 1979 and subsequent years a large numbe of relatively small private manufacturing firms, accused of financial malpractice, were confiscated by the State. The PEs were created with the expectation that they would contribute to broader social and political objectives, would raise revenues, increase employment, promote regional development and redistribute income. However not only have many of these objectives remained largely unaccomplished but the sector has proved to be a major financial burden and source of inefficiency. The performance of the sector has been marked by low productivity, high losses, and increasing illiquidity. PEs have been a major fiscal burden, both in terms of direct operational support from the budget, and indirectly through tax exemptions and tax and loan payment arrears, absence of dividends and, in many cases, inability to repay Government-guaranteed loans. On the whole the PEs have not been paying their bills or taxes, contributing to future investments, servicing their debts or paying dividends to Government. Lack of information makes any analysis of the PE sector in Ghana very difficult. It also seriously impairs financial discipline and sector policy formulation and management. Some efforts are being made to rectify this situation and this Review has used the results of a recent survey by the State Enterprises Commission (SEC) along with data gathered in the Ministry of Finance and Economic Planning (MFEP) as the basis for the quantitative analysis. Most of the quantitative data relate to the 14 core PEs which together accounted for about 60 percent of employment, 72 percent vi of sales value and 67 percent of value added in 1989. Factors that have contributed to poor PE performance have included inadequate Government policies, institutional weaknesses, including a multiplicity of supervisory agencies with overlapping and unclear responsibilities at Government level, and poor management at enterprise level. The overall incentive framework has not rewarded efficient production. There have been quantitative restrictions on trade and -extensive price and distribution controls. PE managers have also been subjected to political interference both in day to day operations and in major decisions relating to location, investment, choice of technology, product, wage negotiations and employment levels. Financial Performance and the Budgetary Burden Based on responses from 127 PEs, including all the large ones, to the 1990 State Enterprises Commission (SEC) Survey, total fixed assets in the sector were about 1,337 billion cedis (US$ 3.6 billion) at the end of 1989. Total sector turnover was about 362 billion cedis (US$ 976 million) during 1989, total value added about 71 billion cedis (US$ 191 million), and total losses before taxes about 23 billion cedis (US$ 62 million). The 14 core PEs in aggregate earned operational profits, excluding subsidies and other non- operational income and expenditure, in each year over the period 1984-1989. There were, however, substantial individual variations in performance between them. Four PEs, the Cocoa Marketing Board (COCOBOD), the Ghana Oil Company (GOEL), the Ghana National Procurement Agency (GNPA) and the Ghana Post and Telecommunications Corporation (GPTC) earned profits ir all five years whereas two PEs, the Ghana Railways Corporation (GRC) and the State Shipping Corporation (SSC) incurred losses in all five years. The others all showed both profits and losses over the period but for four of them, the Volta River Authority (VRA), the Electricity Corporation of Ghana (ECG), the Ghana Ports and Harbours Authority (GPHA) and the Ghana Water and Sewage Corporation (GWSC) the trend was from losses to profits. However these profitability figures mask important negative trends that become apparent when we examine the financial relationship between the State and its PEs. Over the five year period direct annual financial transfers from Government to the 14 core PEs increased from 1.1 billion cedis (US$ 3 million) to 4.9 billion cedis (US$ 13.2 million). Direct subsidies were only a very small percentage of these totals and actually fell over the period. Most of the direct transfers were loan disbursements. Over the same period direct flows from the PEs to Government including tax, dividends and loan repayments fell from 330 million cedis (US$ 0.9 million) to only 39 million cedis (US$ 0.1 million). Net direct outflows from Government to PEs therefore increased from 790 million cedis (US$ 2.1 million) in 1985 to 4.6 billion cedis (US$ 12.4 million) in 1989. Even more serious than the increase in net direct outflows to the PEs are the startling estimated increases over the period in PE tax payments arrears, tax exemptions, dividend payments arrears and payments by Government due to defaults by PEs on Government guaranteed loans. The totals of these indirect subsidies to PEs increased from about 820 million cedis (US$ 2.2 million) in 1985 to about 22.9 billion cedis (US$ 61.7 million) in 1989. Total net outflows from Government to PEs including both direct and indirect transfers are therefore estimated to have increased from 1.6 billion cedis (US$ 4.3 million) in 1985 to 27.8 billion cedis (US$ 74.9 million) in 1989. If we deflate by the consumer price index to allow for inflation vii this is equivalent to an increase in constant 1985 terms from 1.6 billion cedis (US$ 4.3 million) to 10.6 billion cedis (US$ 28.6 million) over the period. Anecdotal evidence suggests that similar trends apply to the rest of the PE sector. The PE sector is clearly imposing a burden on public finances that is not apparent if we only look at direct subsidies and it is growing at an alarming rate. Recent Reform Measures In 1985, as part of the Economic Recovery Program (ERP) the Government established a task force which, in consultation with the Bank and UNDP, formulated the initial phase of PE reform program. The program waL supported by the First Structural Adjustment Credit (SAC 1, 1987), the PE project (1988), and subsequently by the Second Structural Adjustment Credit (SAC II, 1989). SAC IIl became effective in July 1991. The main policy measures implemented under the program have aimed at deregulating prices and increasing competition. They have also included new policies and procedures on Government financial support for PEs, and strict limits on the creation of new PEs. Institutional and legal reforms have been aimed at improving PE managers' autonomy in day-to-day operations while also strengthening their accountability to Government through restructuring the SEC. The rationalization of the PE sector has been initiated through divestitures and mergers to reduce the financial and managerial burden upon Government. Rehabilitation has been initiated of selected potentially viable PEs deemed critical to the success of the ERP. Attempts have been made to achieve improvements to PE management and efficiency through staffing reductions, training programs for managers and accountants, installation of MIS, and preparation of corporate plans and financial audits. Efforts have been made to restore financial solvency and discipline by clearing cross-debts and arrears and by establishing clear guidelines and procedures for Government-PE financial relations. The PE project has provided technical assistance in the form of consultants, training, studies and equipment and logistical support to strengthen the SEC in the management of the program, to help in the conception and implementation of the divestiture program and to help in the restructuring of major PEs. Major IsEues Despite Government's appreciation of need for PE reform and of the support for PE reform provided by the Bank, the figures show that there has not been a turnaround in sector performance. On the contrary the budgetary burden of the PE sector is growing fast. An examination of the major components of the reform process shows that despite the policy statements, studies and documentation prepared, concrete progress in most areas has been patchy. A good start has been made in some areas, particularly in updating the accounts of the core PEs and in initiating the divestiture program, but in many areas the changes have been more in form than in substance. Budetary Burden and Financial Discipline. Indirect subsidies to PEs in the form of loans which are not repaid or equity transfers which produce no dividends, or taxes that are not paid, with apparent impunity, are being made with apparently little concern as to whether the PE is profitable or not. There is a breakdown in financial discipline and transparency in the financial relationships between Government and the PEs. Financial information is not generally available and the MFEP is not adequately monitoring its financial transactions with the sector. viii PE Classificatin. The most recent version of Government's draft PE classification, to which sector ministries made a major input, includes a large number of non-strategic PEs which are designated to be retained in the public sector. There is a danger that if it is left to the sector ministries to determine which PEs will be retained, they will opt for the status quo and hold on to their enterprises rather than propose privatization. Pricing Poliey. Despite the official policy of reduction of price controls by the PIB and other centralized agencies there is still a high degree of often arbitrary intervention by PIB, ministries and the political directorate in setting PE pricc. This is evident across sectors and particularly in food crops, energy, water and transport. Decisions on pricing are not determined by costs. At PE level there is a widespread lack of the effective cost accounting necessary for effective price setting. Procurement Policy. Centralized procurement agencies inc!uding the Ghana National Procurement Agency (GNPA), Ghana National Petroleum Corporation (GNPC), Ghana Supply Commission (GSC), and Ghana Publishing Corporation (GPC) still have formal or de facto monopoly control on procurement of many items including wheat, crude oil and refined petroleum products, office supplies and stores. The GSC Law of 1990 recently strengthened the GSC monopoly on procurement for all PEs. Government also still intervenes in the marketing and distribution and sourcing of many other products handled by PEs including cement and food products. Employment Poligy. Overemployment is one of the most serious problems facing the PE sector. Yet PE management has very little autonomy in decisions to hire, fire or set salary levels. The retrenchment and redeployment necessary to produce a more efficient sector has been at a virtual standstill since 1987. PE staffing structures tend to be based on civil service principles rather than commercial considerations. There is considerable lack of flexibility in employment terms and conditions. Compensation Policy. Over-generous and unaffordable end of service benefits have been negotiated with PE employees since the early 1980s, the time when the Boards of Directors of most major PEs were dismissed. The exorbitant costs that these benefits would cause for necessary redeployment, estimated in total at over $500 million, are one of the main reasons that retrenchment of PE employees has come to a standstill. This is holding up both PE restructuring and privatization. Wages in the PE sector are linked to civil service pay structures. There are few truly performance related bonus schemes. The collective bargaining process still lacks discipline and responsibility on the part of the owners, i.e. the Government. Legal and Institutional Framework. There is much room for improving corporate governance in the PE sector. There are many overlaps in responsibility between the agencies monitoring the sector. The most obvious problem is the overlap between sector ministries and PE Boards. 50 percent of the PEs whose Boards were dismissed in the 1980s still do not have Boards. But even where Boards have been appointed there is still a strong tendency on the part of Government and sector ministries to interfere in day-to-day decision making. The SEC's role is too broad. Its tasks are too many and unprioritized. It has not been able to attract the skills necessary to operate effectively and is understaffed. Despite this SEC has done good quality work in formulating the PE reform program and identifying policy issues. It has not, however, been instrumental in getting Government to resolve these issues. The Public Agreements Board (PAB) is a major bureaucratic obstacle to decision making by PE managers. It is causing unnecessary delays in the award of contracts and provides no guidelines or other assistance to PE managers in the preparation and ix. negotiation of acceptable contracts. Permance Contrac. The performance contracting mechanism has been adopted in Ghana as the means of linking corporate planning to performance monitoring and of defining mutual responsibilities of Government and PE managers. While there has been some improvement in the design of these contracts and extension of their coverage since they were introduced in 1989, there is still much room for improvement. There is still a lack of standardization and focus in the selection of targets and indicators to be monitored. Responsibility for monitoring the contracts is somewhat uncertain. The MFEP is still not involved in their negotiation. This is a very serious shortcoming since many of these contracts include financial commitments from Government and since poor discipline and lack of transparency in the financial relationship between PEs and Government is one of the most important sector problems that needs to be corrected. Pivatization. Although ;9 PEs had been divested up to March 1991, over half of these were liquidations of non-viable PEs and all except one of the rest were very small enterprises. The privatization program is facing a number of political and practical constraints that will need to be overcome if it is to build momentum and be successful. The business community is not yet convinced that the Government is serious about privatization after so many years of interventionist policies which have included nationalization and confiscation of private assets. The emphasis so far has been on reducing the burden of the PEs on Government rather than trying to stimulate private sector investment and activity. Issues that need to be resolved include the lack of expertise in privatization in the Ghanaian public sector, excessive reliance-on replacement cost and on the Land Valuation Board for asset valuation, lack of consistency, transparency and publicity given to the selection of PEs for sale, the methods and conditions for sale and the criteria by which offers are evaluated, and how to deal with the heavy liabilities of the PEs, especially end-of-service benefits. Agenda for Further Reform Reform Strategy. The poor and deteriorating performance of the sector, despite good diagnosis and acknowledgement by Government of many of the problems, means that the policy statements now need to be converted to action, as a matter of urgency. The classification exercise currently underway needs to bring the result that only a handful of highly strategic PEs will remain under Government control at the end of the PE reform program. The privatization and liquidation program needs to take care of most of the PEs in the sector. Government should then be focussing its reform efforts on the core PEs that will remain. They should be made to operate in a commercial manner. Financial discipline should be imposed and the budgetary burden eliminated. Competent Boards should be appointed for all PEs and these Boards should be given full autonomy to make commercial decisions. A suitable regulatory framework should be created for the public monopolies. Budgetary Burden and Financial Discipline. A system to keep track of all financial transactions, explicit and implicit, between Government and the PE sector should be created. A timetable with quantified targets for reduction and elimination of the budgetary burden should be prepared and strict limits set and adhered to. PEs should be properly capitalized with the right balance of equity and loan finance. Loan repayment schedules should be imposed and penalties levied for late payments. Dividends should be paid on all equity capital. Tax collections should ve enforced and no special tax exemptions granted to PEs. There should be no more Government guarantees on commercial bank loans to PEs. All PEIGovernment and PE/PE cross debts should be settled and measures taken to prevent their recurrence. X Priciung and Procurement Policy. The Prices and Incomes Board has outlived its usefulness and should be closed down. Explicit transfers should*be included in the budget for all services that Government requires PEs to provide at less than full cost. PEs should be exempt from all obligations to purchase from or sell to a particular supplier or customer. GSC's monopoly should be limited to central Government procurement. GNPA should'be privatized. New independent mechanisms should be created for setting and reviewing monopoly tariffs with the accent on automaticity, cost recovery and cost reduction. Cost-accounting ard procurement capability at PE level should be strengthened by consulting assistance and training for PE managers, possibly financed by the PE Project. Employment and Compensation Policy. Once competent Boards have been appointed to PEs, they should be granted full autonomy in recruitment and retrenchment policy and in setting pay scales. The practice of referring PE employment decisions to an establishment list should be abandoned. PE pay should be delinked from civil service pay. Labor requirements should be determined by the functional needs of the enterprise. The PE Project could finance job classification and functional requirements assessments for the core PEs. Existing bonus payments which are paid irrespective of performance should be consolidated into regular pay. An incentive bonus scheme should be implemented for managers of PEs which have signed performance contracts. Bonus payments for non-management employees should be left to the discretio.t of PE Boards, If workers representatives and management cannot agree to a downward renegotiation of the unreasonably high end of service benefits entitlements which are crippling efforts at restructuring, one option could be to schedule payments over a period of years letting inflation reduce the real values to afford.ble levels. As with the new pension fund an option to avoid the recurrence of the ESB problem could be to replace negotiated benefits with standardized benefits and in the longer term to create a contributory national unemployment scheme. Legal nd Institutional Framework. A series of measures need to be taken to improve corporate governance in the PE sector. Clear guidelines should be developed on the respective responsibilities of the SEC, the, ministries and Boards. These guidelines should be widely disseminated and adhered to. Competent Board! should be appointed for all PEs. The role of SEC needs to be reduced and its activities prioritized. SEC should have more flexibility to employ consultants to carry out tasks requiring skills that the civil service structure will not allow it to recruit directly. A Task Force or expert group should examine the options for creating independent regulatory mechanisms for the public monopolies. PAB should prepare guidelines on the preparation of acceptable contracts by PE managers who, along with local lawyers, should receive training in their preparation. Contract approvals below certain amounts should be delegated to PE management. To facilitate privatization some of the PEs to be privatized, and also, for the sake of increased autonomy, some of those to remain in Government hands, should be converted to limited liability companies. Performance Contracts. Responsibility for preparing, managing, monitoring and evaluating PE performance under the performance contracts should be given to a single agency. This should probably be the SEC. The MFEP should participate at all stages in the preparation, negotiation and signature of all performance contracts, but particularly those that will have an impact on public finances. The contracts should be imp.oved to include the whole range of measures that will apply to the PE as a result of the reform program. For example the principles of PE autonomy in setting prices, procurement, hiring and firing of labor and setting pay scales etc. should be reflected in all perfo nance contracts as should Government commitment to reimburse services provided below cost at Government request. Particularly important will be the need to include quantitative targets for rate xi of return on investment, reduction of the budgetary burden of the PE sector and elimination of cross- debts. A standard set of Indicators needs to be developed and Included in all performance contracts. Additional technical indicators specific to the sector concerned and the individual circumstances of the PE would also be included. Privatization. The emphasis in the privatization program should move from the somewhat negative aim of divestment of loss-making PEs to the more positive aim of stimulating private sector investment and involvement in the economy. 'his will be particularly important in convincing the somewhat sceptical private sector that the I,r.erriment is really serious about privatization in particular and private sector development in gea...al. The PEs classified as suitable for divestment should be prioritized with highest priority given to the larger more profitable PEs. A large profitable PE should be put up for sale by public offering at the earliest opportunity. Possible candidates could include Ashanti Goldfields, GIHOC Bottling, GIHOC Distilleries or GIHOC Pharmaceuticals. DIC should be given the power necessary to bring PEs to the point of sale. Sector ministries cannot be expected to do this job adequately. DIC should use private Ghanaian professionals to a much greater extent than they have to date in preparing PEs for sale and privatizing them. Much greater transparency in the process is required with clear and simple rules for evaluating bids. An active public information campaign should explain Government's aims, policies and actions regarding privatization. More emphasis needs to be put on market value in assessing asset values and less emphasis on replacement cost. Valuations carried out be the Land Valuation Board should not be used as the means of setting floor prices for the enterprises. REPUBLIC.7 GHANA PUBLIC ENTERPRISE SECTOR REVIEW I. INTRQDUCTION 1. This report is the result of two missions, a preparatory mission which visited Ghana in October 1990 and the main sector review mission which visited Ghana in March 1991. The main purposes of the review were firstly, to assess the general situation of the Public Enterprise (PE) sector and the impact of reform measures taken to date and secondly, to propose a strategy and action program for PE reform for the next five years. It was the first comprehensive PE sector review carried out in Ghana since the UNDP-financed Dank-supervised sector study carried out by consultants in 1985. 2. The review took place in the context of a public enterprise (PE) reform program that has been underway since 1985 and has been supported by Bank Technical Assistance (TA) Projects and Structural Adjustment Credits (SACs). The review has therefore prcvided a useful and timely opportunity to review the impact of the reform measures implemented to date and to propose options for the direction of future reforms. 3. The main report is presented in five sections. The first provides an overview of the sector and its financial performance. The second assesses the burden of the sector on pub?ic finances, the third reviews the policy reform measures taken by Government with the aim of improving sector performance. The fourth section summarizes the main issues and constraints facing the sector at present and the fifth and final section presents the mission's main proposals for further reforms. 4. A series of annexes provide detailed information on sector performance and in-depth analysis of important areas. These areas include the management of financial relations between central Government and the PE sector, the policy environment within which the sector operates, the legal and institutional framework governing the sector and the potential and strategy options for privatization of PEs. 2 II. SECTOR OVERVIEW AND PERFORMANCE 5. An overriding and central issue in Ghana is the lack of up-to- ate reliable financial and operational information on the PE sector. The State Enterprises Commission (SEC) has started to alleviate this problem over the last year by carrying out a data collection survey of the major PEs. Lack of data remains a major impediment to focusing the PE reform program and monitoring its progress. It pervades all aspects of PE reform. It prevents accountability and financial discipline at all levels and also prevents the timely preparation and consummation of privatization deals and of enterprise rehabilitation programs. 6. The main sources of data used in our analysis include whatever audited accounts exist, records of the Investment and Project Analysis Division (IAP), the Internal Revenue Service, the Office of the Controller and the Accountant General and the Budget Division of the MFEP, the Bank of Ghana, the ongoing SEC PE survey and the results of a census carried out in 1984. Macroeconomic Background 7. The Ghanaian Economic Recovery Program (ERP), which was initiated in 1983, has aimed at reversing the economic deterioration of the 1970s and early 1980s. Between 1970 and 1982 per capita real income had declined by 30 percent, import volumes had fallen by one third, real export earnings had dropped by 52 percent, domestic savings and investment had declined from 12 percent and 14 percent of GDP respectively in 1970, to almost insignificant levels, while inflation had averaged 44 percent per annum. 8. Under the ERP efforts have been made to shift relative prices in favor of production, particularly of exports, restore fiscal and monetary discipline, initiate rehabilitation of the country's productive base and infrastructure and restore incentives for private savings and investment. The cedi has been devalued in stages. Administered prices have been increased to reflect the changing exchange rate and many price and distribution controls have been removed. Fiscal subsidies have been reduced and fiscal receipts increased. Improvements to the civil service salary structure have been implemented, public expenditures have been restructured to favor operations and maintenance, health and education, a rolling three year capital expenditure program has been introduced and major rehabilitation programs are being implemented for cocoa, timber and mining. The ERP has received the support of the Bank, the IMF and other donors. Since 1987 the Bank has provided four adjustment credits to Ghana. There has been a positive response. Growth has averaged nearly 5 percent per annum since 1987. External arrears have been eliminated. Stronger fiscal performance has allowed Government to repay its debt to the banking system. 9. The adjustment efforts are continuing at an accelerated pace, however, with the aims of sustaining the improvements and promoting higher growth while maintaining economic stability. The still inadequate level of domestic savings and investment will be addressed. Despite significant liberalization of many aspects of the economy, excessive Government intervention and unnecessary regulation discourage a broad-based supply response. The role of the private sector in influencing policy is minimal. The main adjustment aim now is to promote more dynamic investment. 3 Historical Perspective on the PE Sector 10. Between independence in 1957 and December 1981 Ghana experienced a number of sometimes abrupt changes in Government but the prevailing philosophy over most of the period up to the mid 1980s was for the State to play a major role in the economy and its industrialization. In the first ten years of independence employment in PEs increased more than tenfold from around 11,000 to 115,800. By 1966 cocoa marketing and mining had become virtual State monopolies and PEs dominated the financial and insurance services sectors. More than half of all imports were controlled by the Ghana National Trading Corporation (GNTC) and the Ghana National Construction Corporation dominated the construction sector. The State Farms Corporation had established a number of mechanized farms and Government also owned palm oil and rubber plantations. State owned manufacturing enterprises had also increased in number. 11. During the period from 1966 to 1972 there was a relaxation of the pressures for State intervention in the economy. To improve autonomy the Ghana Industrial Holdings Corporation (GIHOC) was established and took over a number of the PEs. Also a number of Government departments were transformed into PEs, for example the Posts and Telecommunications Administration and the Electricity Corporation. However the sector was already a heavy budgetary burden, contributing little in the form of dividends. 12. 1972 marked a return to the more interventionist policies. Government acquired a majority interest in a number of well established, relatively large foreign owned mining and other enterprises and a large number of relatively small private manufacturing firms were confiscated. The PNDC Government which came to power in 1981 continued the strongly interventionist policy, replacing the management structures of 61 of the largest PEs by "Interim Management Committees". 13. The beginning of the ERP in 1983 marked a significant declared policy change from the strongly interventionist philosophy of the preceding decades. This was brought about by the rapidly deteriorating performance of the PE sector and of the economy in general. In 1983 the PEs occupied a dominant position in a number of industries. The 1984 census showed that public boards and corporations employed around 241,600 people which represented 4.5 percent of total employment and 27.6 percent of formal sector employment. This represented a considerable increase over the 1970 census which recorded PE employment as around 121,000 people. 14. The index of manufacturing production (1977= 100) stood at 35.3 in 1983 with sectors in which State owned enterprises dominated having experienced greater than average declines. Average capacity utilization in the industrial sector in 1984 was 18 percent. In the mid-1980s PE value added per employee was two thirds that of private sector enterprises compared with between 70 and 90 percent over the 1970s. Government Monitoring and Control 15. Ghana's institutional framework for the supervision and control of PEs consists of a multiplicity of agencies with overlapping responsibilities and by entrenched practices that often have gone beyond the intervention authority conferred by legislation. The responsibility for public enterprises is diffused and often uncertain, a circumstance that has complicated the management of the PE Reform Program. The major components of this institutional framework include the instruments of establishment of PEs, the different legal bases for Government's intervention authority, 4 and the public institutions which have been assigned various and varying responsibilities for sector and enterprise management and performance. 16. Within the Government structure, there are seven public authorities/agencies that play varying roles in the supervision and control of PEs. (1) The PNDC and the Head of State are responsible for the enactment of the decrees or executive orders establishing PEs. They are also the authority for the appointment of the chief executives and boards of PEs. (2) The State Enterprises Commission is the nodal agency established by the PNDC to monitor and review PE operations and to advise Government on key decisions concerning PEs and PE policy. (3) By delegation from the Head of State, sector ministries are responsible for overseeing the working of PE boards and to advise the PNDC and MFEP in matters such as PE investments, budgets, and loans and equity contributions from Government. (4) MFEP is responsible for the allocation to PEs of loans, equity and subsidies from Government. It also receives loan repayments and dividends from PEs. (5) The Prices and Incomes Board is nominally responsible for approving the prices of goods and the wage contracts pertaining to PEs. This is perceived by observers to be a function that is being phased out. (6) The Public Agreements Board (PAB) in the Attorney General's Office has lately been active in approving all legal agreements of PEs involving consultancy, procurement, etc. PAB approval covers not only the legal provisions and safeguards, but also the substantive issues concerning agreements. (7) The Ministry of Labor must give prior approval of intended lay-offs of workers before PEs can take action. Recent Trends in Sector Performance 17. The most comprehensive and up to date picture available of aggregate PE sector performance is shown in Table 1 below. The data are based on responses from 127 PEs to the SEC survey of 1990-1991. The aggregate losses of the sector were around 23 billion cedis on a turnover of 362 billion cedis and fixed assets of 1,338 billion cedis. 18. The SEC survey, however, provides data for a single year only and, therefore, does not permit an inter-temporal analysis. Time-series data of a reasonably good quality which is required for such an analysis is available basically for the 14 PEs designated as core by Government and the Bank. Even for these enterprises, data are not perfect but are good enough to provide the basis for a useful analysis. 19. The bulk of the analysis of the financial relations between Government and the PE sector carried out in this report is thus confined to these 14 core enterprises. This includes the rigorous quantification of the financial flows between Government and the PEs during 1985-89 given in Tables 3 and 4. In addition, detailed financial data is provided in Tables B1-B14 in Annex II for these core enterprises. 20. Although the focus is on the core enterprises, wherever data availability has permitted, the analysis of the financial relations between Government and PEs takes into account a larger segment of the sector. In addition, Tables A15-A21 in Annex HI contain data on some important non-core enterprises. 5 TABLE 1. GHANA: PROFILE OF THE PE SECTOR IN GHANA BASED ON SEC SURVEY OF 1989 Variable Figres for 1989 (in million cedis) 1. Total fixed assets 1,337,924 2. Total turnover 362,161 3. Total debts outstanding at end 1989 272,984 of which: domestic debt 149,765 foreign debt 123,219 4. Total debt guaranteed by government 120,316 of which: domestic debt 11,882 foreign debt 108,434 5. Total debt repayments during the year 22,670 of whigh: domestic debt repayment 12,081 foreign debt repayment 10,589 6. Total borrowing during the year 36,686 of which: domestic borrowing 14,134 foreign borrowing 22,552 7. Total amount of dividends paid 1,225 of which: to government 671 to others 554 8. Total amount of taxes paid 4,769 9. Total operational expenses 195,622 10. Total wage payments 38,885 11. Total losses before taxes 22,896 12. Total investment 543,229 13 Total savings 5,453 14. Total export earnings 109,978 5QrQ: 1990 SEC survey of PEs. 6 21. Of the 14 core PEs, 4 are in the public utility sector. These are the Electricity Corporation of Ghana (ECG), the Volta River Authority (VRA), the Ghana Water and Sewerage Corporation (GWSC) and the Ghana Posts and Telecommunications Corporation (GPTC). Three are related to the petroleum industry: the Ghana Oil Company (GOIL), the Ghanaian Italian Petroleum Company (GHAIP) and the Ghana National Petroleum Corporation (GNPC). Four are in the transportation sector: i.e. the Ghana Airways Corporation (GAC), Ghana Railway Corporation (GRC), the State Shipping Corporation (SSC - formerly the Black Star Line) and the Ghana Ports and Harbours Authority (GPHA). Two are procurement agencies: the Ghana Supply Commission (GSC) and the Ghana National Procurement Agency (GNPA). Finally, there is the Ghana Cocoa Board (COCOBOD). 22. These 14 core PEs accounted for roughly 60% of employment, 72% of sales value and 67% of value-added by the PE sector in 1989. In terms of sales revenue, the COCOBOD is by far the largest, earning about 90 billion cedis in 1989. Other large PEs (with their 1989 sales revenues in parentheses) are the VRA (29 billion cedis), GAC (20 billion cedis) and GOIL (16 billion cedis). Data on GNPC are not available for 1989, but in 1987 its sales revenue exceeded 26 billion cedis. Total sales revenue earned by the core PE sector as a whole (except GNPC) in 1989 was about 195 billion cedis. Further details of the financial performance of the core PEs is given in Tables BI - B14 in Annex II. 23. Table 2 gives a summary of the recent financial performance of the core PEs. Given the deficiencies in the valuation of the capital stock of PEs in Ghana, indicators of financial performance based on capital employed may be misleading. Hence, profit rates as percentage of sales revenue have been used as indicators of financial performance. Two measures of profitability are presented in the table - the operating profit/sales ratio and the net profits/sales ratio.' The former indicator is not affected by subsidies and other non-operational income and non-operational expenditures, and hence provides a more accurate picture of the financial performance resulting from the operation of the enterprise than the net profits/sales ratio which is obtained after adding non-operational income including subsidies. The latter ratio, however, is a better indicator of the overall financial performance of enterprises and is thus also analyzed here. 24. In terms of operational profits, the 14 core PEs taken as a whole managed to earn profits in all the five years covered in our analysis, i.e. 1985-89. There is no significant trend in performance. Apart from a deterioration in 1987 when profits were barely earned,2 the ratio of operational profits to gross sales revenue remained more or less stable - between 11.4% and 13.6% - until 1988, before increasing somewhat in 1989. The same is true for the absolute volume of real profits earned. In all years, except 1987, operational profits were greater than net profits suggesting that non-operational income was not adequate to cover non-operational costs. 25. These aggregate figures, however, mask substantial variations between PEs (see detailed tables in Annex II). Four PEs, COCOBOD, GOIL, GNPA and GPTC, earned profits in all the five years. However, in two of these, COCOBOD and GNPA, there has been a steady deterioration in performance in recent years. The operational profits/sales ratio of COCOBOD, fell from 48% in 1985 to 22% in 1989, while that of GNPA fell from 41% to 20% over the same period. 26. At the other end of the spectrum, two enterprises, both in the transport sector - the Ghana Railways Corporation and the State Shipping Corporation - did not earn any profits during 1984-89. 7 GRC's performance has been particularly bad, its operational loss/sales ratio exceeding 100% in 1985 and 1986 and always being above 50%, and although there has been some reduction in the loss ratio in recent years, it still exceeded 50% in 1989. In absolute terms, GRC's total operational losses during 1985-89 were about 4.4 billion cedis. 27. All other enterprises have earned profits in some years and incurred losses in others. Within this other group, some have improved their performance in recent years. These include the VRA which has moved from an operational loss/sales ratio of 34% in 1984 to a profit ratio of 32% in 1989, the ECO which reduced the loss ratio from 124% in 1986 to 57% in 1988 before earning profits in 1989, the GPHA which moved from incurring huge losses of 76% of sales in 1986 to profits of 24% in 1989. The trend of improvement is less steady in the case of the GWSC but, on average, its losses were less during 1987-89 than in the preceding three years. 28. Among other factors, the massive devaluations of the Ghanaian currency have had a major impact on the financial performance of some of the most important PEs. The huge losses of the ECG during 1986-88, for example, were caused mainly by a significant increase in costs, which was induced by the devaluation, and not matched by equivalent increases in electricity tariffs. Devaluation, however, had a favorable impact on the financial performance of PEs which export all or part of their output. The enterprises which benefitted include COCOBOD and the VRA. The latter, for example, benefitted from the favorable impact of devaluation on the value of sales to neighboring countries. 29. Apart from the poor financial performance of many PEs, another matter of concern is the poor degree of capitalization of some PEs. Some enterprises with good financial performance, such as COCOBOD and the VRA have debt-equity ratios of below 30/70, but others have much higher debt-equity ratios. For example, the GHAIP had a debt-equity ratio of 86/14 in 1987 while the Posts and Telecommunications Corporation had a ratio of 78/22 in 1988. There has, however, been some improvement in the capital structure of some PEs in the most recent years. ECG, for example, was seriously undercapitalized until recently. At the end of 1986, total equity was actually negative. The situation improved in 1987 with a reevaluation of the fixed assets and, by end 1988, total equity had reached about 6 billion cedis, although the government's own equity was a mere 17 million cedis. In recent years, however, ECG's capital structure has improved following restructuring which included the conversion of ECG's debt to the government and the VRA, to gove**iment equity, in 1988. By end 1989, the government's equity had reached 10.8 billion cedis while total equity was 20 billion cedis; the total debt being 17.6 billion. 8 Tahle 2; FINANCIAL PERFORMANCE OF 14 CORE PEs 1985 IM~ 1987 2I 1M~ (in million current cedis) 1. Operational Profits' 5907d 9492 3460 16024 34397* 2.. Net Profits' 21, 8693 10989 6980 33365* (in million constant 1985 cedis) 1. Operational Profits 5907' 7618 1986 7003 13230* 2. Net Profits 21d 6976 6308 3051 12833* 1. Operational profits as % 13.6' 11.8 2.8 11.4 17.20 of sales revenue 2. Net profits as % 0.04d 10.9 9.1 4.9 16.60 of sales revenue a Operational profit is profit earned from the operations of the enterprise. It excludes subsidies, non- operational income and non-operational expenses. b Net profit = operational profit + subsidies + non-operational income - non-operational expenses c Constant figures obtained by using the Ghanaian CPI as given in IMF, International Finance Statistics. d Excludes Ghana Ports and Harbors Authority, for which 1985 data are not available. * Excludes Ghana National Petroleum Corporation, for which 1989 data are not available. 9 III. BUDGETARY BURDEN OF THE PE SECTOR 30. This section analyzes the financial flows, both direct and indirect, between Government and PEs for the period 1985-89. As mentioned before, rigorous estimates of the financial flows were done for 14 core enterprises; these estimates are presented in nominal terms in Table 3 and in constant 1985 cedis in Table 4. While the bulk of the analysis revolves around these estimates, information on the non-core enterprises are provided wherever available. Despite the data limitations it is unlikely that our major conclusions would be significantly altered if more comprehensive data were available; anecdotal evidence suggests that they would be reinforced. Direct Flows from Government to PEs 31. Subventions. Subventions are subsidies which are explicitly included in the budget on a recurrent basis and constitute an "above-the-line" entry.? They are disbursed on a quarterly basis drawn down from the amount approved in the annual budget. Subventions have not been an important means of transfer of funds to PEs in recent years and their importance is steadily declining. There are currently 167 subvented institutions but very few of them are PEs. Most of these institutions, which are organized along ministerial lines, are statutory boards that provide discrete public services which fall under the respective ministry's jurisdiction, such as schools, research institutes, correctional institutes, etc. 32. Of the core PEs, only four, GWSC, GPTC, GRC and SSC, received any subventions during the period 1985-89. Total subsidies to these enterprises amounted to about 34 million cedis during this period with the annual outflow steadily falling, both in nominal as well as real terms, since 1986. In 1988 and 1989, for example, only the Railways Corporation received any subsidies; the amount transferred being a little over 2 million each year. Among the non-core enterprises, six - the Bast Fibre Development Board, VORADEP, URADEP, the Ghana Highway Authority and the Irrigation Development Authorities - were subvented in the 1989 budget. Total subventions to these came to around 3.4 billion cedis in 1990, which represents 18% of the 1990 budget for subventions, or around 2 percent of total Government expenditures. In general, the share of PE subventions in the Government budget has declined in recent years. 33. For a small number of PEs there is also provision in the budget to support their investment program through the capital expenditures entry. Data on this are, however, not readily available. 34. Equity and Loans. A more important means of transferring funds to the PEs has been through equity contributions and new lending. The Government is currently not making equity investments in new PEs since there is a moratorium on the creation of new PEs, but PEs that are distressed or have particular cash flow needs have received transfcrs, which for accounting purposes, are entered either as equity or loans. Equity contributions to the core PE sector totalled about 750 million cedis during 1985-89 (Table 3). In real terms, there appears to be a declining trend, with equity transfers falling from about 192 million cedis (at constant 1985 cedis) in 1985 to 38 million cedis in 1989 (Table 4). There has also been a decline in equity contributions to the entire PE sector in recent years. 10 Table 3: FINANCIAL FLOWS BETWEEN Government AND 14 CORE PEs: 1985-89 (in million current cedis) 185 1986 &8_7. 1988 1989 Fr3m Government to PEs 1. Subventions 680 1306 942 216 215 2. Equity contributions 192 100 148 206 101 3. Loans 250 1854 3697 3424 4997 Total direct flows from Government to PEs 1122 3260 3034 3061 4958 From PEs to Government 1. Direct taxes paid 334 646 648 300 0 2. Dividends paid 0 4 15 39 15 3. Loan repayment 0 0 0 24 24 Total direct flows from PEs to Government 334 650 663 363 39 Net direct outflow from Government to PEs 788 2610 1944 2639 4642 B. Indirect Flow From Government to PEs 1. Tax arrears 404 2610 746 2212 5697 2. Tax exemptions 215 3660 7923 4026 11467 3. Dividend arrears 95 687 927 615 1697 4. Payment by govt. due to defaults on guaranteed loans 104 536 1663 2128 4011 Total indirect flows from govt. to PEs 818 7493 11259 8981 22872 Net outflow from govt. to PEs 1606 10103 14293 12042 27830 Total Government expenditures 43704 95587 100915 147019 162974 SOURCE: Estimated from data provided by the Ministry of Finance and Economic Planning, the Office of the Controller and Accountant General, the Internal Revenue Service and the State Enterprises Commission. 11 TAblg 4; FlNANCIAL FLOWS BETWEEN Government AND 14 CORE PEs; 19849 (in million constant 1985 cedis) 1985 1987 1988 128 From goverment to PEs 1. Subventions 680 1048 541 94 82 2. Equity contributions 192 80 85 90 38 3. Loans 250 1497 870 1127 1678 Total direct flows from Government to PEs 1122 2615 1496 1312 1800 From PEs to Government 1. Direct taxes paid 334 518 372 131 0 2. Dividends paid 0 3 9 17 6 3. Loan repayment 0 0 0 10 9 Total direct flows from PEs to Government 334 521 381 158 15 Net direct outflow from Government to PEs 788 2094 1115 1154 1785 B. Indirect Flows From Government to PEs 1. Tax arrears 404 2094 428 967 2191 2. Tax exemptions 215 2937 4548 1759 4410 3. Dividend arrears 95 551 532 269 653 4. Payment by govt. due to defaults on guaranteed loans 104 430 955 930 1543 Total indirect flows from govt. to PEs 818 6012 6463 3925 8797 Net outflow from govt. gLgg 1606 8106 7579 5078 10582 Total Government expenditures 43704 76715 57931 64257 62682 SOURCE: Estimated from data provided by the Ministry of Finance and Economic Planning, the Office of the Controller and Accountant General, the Internal Revenue Service and the State enterprises Commission 12 35. There appears to be no well-defined criterion for deciding whether a transfer is to be counted as equity or as a loan. However, Government officials indicated that the Government is generally reluctant to treat transfers made to PEs with poor financial prospects as equity and thus classifies these as loans. It must, nonetheless, be pointed out that a substantial part of the Government's equity contribution during 1985-89 has been in enterprises which have made little or no dividend payments to Government. 36. Of the three types of direct flows from Government to PEs identified above, loans have been the most important. Disbursements of new loans to core PEs totalled about 14 billion cedis in nominal terms during 1985-89, and 5 billion in constant 1985 cedis. Moreover, the trend is that of a steady increase both in nominal and real terms. Almost all of the lending to the core PEs has gone to three enterprises, SSC, GWSC and GPTC. Loans to the non-core PE sector has also increased in both nominal and real terms over the same period. Total loans to the PEs (core + non-core) during this period was 19 billion in nominal terms and 11 billion in constant 1985 cedis. As we see below, the substantial amount of loan disbursements to PEs has not yet been matched by a respectable loan repayment record. Flows from PEs to Government: 37. Taxes. Of the 14 core enterprises, four, i.e. the ECG, the VRA, the GWSC and COCOBOD, are exempt from payment of income taxes. The remaining 10 are obliged to pay but rarely do. During 1985-89, for example, total taxes paid by these enterprises amounted to only 1.9 billion cedis (Table 3), or barely 15% of the total amount due. Of the core PEs which have been delinquent with their tax payment obligations, the worst offenders are the GPTC and the GNPA. Neither of these enterprises paid any taxes during 1985-89 despite earning profits of more than 12 billion cedis. Most of the taxes paid by the core PE sector have come from the GOIL. Other tax payers are the GAC, the GHAIP, the GPHA and the GSC. Data on tax payments by other PEs is more patchy but whatever evidence exists point to the same conclusion, i.e. that the tax payment record of the PE sector has been very poor. According to data provided by the Accountant General, a total of 6.3 billion cedis, or 2.7% of total Government revenues, was paid by PEs in the financial year 1989. Data from the SEC survey of 1989 suggests that less than half, or 60 out of the 127 reporting enterprises, paid any taxes during 1989. Total payment of taxes by these enterprises was about 4.76 billion cedis. 38. Dividends. The performance of PEs with regard to dividend payments is even worse. In no year, during 1985-89, have more than 26 enterprises paid any dividends; moreover, the number of enterprises paying dividends appears to have gone down steadily in recent years. In nominal terms, dividend payments, which reached a peak in 1987, have totalled only 5.1 billion cedis. This is insignificant compared to the Government's equity investment in the PEs and even compared to the profits actually earned by the enterprises. More than half of the dividend payments came from just two PEs, the Ashanti Goldfields Corporation and Lever Brothers Ghana Ltd, which together paid about 3 billion cedis during 1985-89. Apart from the core PEs, the rest of the payments are accounted for mostly by joint venture companies with a strong commercial orientation, such as the breweries, timber, insurance and aluminum companies. 39. The performance of the core enterprises, where a substantial portion of the Government's investment is locked up, has been particularly dismal. Despite earning aggregate net profits of over 82 billion cedis during 1985-89, the core PE sector paid only 73 million cedis in dividends during 13 this period (Table 3), all of which came from only three core PEs, GOIL, GHAIP, and GAC. Major defaulters include COCOBOD and VRA. The poor dividend payments record implies a substantial amount of implicit flows from the Government to the PEs. 40. Dividends are also paid to the State banks by companies in which they hold equity. These payments do not appear on the Government ledger but do indirectly provide Government income. Total dividend payments to the State banks between 1984 and 1989 amounted to 236 million cedis. Data is unavailable on the breakdown for each year. 41. One explanation given for the low tax and dividend payments is the poor capital base of the PEs, an issue discussed earlier, and the consequent need for capitalization. It appears that the PEs are using unpaid taxes and dividends to build up their capital base, in particular their working capital. The Government's willingness to ignore such defaults particularly when the Government itself has owed money to the PEs, has also been a contributory factor. One explanation given for the very poor tax payment record of the GPTC, for example, is the huge Government debt in unpaid bills to the enterprise. Officials at both the Ministry of Finance as well as GPTC admitted that this was a reason why the Government did not press for regular tax payments. While there is some logic to this arrangement, this is clearly not in the interests of transparency and financial discipline. 42. Similarly, while it is true that the capital base of many enterprises is weak and there is a need for recapitalization, it is in the interests of transparency and financial discipline that the recapitalization is done explicitly rather than covertly through non-payment of taxes, dividends and other obligations. The Government appears to be aware of the need for recapitalization as well as the benefits of a more explicit method of improving the capital structure. The SEC indicated that one of the objectives of the proposed cross-debt study would be to carry out a rigorous evaluation of the recapitalization requirements of individual PEs and, in the light of this, design the program for the settlement of cross-debts between the PEs and the Government and between the PEs themselves. 43. Loan repayments. While substantial amounts of money have flown from the Government to PEs in the form of loans, reverse flows in the form of loan repayments have been negligible, at least for the core PEs. Total repayment by the core PEs on direct Government loans was only 48 million cedis during 1985-89 (Table 3). Indirect Flows From Government to PEs 44. Arrears in tax payments The poor tax payment record of the core PEs and tax exemptions granted to some of the more profitable PEs implies a substantial amount of implicit outflow from Government to the core PE sector. Arrears in payments for a particular enterprise in a particular year have been estimated by assuming a company tax rate of 50% and applying it to the net profits earned by the enterprise in that year to obtain a measure of taxes due and then deducting actual payments from this.4 On this basis total taxes due from the core PE sector during 1985-89 were about 13.6 billion cedis; given that only 1.9 billion was actually paid, this means an implicit financial flow of about 11.6 billion cedis from the Government to the PEs in the form of unpaid taxes. The tax payment record has also deteriorated over time as the amount of taxes paid has fallen steadily as a proportion of taxes due. 45. While the Government is losing a substantial volume of potential revenues due to non- payment of taxes by PEs which are supposed to pay, it is losing an even larger amount through 14 exemptions granted to the four core PEs, particularly since these are among the major profit earners. Assuming a 50% company income tax rate on net profits, the four exempted PEs would have been obliged to pay a total of about 27 billion cedis between 1984 and 1989, against which nothing has been paid. The total amount of tax revenue forgone by the core PE sector, in the form of exemptions and tax arrears, is thus about 38 billion cedis for the. 1984-89 period (Table 3). The amount of revenue foregone in this manner has grown in recent years, not only in nominal but also in real terms, with an improvement in the financial performance of these enterprises. 46. Arrears in dividend payments The poor dividend payments record of the PEs means that a substantial amount of money has implicitly flown from the Government to the PEs. A rough estimate of the arrears was obtained by assuming that each enterprise which makes profits should pay 5% of its net profits as dividends to the Government and then computing the difference between this amount and actual payments. The result of this exercise, reported in Tables 2 and 3, shows that about 4 billion cedis were "transferred" by Government to the core PEs in the form of unpaid dividends. Even this somewhat conservative estimate of unpaid dividends yields an amount which is double that of the total direct flows from PEs to the government. A similar estimate of unpaid dividends could not be made for the entire PE sector due to lack of data on net profits earned.' 47. Arreas in repayment of loans. The poor record of repayment on direct Government loans described above suggests huge arrears in loan repayments which would constitute another important type of implicit flow from Government to PEs. Unfortunately, rigorous estimates of this flow could not be made, even for the core PEs, due to non-availability of information on the amount of repayment due each year. A comparison of the stock of debt at the beginning of each year with actual payments during the year, however, suggests that arrears were very substantial in all years. 48. Data, however, exists to show that the Government has had to make substantial amounts of payments on behalf of PEs due to defaults by the latter on Government guaranteed loans. As Tables 3 and 4 show, at least 8 billion cedis were paid out on this account for core PEs during 1985-89 with the amount increasing in both real as well as nominal terms over the period. 49. Cross-dts. A study covering cross-debts between 18 PEs, carried out in 1987, found that as of June 30, 1986, the 18 PEs owed 5.23 billion cedis to each other. Their cross-debts with the Government were as follows: i) Owed by 18 PEs to Government: 40.2 billion cedis of which: unpaid taxes and duties 6.0 unpaid dividends 0.1 loans outstanding: direct 18.4 domestic 2.3 foreign 16.1 loans outstanding: on-lent 15.3 loans outstanding: guaranteed 0.4 ii) Owed by Government to 18 PEs: 3.6 15 of which: goods sold and services rendered 1.7 subsidies 1.2 equity -and capital contribution 0.7 " iii) Net owed by 18 PEs to Government 36.6 In addition, the PEs owed 14.3 billion cedis to others. including 12.4 billion cedis to domestic banks. A Cross-debt clearing house was set up in 1988 covering the Government and three PEs, the ECG, the VRA and the GWSC. Settlements were made under this scheme during 1989 and 1990. 16 IV. RECENT REFORM MEASURES Economic Recovery Proram 50. In developing its Economic Recovery Program in 1983, Government recognized the need to undertake a comprehensive reform of the PE sector. A diagnostic survey of the PE sector was undertaken with UNDP finance. In parallel, the Bank approved a PPF (US$400,000) in August 1984 for related project preparation activities. Using the study as a base a Task Force established in 1985 formulated a comprehensive PE reform program whose major thrusts were intended to include: - policy reforms to ensure PEs operate in a commercial manner, including decontrol of prices, increased competition, new policies and procedures on Government financial support for PEs, and strict limits on the creation of new PEs; - institutional and legal reforms aimed at improving PE managers' autonomy in day-to-day operations while also strengthening their accountability to Government through restructuring the SEC; - rationalization of the PE sector through divestitures and mergers to reduce the financial and managerial burden upon Government; - rehabilitation of selected potentially viable PEs deemed critical to the success of the ERP; - improvements to PE management and efficiency through staffing reductions, training programs for r anagers and accountants, installation of MIS, and preparation of corporate plans and fina.cial audits; and - restoring financial solvency and discipline by clearing cross-debts and arrears and by establishing clear guidelines and procedures for Government-PE financial relations. Bank Support for PE Reform under the Structural Adjustment Program 51. The program has been supported by the First Structural Adjustment Credit (SAC I, 1987), the PE project (1988), and subsequently by the Second Structural Adjustment Credit (SAC II, 1989). The most important actions taken under these operations have been as follows: * restructuring and strengthening of the State Enterprises Commission (SEC) as the Government's oversight agency and focal point for development and management of PE reform programs - preparation of corporate plans and performance agreements for 14 priority PEs and updating of their audited accounts - review of PE policy issues on pricing, staffing, and procurement - reconciliation of cross debts of 3 utility PEs - development of a guideline on Government PE financial transfers 17 - creation of a Divestiture Implementation Committee (DIC), to manage and implement the divestiture program, and divestiture of 27 PEs - moratorium on creatin of new PEs - provision of technical assistance and logistical support to strengthen the implementation capacity of the SEC and DIC. 52. In developing the action program under SAC I and SAC I it was clear that, given the large size of the sector and the Government"s limited implementation capacity, it would not be possible to address all the problems of the sector within the relatively short time frame of these operations. Accordingly, the strategy in this first phase was to establish an appropriate policy and institutional framework, target specific actions for efficiency improvements on a core group of 14 PEs which were selected on the basis of their financial and budgetary importance, and to divest a number of PEs from an initial list of 30. The 14 PEs accounted for approximately 100,000 employees, about 60 percent of the total PE Sector employment. Under the current SAC III the Government is continuing with these reforms, implementing a new PE classification, streamlining tariff and price setting policies, improving PE accounts and signing further performance agreements. 53. The major actions under SACs I and II included strengthening the SEC as Government's PE oversight agency, divestiture of 30 PEs in the first phase of a rationalization program, sector-wide staff reductions (target of 5 percent annually over two years) preparation of up-to-date audited financial statements, medium-term corporate plans, and performance agreements with Government (based on the corporate plans) for the 14 priority PEs, design and implementation of a performance monitoring and evaluation system to be administered by the SEC, clearance of cross-debts for the 14 priority PEs, establishment of guidelines on Government-PE financial relations and agreed levels of financial support, and a review of the legal and institutional arrangements with a view to increasing PE autonomy and clarifying the respective roles of the SEC, MFEP, sector ministries and sector commissions and boards vis-a-vis the PE sector. 54. SAC M which became effective in July 1991 is supporting continued reforms of the PE sector including annual updating of the performance agreements and audits for 13 PEs, inclusion in these agreements of necessary measures to improve tariff setting, autonomy in pricing, staffing and procurement, settling of cross-debts, retrenchment of excess staff and other cost saving measures, classification of all PEs according to the type of reform action required, identification of complementary actions to improve the policy and legal framework for PEs, continuation of the moratorium on creation of new PEs, acceleration of the divestment program including adherence to an agreed timetable and satisfactory procedures to divest some 40 enterprises. The divestiture program is to include the whole range of privatization options including public offerings through the newly established stock exchange. Public Enterprises Project 55. The PE Project has three major components: a. Strengthening of management of PE Reform Program strengthening of SEC's capability to manage the PE reform program, monitor and 18 evaluate PE performance, and advise on major PE issues and policies; - streamlining of the institutional framework governing the PE sector, - assessment and adjustment of the legal and policy framework governing PEs, in order to increase PE autonomy and accountability and improve performance; and - training of SEC staff, rental and construction of SEC offices and acquisition of office equipment and vehicles for SEC. b. Divestiture of PEs. Responsibility for implementing the divestiture program was initially given to an ad hoc group organized within SEC. In December 1989 divestiture responsibilities were re-assigned to the newly created Divestiture Implementation Committee (DIC). The SEC remains responsible for evaluating PE performance and for making recommendations concerning the restructuring, rehabilitation, divestiture or closure of individual PEs. c. PE restructuring program. This included the establishment of a fund to be managed by SEC to assist selected PEs (including Black Star Line, Ghana Airways, State Transport Corporation, Omnibus Service Authority and City Express Service) to prepare and implement restructuring programs and corporate plans with a view to ach;eving financial viability and operational and managerial improvements. A number of specific types of expenditures are anticipated under this part of the credit agreement: - viability studies - market forecasts - financial and management audits - staff inventories and manpower redeployment plans - management contracts or twinning arrangements - training of PE managers and staff - office equipment to improve management information, accounting and budget system. 19 V. MAJOR ISSUES 56. Despite the efforts at PE reform in Ghana over the last six years, there has not yet been a substantial turnaround in the performance of the PE sector. On the contrary the data presented in this report on the budgetary burden of the sector show a continued deterioration in performance. Particularly alarming is the steady growth in indirect transfers from Government to the PEs and the continued lack of financial discipline and reliable financial reporting. Efforts to improve the policy environment of the sector, to improve PE autonomy and accountability, to strengthen monitoring of the sector and to divest commercial and industrial PEs have also been slow in bringing concrete results. These and other issues affecting the sector are examined in this section. The analytical background to the conclusions is contained in the Annexes to this report. Budgetary Burden and Financial Discipline 57. Section III of this report described in detail the growing burden of the PE sector on Government finances. This burden is not apparent if we examine only direct subsidies - these are not very significant and have declined in recent years - but becomes clear when the totality of flows is taken into account. Direct outflows in the form of equity transfers and loans, which, in the Ghanaian context, are often subsidies in disguise, have been important and, moreover, rising. Of even greater concern, is the substantial and rising amount of indirect outflows from Government, resulting from the failure of PEs to meet their financial obligations, and the adverse implications which the growing importance of such flows have for financial discipline and transparency in the financial relationship between Government and the PE sector. 58. Also alarming is the fact that such outflows are not restricted to enterprises with a poor financial performance but have also typified the Government's financial relationships with profitable PEs. This suggests that there is no straightforward relationship between the financial performance of Ghanaian PEs and the degree of their dependence on Government transfers; an improvement in financial performance of an enterprise is no guarantee that it will make a positive contribution to the Government budget or, at least, cease to be a burden on it. Given this situation, introduction of greater discipline in the financial relations between Government and the PEs needs to be given high priority in the agenda for reform in the Ghanaian PE sector. 59. The introduction and maintenance of greater financial discipline will require greater transparency in financial transactions. There is no mechanism whereby enterprise level data on all types of financial flows, direct and indirect, between PEs and the Government, is collected on a regular and systematic basis and then consolidated and analyzed to provide a comprehensive picture of the financial relationship between the Government and the PE sector. Such a mechanism is urgently needed. It would not only help in creating awareness about the need for greater financial discipline but would also lay the basis for setting precise quantitative targets, a prerequisite for financial discipline. 60. Most of the required data exist but are scattered in various Government offices, particularly those under the Ministry of Finance and Economic Planning, and are not easily accessible. With some coordination, however, these data could be brought together to form the basis of a comprehensive monitoring system. This would be an appropriate time to initiate such an exercise. The budgetary burden of the PE sector has reached an intolerable level. There is an awareness within the Government agencies of the need for such monitoring systems and in many offices some capacity 20 for comprehensive monitoring, in the form of computers and qualified staff assigned to work with these, has already been established. The existence of such infrastructure makes the task of developing a good reporting system relatively easier. The challenge now is to make full use of the opportunities. Classification of PEs for Action 61. Government is in the process of classifying the PEs according to the type of reform action required. In December, 1990, the State Enterprises Commission circulated a preliminary classification of some 345 PEs to sector ministries. The main aim of the classification is to identify which PEs will remain in the Government portfolio and which will be divested or liquidated. 62. The draft PE classification at present under consideration which has taken into account the responses of the sector ministries contains a number of inconsistencies. These relate mainly to the large number of PEs which are considered to have an important policy purpose and therefore are not considered as candidates for divestment. It is being left up to the sector ministries, to some extent, to decide on the future of the non-core PEs in their portfolios (core PEs have already been designated by Government to be retained for the time being in the public sector). There is therefore a risk that sector ministries will elect to maintain the status quo with a relatively large number of PEs under their control, thereby negating the aims of the reform program. Pricing Policy 63. Since the early 1960s, when the Government adopted the philosophy of a planned, regulated and centralized economy, the PE sector has shown a high degree of dependence on ministries and other centralized agencies for key business decisions. Ministries have performed corporate planning functions including the specification of roles, activities and trading relationships among enterprises. Centralized toards and agencies were established to manage the procurement function, to review production costs and to set producer margins and prices. In early 1991 the legacy of this history stands out clearly. By and large, public enterprises are not being allowed to plan and manage basic business functions which continue to be managed by centralized Ministries and agencies. This is encouraged by the political directorate, and by the Ministries and agencies themselves who are reluctant to give up their long established roles. 64. As part of the Economic Recovery Program it is the official policy of Government to progressively reduce the role played by Government in price administration and control. In implementing this policy a number of measures have been taken, including the reduction of formal price control by the Prices and Incomes Board (PIB) to only three items in 1991 - wheat flour, cement and printed cotton textiles. Nevertheless, despite this formal renunciation of interventionism, in practice a significant degree of price control and administration continues to be exercised by sector Ministries, PIB and the Revenue Secretariat. 65. In many areas the final determination of allowable rates, tariffs and charges is taken at a senior political level where there is a consistent bias to setting approved prices below full cost recovery levels. The argument at this level is in terms of making public services accessible and affordable to people of low income. Examples include bus and rail passenger fares, daily newspapers, water rates and electricity. Clearly in the area of PE pricing the spirit of the ERP is not evident. 21 66. In the agricultural sector Government intervenes actively in the pricing mechanisms of COCOBOD and the Ghana Food Distribution Corporation (GFDC). With COCOBOD Government's interest is to maximize Government revenues from taxes while not unduly reducing incentives to cocoa growers. With GFDC the tendency has always been for Government to compel GFDC to buy food crops from growers at a relatively high price and to sell to consumers at a relatively low price, with disastrous effects on the finances of the enterprise. GFDC is also expected to fulfill important policy purposes such as grain storage for food security but is not allowed to recover the costs of these activities through the pricing mechanism. 67. In the energy sector there is rigid Government control qver petroleum products prices and margins. Pan-territorial pricing is applied and there is considerable cross-subsidization between products and geographical areas. The price charged for electricity by VRA to the ECG covers VRA's costs. However the price that ECG is allowed to charge consumers does not cover ECG's costs. 68. In the surface transport sector all tariffs, private and public, are set by the Ministry of Transport. Transport operators state that they are never asked for cost information and that the tariffs are therefore set on some other basis. All the PEs in the surface transportation sector, including City Express, State Transport Corporation and the Omnibus Service Authority are in financial difficulties. 69. At the enterprise level there is, generally, a serious lack of current and reliable information that would permit an enterprise to properly cost the goods and services produced. Idiosyncratic accounting practices tend to understate the capital costs of production and the treatment of labor as a fixed rather than a variable cost, and the basing of prices on recovery of variable costs, further distort the perceptions of enterprise management. 70. In summary the main policy issues in the areas of pricing affecting PEs are: * continued excessive interventionby Government in pricing decisions of PEs including residual price controls still maintained by the Prices and Incomes Board - lack of transparency in the relationship between Government and enterprise in the case of subsidized, or below-cost goods or services provided at the direction of Government and the related issue of cross-subsidization within an enterprise; - deficiencies in financial and cost accounting information at the enterprise level; - for the monopolies, the need for a pricing system which allows a reasonable return on investment while protecting consumers and encouraging improvements in efficiency. 71. Further details of issues in these areas are given in Annex IV to this report. Procurement Policy 72. Many of the interventionist approaches to PE pricing mentioned above are also evident in Government's appro h to PE procurement. Ghana still has a number of centralized procurement agencies and there are signs that their control of purchasing for PEs is increasing. Government's 22 main declared motives for maintaining this control are concerns about "suspected irregularities" in procurement, including over-invoicing, favoritism in the awarding of contracts, and irregularities in tender calls and review of bids. 73. The activities of these agencies have discouraged many PEs from developing their own purchasing expertise. They have taken decision making away from PE managers in this important operational area thereby reducing the extent to which the managers can be held accountable for performance. They have also produced delays in procurement of important materials and equipment and may also have resulted in goods of inappropriate specifications being purchased. 74. The main agencies involved in centralized procurement are the Ghana National Procurement Agency (GNPA), Ghana National Petroleum Corporation (GNPC), Ghana Supply Commission (GSC) and the Ghana Publishing Corporation. GNPA imports bulk commodities designated as "essential" by the Ministry of Trade and Tourism. Only in the supply of wheat does GNPA have a de facto monopoly. GNPC has a monopoly on the importation of crude oil and refined petroleum fuel products. GSC's powers were recently increased by the 1990 GSC Law which has given GSC the monopoly on procurement of supplies and stores for all PEs, a step that is directly opposite to the increases in autonomy f:r PE managers that the PE reform program is intended to support. Since 1984 the GPC has had a monopoly on all Government printing and stationery procurement. 75. In addition to the activities of these agencies there are number of other examples of Government intervention in procurement which are encouraging inefficiencies and compromising enterprise autonomy. Examples are the existence of vertically integrated PE groupings where a given PE depends for its existence on being the sole supplier to another PE. This is the case, for instance with the supply of kenaf and kenaf sacks to the COCOBOD. 76. In the cluster of public enterprises involved in the importation, production and marketing of cement, wheat and flour there is a complete lack of autonomy in both pricing and marketing decisions. Effective control by Government over raw material sourcing, pricing and product distribution, means that the performance of GNPA, GHACEM, TFCC as well as bakeries and feed mills dependent upon TFCC for raw materials remains highly controlled and constrained. PE management has no control over these critical business parameters. Employment and Compensation Policy 77. Issues relating to employment policy are of crucial importance to the future of the PE reform program. Overemployment is one of the main reasons for PE inefficiency and the unaffordability of excessive end-of-service benefits payable to retrenched employees is a major obstacle to the initiation of enterprise restructuring and privatization. 78. Employment Levels and Retrenchment. The need for rationalization of workforce structures and reduction of staffing levels in the PE sector has been a critical factor in the reform program since the outset. But redeployment efforts to date have been viewed by management and unions largely as exercises to shed undesirable staff. Personal characteristics of the worker - poor health, physical infirmity, poor attitude - have been the dominant criteria for identifying redundant staff. There appears to be little recognition at the enterprise level of inappropriate ratios of administrative to production staff and of unnecessarily large complements of clerical and support staff. 23 79. Despite an overemployment problem of crisis proportions, redeployment activity slowed to a virtual halt after 1987, with the completion of the COCOBOD retrenchment of some 30,000 workers. Less than 22 percent of the sector retrenchment planned for 1989 was actually carried out and some 22,000 workers identified as redundant remain on PE payrolls. The inability to pay large end-of-service benefits (ESBs) is the reason given for the failure to continue with workforce rationalization measures. Outstanding and unpaid ESBs for workers actually redeployed to date stand at 10 billion cedis (US$ 25 million). 80. Enterprise management generally reports that they lack the autonomy to make staffing decisions. About one-quarter report that ministerial approval is required for appointments to middle rank and lower level positions. Most enterprises lack both the capacity and the knowledge of job classification and functional review approaches to the determination of workforce requirements. Among the consequences are such common problems as 18 drivers for 5 cars, a proliferation of meaningless grade and occupational classifications, and irrational ratios of support and management or administrative staff. 81. The main policy issues relating to employment are the following: a. the lack of management autonomy in decisions to hire, discharge or temporarily lay off employees; b. inappropriate employment and occupational classifications and structures; c. the failure of a costly effort to redeploy redundant staff to contribute significantly to workforce restructuring; d. the absence of a temporary layoff/recall option in employment contracts; and e. the near cessation of redeployment activity in the public enterprise sector since 1987. 82. Co ensation. Within the PE sector, collective bargaining agreements are the normal instrument for determining compensation levels. Collective agreements define basic salary and annual increments, various allowances payable in addition to basic salary, and the benefits or subsidies provided by the employer. They also define the entitlements of workers who retire, become sick or die, or are declared redundant. Across a broad sample of 64 public enterprises having a total employment of more than 100,000, basic salary accounts for between 25 and 60 percent of total compensation and averages near 50 percent. 83. The provisions of collective agreements for retirement and severance benefits are unreasonably generous. The resulting very high costs of redeployment are the main reason that workforce restructuring and retrenchment have been brought to a virtual halt. The proliferation of special allowances and other subsidies payable by the employer, many of them related to exemptions from taxable income provided in the Income Tax Act, have complicated collective bargaining and, in aggregate, these payments have become at least as important as salary in the total compensation package. 84. It is clear that the collective bargaining process is itself a major problem area. Over the 1980s there was an apparent breakdown of discipline and responsibility on the part of those 24 responsible for negotiating collective agreements. The 1982 decision to replace the Boards of more than 61 of the largest PEs with Interim Management Committees corresponds with the beginning of a period over which the generosity and unaffordability of collective agreements increased dramatically. 85. During 1990 a number of compensation reforms were introduced that materially affect the PE sector. The most important of these is the directive of October, 1990 that all PEs enter into negotiations with their workers for scheduling the payment of accrued entitlements to a retirement gratuity. This directive has replaced an earlier directive to renegotiate the amounts of the entitlements. The earlier directive was rejected by the TUC. The latest directive is part of the transition to a contributory national pension scheme for all workers and the removal of retirement gratuity provisions from collective agreements. No single estimate of the financial costs of these accrued entitlements has been made. Available estimates suggest a figure in the order of 200 billion cedis (US$563 million). The payment of these accrued retirement liabilities, largely unfunded, will place an enormous financial strain on public enterprises or, in case of default, on the Government budget. 86. Government has also taken some measures to delink wage negotiations in the PEs from pay awards in the Civil Service. Efforts to delink these two sectors face a major obstacle as the Trades Union Congress (TUC) still maintains the position that PEs are part of Government, and that the announcement of a pay award for the Civil Service triggers wage reopener clauses in PE collective agreements. Another TUC position is that the provisions of collective agreements are binding on the enterprise and, in the event that an enterprise is unable to pay, upon Government. 87. In summary the main policy issues relating to employee compensation are the following: a. the financial implications for the sector of the transition to a national pension scheme; b. the restoration of discipline and responsibility to the collective bargaining process; c. the unreasonably generous provisions for severance or redundancy pay that make workforce restructuring excessively costly; d. the problem of delinking wage negotiations in the public enterprises from pay awards in the Civil Service; e. the problem of introducing performance related incentive pay and bonuses in a context where annual bonuses have been payable to all automatically. 88. A detailed discussion of the issues relating to employment and compensation policy is given in Annex V to this report. Legal and Institutional Framework 89. A serious problem facing the PE sector is the overlap in functions and roles between agencies responsible for monitoring and controlling the PEs. The most obvious problem in this area is the overlap between responsibilities of sector ministries and PE Boards. This probably stems from the non-existence of many Boards since 1982. It was from this time that many ministry officials got used 25 to taking day-to-day operational decisions for PEs. This factor is probably also responsible for the overlap between SEC and sector ministries and the tendency of PEs to go direct to ministries to get things done. 90. The SEC's role is too broad. PNDC Law 170 has given the SEC responsibilities that are no longer appropriate. Tasks such as review of PE organizational structures and personnel policies, examination of the financial structures and investment proposals of PEs, ensuring that PEs pay adequate dividends to Government, recommendations on credit transfers to PEs and several other of SEC's functions should be carried out by PE Boards, by the Ministry of Finance, by banks or consultants. The SEC has not been able to attract the necessary skills to carry out its broad mandate. Nor does its organizational structure reflect its mandate. Its officially assigned tasks are many, over specified and not prioritized. There is no clear allocation of responsibility for the establishment of an information system on the PEs on which much of SEC's responsibility depends and for which there is an urgent need in Ghana. SEC is seriously understaffed. Only 14 out of 36 professional positions are currently filled. The salary structure compares unfavorably even with the civil service. 91. SEC has been a positive influence on the direction of the PE reform program. It has successfully promoted the use of performance contracts, it has provided training and design of accounting systems to core PEs and has bought many sector reform issues to the notice of the PNDC. It has not, however been very successful in getting Cabinet to take action to resolve these issues. 92. Because of foreign exchange constraints and concern about corruption The Public Agreements Board (PAB) has been given a stronger role in the approval of legal agreements by PEs. The PAB is now a major bureaucratic obstacle to decision making by PE managers. It examines all agreements in depth, including substantive matters that go beyond the legal aspects, and its capacity is severely overloaded. Long delays are the norm. SEC and the PEs believe that much time and money are being wasted because of excessive delays. It has often been necessary to renegotiate contracts. There are no guidelines on what agreements would be acceptable to PAB. 93. Most large PEs are statutory corporations. This is a legal form which does not lend itself to greater private participation in PE ownership. Over the years there has been wide variation in the quality of individuals appointed to PE Boards. In 1982 there were wholesale dismissals of the Boards of 61 of the largest PEs and their replacement by Interim Management Committees. As of 1991 only 50 percent of these Boards have been reconstituted. However there remains a strong tendency on the part of Government, even where Boards have been appointed, to interfere in decisions such as appointment of senior executives which should be left to the Boards. This interference is arbitrary and unpredictable, it erodes autonomy and does not motivate Boards to behave responsibly. Performance Contracts 94. As in some other countries performance contracts have become an important instrument in Ghana for legitimizing corporate plans and defining performance targets for the largest PEs. In Ghana these contracts are negotiated between a sector Ministry and the managers of a public enterprise accountable to that Ministry. Such contracts are intended to define the respective intentions, obligations and responsibilities of Government and the enterprise. The setting of specific performance targets is intended to provide the basis for evaluating performance and improving accountability in the public enterprise sector. In many countries experience with these contracts has been mixed. Ghana is no exception. 26 95. In Ghana the performance contract system has been applied since 1989 to 17 core or strategic enterprises. All have signed agreements for 1991. In early 1991 the decision was made by Government to include a larger number of enterprises intended to remain in the public sector in the performance contract system. The State Enterprises Commission began work in April 1991 with an additional 20 public enterprises for which it is expected a 1991 performance contract can be made. Further details on the use of performance contracts in Ghana can be found in Annex VII to this report. 96. The brief history of Ghana's experience with performance contracts suggest a progressive evolution from the partial coverage and pro forma compliance with SAC conditionalities in 1989 to the situation in early 1991 where several Ministries and enterprises are actively lobbying for inclusion in the system. The change relates to a dawning recognition in several ministries that the system can be a useful way to structure the ministry-enterprise relationship, and, to the prominence given to the widely publicized signing of the 1991 agreements. 97. The 1991 Performance Contracts, while much improved over those of previous years, still lack important, substantive content. In addition, those provisions, common to all agreements, that Government will compensate the enterprise for goods and services provided below cost at the request of Government are not credible. Government has not, and this year almost certainly will not, finance the costs of subsidized goods and services. 98. There is a visible tendency, coincident with the growing interest of sector ministries in the system, for the performance targets to become increasingly technical in detail. At the same time targets for improvement in financial and cost indicators and in workforce restructuring remain excessively vague. There is a risk that the performance evaluation of an enterprise will be diluted by the inclusion of micro-detail that is not essential to monitoring enterprise performance. Simultaneously, there is increasing pressure from sector ministries and other sector agencies to take monitoring responsibilities away from the State Enterprises Commission, a development that would weaken the assessment of ministry performance in respect to the contract system and fragment the implementation of the system. 99. The absence of the Ministry of Finance and Planning during the negotiation of the performance contracts, especially where the contracts include commitments of financial support, has seriously undermined the legitimacy of these agreements. Experience elsewhere has shown that performance contracts, or any other target setting and performance monitoring system for that matter, are not effective where there is a lack of financial discipline or accountability for performance. As outlined earlier this is unfortunately the case in Ghana. The performance contracts signed to date have not included any commitment or measures on the part of the enterprises to reduce their burden on the public purse. Privatization 100. Up to March 1991 thirty-nine PEs had been "divested". Details of progress to date are presented in Annex VIII to this report. Government has sold some of its shares in eight enterprises and all of its shares in a further five. Three enterprises have been leased. Five enterprises have been liquidated and a further seventeen are in the process of liquidation. The plan is to divest a total of twenty-five enterprises in 1991 from a list of forty-two. 27 101. Of the successful divestments so far, only one, consisting of 45 percent of the Government's share of Lever Brothers Ghana, which was sold for almost two billion cedis, could be regarded as large. However some of the possible enterprises on the list for 1991 are significant, and if selected and successfully divested would represent important progress in privatization. They include the Government's holdings in Nestle Ghana, State Gold. Mining Corporation, National Manganese Corporation, Tema Food Complex, Achimota Brewery, GIHOC Distilleries, GIHOC Bottling and Gliksten Ghana. 102. Although the program has started there are a number of constraints that will need to be overcome and changes in approach that will need to be made if momentum is to be built up and maintained. The problems are both practical and political. Particular constraints are bottlenecks and delays in the Land Valuation Board (LVB), inappropriate valuations carried out by the LVB, political inhibitions injected at various stages and levels, obstructiveness on the part of sponsoring ministries, lack of up-to-date accounting information, or, indeed, knowledge of the enterprises themselves, practical inexperience and lack of professional resources in the DIC Secretariat, and concern about the liabilities of the enterprises, particularly for end of service benefits (ESBs). 103. DIC and other Government representatives emphasize the practical problems but it is clear that practical problems can easily be made insurmountable through lack of political will. There are a number of examples of how either real or presumed political objections affected the execution of a number of the deals, causing serious delays. The Ghanaian business community are still not convinced of Government's commitment to privatization and are adopting a "wait and see" position. There are worries that those coming forward with capital will be subject to investigation by the tax or other authorities, that ownership will not necessarily include the right to hire new management, particularly from overseas sources. There are concerns about the lack of clarity about exactly what is being offered for sale and with what restrictions and conditions. The private sector is not convinced that Government has really had a change of heart after all these years. 104. On the other hand Government officials are willing to discuss openly the steps that could be taken to improve the program and there are signs that there may be a readiness to try some new approaches. 105. Issues that will need to be addressed include the following: - how to deal with private companies that misbehave. The traditional Ghanaian solution has been nationalization. In the new environment there will be a need to develop anti-trust and other regulations - how to evaluate bidders. Political considerations have been applied in deciding on a bidder's "acceptability" - excessive Government intervention in economic decisions e.g. allocation of foreign exchange, investment approvals, selection of overseas managers, workforce restructuring etc - availability of finance. Many private business people believe that it is easier for PEs than private enterprises to get necessary credit from the banking system 28 - concerns, sometimes exaggerated, about whether the Government is getting good value for its enterprises. Undue reliance is being placed on replacement cost rather than market value - treatment of the very large liabilities of many of the enterprises. So far for the PEs that have been privatized Government has assumed these liabilities but there is a strong temptation to avoid this by deferring the divestment 29 VI. AGENDA FOR FURTHER REFORM Reform Straty 106. Many advances have been made over the last six years in PE reform in Ghana. But much remains to be done. Although the policy declarations have shown a good appreciation of many of the problems and of the measures necessary to overcome them, and although tentative steps in the right direction have been taken, the ingrained habits of excessive Government intervention in the PE sector have proven difficult to dislodge. 107. The time is right for a renewed effort. Those commercial and industrial PEs which are viable should be divested to the private sector which has proven its effectiveness in the Ghanaian context. Those which are non-viable should be liquidated. The emphasis in the privatization program needs to be more positive and enthusiastic than it has been to date. The privatization of PEs needs to be seen as an integral part of private sector development in general. The Ghanaian private sector is ready to take on the ownership and/or management of the viable and potentially viable PEs. These enterprises should be put on the market as soon as possible. Foreign investors too, with their access to technology, markets and finance, should be allowed to play their part in Ghana's economic recovery by taking some share of the PEs to be privatized. 108. The PE classification at preseri under consideration needs to be carefully scrutinized in the light of Government policies on the respective roles of the State and the private sector. Many of the PEs designated by sectcr ministries as fulfilling an important policy purpose and therefore to be retained in Government hands are commercial or industrial enterprises which would be better managed by the private sector. 109. The budgetary burden of the PE sector is still growing. This drain on the public purse Eas to be first reduced and then eliminated. Those PEs which will remain in Government hands should be subjected to market forces or proxies for market forces. Financial discipline needs to be enforced. Policies which favor autonomy of decision making and accountability and incentives for performance in managers need to be put into effect. These PEs should be given competent Boards with the authority to make necessary decisions. The role of Government needs to change. Government should not intervene in the pricing, purchasing, marketing or employment policies of these PEs. These PEs should obtain finance from the banking sector in competition with other borrowers without Government guarantees or preferential treatment. The role of Government should be to facilitate, and in the case of monopolies, to regulate in the public interest, not to control or to micro-manage the PEs. 110. Detailed analysis underlying the recommendations below can be found in the Annexes to this report. Budgetary Burden and FinancialDiscipline 111. Action should be taken as a matter of urgency to bring the growing budgetary burden of the PEs under control. A series of measures to this effect are recommended in this sub-section. 112. The current practice of treating most transfers to distressed enterprises as either equity or loans without discrimination between the two types of transfer should be stopped. The amount of 30 equity which the Government puts into an enterprise should je determined on the basis of sound investment analysis and not driven by the need to assist distressed enterprises. Investments in PEs should be subject to the rate of return requirements of the public sector investment program. If assistance needs to be given to PEs in difficulty it should be treated as a loan. Loan agreements, which clearly specify the terms and conditions of the loan, in particular an explicit schedule for debt servicing, should be drawr up and enforced. This is also true for loans given for other purposes. The currently widespread tendency, both on part of the Government as well as the enterprises, to treat loans as grants, never to be repaid, clearly militates against financial discipline and needs to be curbed. The debt equity ratios of all the core PEs should be brought into line with the norms of good financial management. 113. Debt servicing by the Government on behalf of defaulting PEs should be kept at a minimum and whenever it happens, efforts should be made to have the PEs concerned reimburse the Government as soon as possible. The practice of providing Government guarantees on commercial bank loans to PEs should be stopped. 114. The machinery for collecting taxes from PEs should be activated and enforced. A prerequisite for this will be the updating of the audited accounts of the enterprises since the absence of these is usually responsible fo disagreements on the amount of taxes due and consequently delays in tax payments. However, the existence of huge arrears even when audited accounts exist indicate that, in many cases, the problem is not the assessment of tax obligations but rather the collection of assessed taxes. 115. Dividend payments from PEs to Government should be increased substantially. Profit making enterprises should be required to declare dividends according to predetermined criteria and on a regular basis. Penalties should be levied on all late payments. 116. Cross-debts between the Government and PEs and between the PEs themselves should be settled expeditiously. As a first step towards this, the updating of the 1987 cross-debt study should be completed as soon as possible and a scheme for settling cross-debts should be designed and implemented. This scheme could be developed in phases. In the first phase, the scope of the existing clearing house covering the Government and three PEs - ECG, VRA, and GWSC, could be widened to include all the 14 core PEs. Subsequently, other PEs may be brought under the system. Interest should be paid on all arrears and the normal legal measures including bankruptcy and liquidation should be applied for debt defaults. The MFEP should ensure that adequate sums are budgeted for Government expenditures on services provided by the PEs. 117. A system to monitor all financial transactions between central Government and the PEs should be created and located in a central unit within the Ministry of Finance. This unit would coordinate the data gathering activities of various divisions and affiliated offices of the Ministry as well as other Government offices, the enterprisri, the SEC and any other relevant agency. Attachment I to Annex II provides a suggested detailed list of the variables on which information should be collected through this system. If the Ministry of Finance is overburdened with other responsibilities at present another option would be to locate this unit in the SEC initially. But this would be a temporary arrangement. In the long-run such a unit has to be located in the Ministry of Finance, the agency accountable for the management of public finances. 118. A program for the phased reduction and eventual elimination of the budgetary burden of the 31 PE sector should be prepared and implemented. A timetable for achieving quantified targets on the reduction of flows from Government to the PEs and the increase of flows from the PEs to Government should be set and rigorously enforced. Pricing and Procurement Policy 119. The Prices and Incomes Board has outlived its usefulness. Its continued existence is against the spirit of the PE reform program and is holding up the development of responsible autonomous pricing by PEs. The PIB should be closed down. 120. Where Government requires a PE to provide goods or services at less than full cost Government should make an explicit transfer to that PE through the budget. Where Government sets a retail price at above cost, e.g. in the case of petroleum products the extra revenues should be collected as a direct tax and not accrue to the PE concerned. 121. PE cost accounting systems should be strengthened to allow effective price setting. Consulting assistance and training should be provided to the relevant PE managers to achieve this aim. The Bank PE project would be a suitable vehicle for financing this kind of support. 122. New mechanisms need to be designed for approving the tariffs for the monopoly public services. Automaticity in tariff setting should be applied to the maximum extent possible. Further work is required to determine precisely what regulatory structures would be appropriate in Ghana. The performance contracting system, if it is maintained as the main means of setting objectives and monitoring performance, should be an integral part of any such structures. 123. Government should exempt public enterprises from any requirement that they utilize the services of the Ghana Supply Commission or the Ghana National Procurement Agency. The GSC's role should be limited to procurement of supplies and stores for Government Ministries. Because the GNPA competes with private sector enterprises across virtually its entire line it would be appropriate to privatize the agency. 124. Legitimate concerns over irregularities in procurement are best addressed by strengthening the procurement capabilities and accountability at PE level. Employment and Compensation Policy 125. The appointment of Boards to those enterprises still lacking them and the grant of real autonomy in hiring, firing and wage determination is essential to avoid a recurrence/continuation of excesses and abuses in collective bargaining and staffing behavior of public enterprises. 126. The practice of determining enterprise staffing requirements from an approved establishment list has introduced a degree of rigidity into PE personnel management that has made it difficult if not impossible to adjust staffing levels and occupational structures to enterprise operations. A necessary prelude to further restructuring and redeployment efforts is the review of job classifications and functional requirements. The objective of this exercise would be to relate the functional and operational needs of the enterprise to the determination of its labor requirements. An incidental benefit of such an effort would be to break the link with civil service practice and terminology that is inappropriate to the needs of a commercially oriented enterprise. The resources of the 32 Restructuring Fund incorporated in the Public Enterprise Project could be used to finance the technical support of job classification and functional requirements assessments for key enterprises 127. Temporary layoff/recall options should become standard features of collective agreements and the support of the TUC should be sought for their inclusion. 128. The practice of universal payment of annual bonuses to all PE employees should be discontinued and the existing kels of bonuses consolidated in annual salaries. A management incentive scheme should be implemented for all PEs which are subject to performance contracts. Incentive bonuses should be paid to the extent that PEs achieve their agreed targets and distributed according to a regular system of performance appraisal. Bonus incentive schemes for non- management staff should be left to the discretion of the Boards and based on regular systematic performance appraisal. 129. The best solution to the financial obstacle that overgenerous end of service benefits have created to enterprise restructuring and privatization would be for workers and enterprise management to accept the unreasonable nature of provisions in current contracts and mutually agree to a renegotiation downwards of the entitlements. However this possibility has been explicitly rejected by the TUC and in the approach taken by its member unions towards the implementation of Government's directive. In these circumstances an appropriate strategy for enterprise negotiations might be to arrange for payment of the December 1990 entitlements in nominal terms over a period of not less than 3 years. This would have the effect of letting domestic inflation reduce the nominal values to an affordable level for the enterprises. 130. The key to restoring the discipline necessary to ensure that overgenerous compensation awards are not made in future is the assignment to Boards of the responsibility for negotiating a reasonable and affordable settlement and the granting to Boards of the autonomy to do so. Critical to the success of this measure is the delinking of Civil Service and Minimum Wage determination from wage negotiations in the public enterprise sector. 131. In the same way that future retirement benefits will be standardized under a national pension scheme the Labor Decree could also be modified to standardize future entitlements to severance payments. In the longer term it might be desirable to replace the concept of severance pay with a contributory nationa! - ployment insurance scheme. Legal and Institutional Framework 132. In the interest of improved corporate governance a number of institutional and legal changes need to be made. There is a need to redefine the roles and functions of sector ministries and Boards of Directors and to adhere to these definitions. This will become more important as more Boards are appointed. It will also become more important as the performance contracting mechanism becomes more widely used since the system will require autonomy for Boards and managers if they are to be held accountable for performance. For those PEs to retain monopolies there will need to be a regulatory function established at central Government level which will not be the same as the portfolio responsibility of a sector ministry. A Task Force or Expert Group should examine these issues and develop detailed guidelines for Government. 133. SEC's mission should be redefined along with that of the sector ministries. Its organization 33 structure should be modified to reflect a narrower range of responsibilities and the fact that a large number of PEs will be privatized in the short to medium term. SEC should be given more flexibility to use consultants to carry out tasks with skills that the civil service wage structure will never allow it to recruit directly. 134. PAB should prepare and distribute guidelines on contracts and legal conditions and safeguards which will enable PEs to prepare better agreements and reduce delays at PAB. PAB should also request PEs to take legal advice on contracts before submitting them to PAB for approval. Contract approvals for amounts below certain limits should be delegated to ministries or the PEs themselves. Lawyers should be trained by PAB in the skills necessary to prepare acceptable contracts. 135. PEs in which some private sector participation is to be sought should be converted to limited liability corporations. Boards should be appointed as soon as possible to all PEs which will not be divested. The main criterion for selection of Board members should be expertise in the relevant areas. The issue of political interference in PE decision making needs to be addressed directly by Goveinment. Performance Contracts 136. If the performance contracting mechanism, selected in Ghana as the main means of holding PE managers accountable for performance, is to achieve its purpose, it has to be made more effective. One central agency should be given responsibility for managing the performance contracting process, for monitoring performance against the agreed indicators and for the preparation of annual evaluation reports. It would make sense in Ghana for this agency to be the SEC. 137. The performance contracts should include the whole range of measures, with quantitative targets, for the reduction and elimination of the budgetary burden of the PE sector, and the elimination of cross-debts. 138. A standard set of indicators reflecting financial and productivity trends should be included in all performance contracts. These would be complemented as appropriate by indicators suited to the specific PE or industry sector. These generic indicators would relate to financial performance, trends in employment, the revaluation of assets, the updating of accounts, and progress with corporate planning and restructuring. As a minimum they should include: - net operating profit/loss - ratio of salaries to sales or revenues - ratio of administrative expenses to sales or revenues - rate of return on assets - revaluation to current basis of assets (target month) - completion of audited accounts (target month) - employment/redeployment (year-end targets) 34 status of corporate planning and/or restructuring 139. The weighting formula applied by SEC for assessing overall PE performance should be adjusted to distribute the 50 p rcent currently attached to a profitability criteria over a broader range of financial and productivity indicators 140. The principle agreed by Government in respect of autonomy of PE managers in setting prices should be reflected in all Performance Contracts. The general commitment by Government, contained in several Performance Contracts, to compensate the enterprise for goods or services provided, on the request of Government, at less than breakeven cost plus margin, should be strengthened by an indication of the anticipated nature and estimated volume of such transactions over the contract period. 141. The Ministry of Finance and Economic Planning should participate at all stages in the negotiation of, and be a signatory to, all performance contracts. Privatization 142. There is a need to change the approach to privatization, to move away from the somewhat negative approach of divestment or liquidation of loss-making PEs that are a burden on public finances to a more positive and accelerated approach geared to the promotion of private investment and involvement in the economy. An important first step could be the public offering for sale of a large profitable PE. There is much acceptance of this idea in Ghana and the necessary institutional and legal infrastructure to make it succeed already exists. Good candidates for a public offering could include Ashanti Goldfields, GIHOC Bottling, GIHOC Distilleries and GIHOC Pharmaceuticals. Details of the next steps needed to achieve this are given in Annex VIII. 143. Rather than the "headcount" approach to divestiture which is being applied at present, the enterprises classified as suitable for privatization should be prioritized, with highest priority given to public offerings of profitable companies and of Government shares in companies already quoted on the Stock Exchange. The next priority should be sales of viable companies to large investors, trade sales of smaller companies, manager/employee buy-outs etc. The lowest priority should be liquidations of non-viable enterprises. In fact the latter should not be regarded as privatization but as necessary cleaning up of the sector. 144. The DIC secretariat needs to be given the power and the technical expertise necessary to do its job. Sector Ministries should not be given responsibility for preparing PEs for privatization. Also the mistrust of the Ghanaian private sector within the Ghanaian public administration needs to be overcome. There are many well qualified Ghanaian professionals - accountants, lawyers and bankers, who could be playing a greater part in the privatization process. DIC should use private Ghanaian and foreign expertise to the maximum extent possible and to a much greater extent than it has done up to now. 145. A number of steps need to be taken to increase the transparency in the divestiture process. These include much greater openness about the process with an active program of public information including regular press briefings, speeches by senior officials etc. Competition should be maximized at all stages in the process from the provision of technical advice to DIC to the submission of bids for the enterprises. Clear and simple rules for evaluating bids need to be developed, widely 35 publicized and adhered to. Requests for bids should be explicit in describing exactly what is being offered, under what conditions, what information is expected from the bidders and what criteria will be employed in evaluating the bids. 146. DIC should attach less importance to the valuations by the LVB in setting minimum floor prices for enterprises. The focus should be on more realistic minimum levels based on market value and on the known alternative i.e. continuing State ownership. The best way in ensuring maximum sales revenue is to achieve maximum competition in the bidding process. 36 FOOTNOTES 1. Operational profit is profit earned from the operations of the enterprise. It excludes subsidies, non-operational income and non-operational expenses. Net profit is operational profit plus subsidies and non-operational income minus non-operational expenses. 2. The sharp drop in operational profits in 1987 is mainly explained by a significant deterioration in the financial performance of the COCOBOD, whose operational profits fell by about 4 billion cedis, and the Ghana National Petroleum Corporation, which switched from operational profits of about 4 billion cedis to operational losses of about 1 billion cedis. These adverse movements were only partly offset by the increase in the operational profits, by 3 billion cedis, of the Volta River Authority. 3. The Ghanaian central budget distinguishes between expenditures that are "above-the-line" and those "below the line". The distinction is meant to differentiate between recurrent budgeted transactions, and those transactions undertaken to balance the fiscal account. In practice the distinction is somewhat artificial, but it is nevertheless an important one since large transfers to SOEs are made below the line which are not transparent and over which little systematic control is exercised. 4. The company tax rate has varied from 45 to 55% in recent years. An average rate of 50% is thus a realistic assumption. 5. An alternative way of estimating arrears in dividend payments would be to compare actual dividend payments to declared dividend payments. This approach could not be followed since data on declared dividends were very scanty. REPUBLIC OF GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEXES OCTOBER 25, 1991 GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX I GHANA: PROPOSED CLASSIFICATION OF THE PUBLIC ENTERPRISES Background The completion of a PE classification exercise was one of two conditions to be satisfied prior to the negotiation of SAC Il by Government. The purpose of the exercise is to classify the PEs according to the types of action required to achieve the objectives of the PE reform programme. The classification would group together a set of PEs that will be targeted by a specific package of reform and policy measures. Different categories in the classification would be addressed by a different mix of policies. The Government's letter of development policy for SAC M indicates four categories in the classification and suggests the nature of the package of policy and reform measures that would be addressed to each. Summarized in Attachment 1 is a brief clarification of the definition of categories and related policy measures as agreed with the Bank/IMF. A preliminary draft classification and guidelines for its review by sector ministries were circulated in December, 1990. Following this review a final draft classification will be prepared by the State Enterprises Commission for the consideration of Government. A copy of the initial draft classification is at Attachment 2. ANNE-X_I Attachment 1 Page 1 or 2 GHANA: CLASSIFICATION OF PUBLIC ENTERPRISES Category (1) strategic/viable PEs Definition: PEs which are providing basic public services and are to remain with Government. Rerm measures: progressive elimination of Government subsidies, further rehabilitation and restructuring programs to improve service delivery, efficiency and financial performance. Category (2) non-strategic commercially viable PEs Definition: PEs which, under the terms of their instrument of establishment, produce or are intended to produce goods or services on a commercial basis and which are, or potentially are financially viable. Reform measures: to be included in the divestiture programme. Category (3) non-strategic/non-viable PEs Definition: PEs which, under the terms of their instrument of establishment, produce or are intended to produce goods or services on a commercial basis but which are not considered to be financially viable. Reform measures: to be liquidated Category (4) strategic/non-viable PEs Definition: PEs which have social and development roles as instruments of a policy purpose and which require budgetary support Many PEs in this category will perform some combination of commercial and policy-related functions. Reorm-measures: review of PE functions to determine those that should be reabsorbed within the administration, remain with the PE or be divested; restructuring and rehabilitation measures to improve efficiency, cost recovery and effectiveness in performance of residual functions. ANNEX I Attachment 1 Page 2 or 2 B. Guidelines for Review of Classification by Sector Ministries For purposes of PE classification the following guidelines have been suggested for purposes of preparing a draft classification that can serve as the basis for discussion between the responsible sector ministries and The State Enterprises Commission: (a) identify strategic/core/priority PEs which are to remain in Government ownership and control; (b) identify PEs that perform some combination of social/developmental and commercial functions and require financial support from Government for the developmental functions; and (c) assign all other PEs to Categories 2 or 3 as potential candidates for divestiture or liquidation depending upon an assessment of their commercial and financial viability. Attachment 2 Preliminary Draft Classification of Public Enterprises as of December 1990. ANNEX 1 Attachmnent 2 Pagel1of 6 Prelihinar? Classification if State Enterprises P Class SEC Sector Gevern- via State Maie of Interprise Code Schedule Ministry gent Banks Legal in 1990 RUMARKS 1 City Express Services 1.1 Yes MOTC 100 1.392 2 Electricity Corp. of Ghana 1.1 FP 100 Corp 3,196 3 Ghana Airvays Corporation 1.1 Yes MOTC 100 Corp 1,350 4 Ghana Cocoa Board 1.1 • PNDC 100 Cor; 4:,165 5 Ghana Italian Petroleum Co. Ltd. (GHAIP) 1.1 F&P 10 ,L 53 6 Ghana Nati:nal ?etroleu corporation 1. F&P 100 Cerp 367 i 7 Ghana National Procureent Agenc 1.1 Yes TRADE 100 Corp 119 3 Ghana 01 C2. ltd. IG0 L) 1.1 ?&P 100 LL 9 Ghana Ports & arbours A:uthority 1.1 HATC i00 Corp 3,151 1 l1 Ghana Railvays Corporation 1.1 Yes HOC 100 Corp 6,760 !! Ghana Supply Cialission 1.1 Yes YINKCE 100 Corp 224 1 12 Ghana Water & Sewerage Corp. 1.1 Yes YORKS 100 Corp 5,419 1 i3 Cnibus Services Authority 1.i les KOTC 100 Corp 1,226 1 14 Pos: & ?elecomunication Corp. 1.1 Yes mOTC 100 Corp 7,016 i 15 State Sh:pping Corp. 1.1 Yes MOTC 100 Corp 325 i 16 State Transport Corp. 1.1 les MOT 100 Corp 1,619 - 17 Volta River AuthorIty 1.1 F&P 100 Corp 2,263 1 13 Agricutural Development Bank 1.2 9.3 19 Bank for Hfusmng & CDnstruction 1.2 30 20 ank of Ghana 1.2 NS 2< Co-operative Rank Ltd 1.2 NS 22 Ghana Broadcasting Corporation 1.2 Yes HI 100 Corp 2,180 1 23 Ghana Civil Aviat,on Author,ty 1.2 1 NS 24 Ghana Comercial Bank 1.2 25 Ghana Fil Industry Corp. 1.2 Yes NI 100 Corp 255 26 Ghana trade Fair Autbority 1.2 TRADE 100 Corp 60 27 Graphic CorporatiDn 1.2 yes I 100 Corp 773 29 Merchant Bank !Gh) Ltd. 1.2 25 29 National investåent Bank 1.2 6.4 30 Naticnal Lotteries 1.2 31 Nat-nal Savings & Credit Bank Ltd 1.2 NS 32 National !rust Holding Co. Ltd. 1.2 33 !3 New Times Corp. 1.2 Yes 34 Social Security Rank Ltd. 1.2 35 Social Security ý National Insurance Trust 1.2 2,701 INS 36 Acera Brewery Lisited 2 HIS? 40 IL 713 1 37 Accra City Hotels Ltd. 2 30 1 äU, Nv:t 39 Accra Markets Ltd. 2 TRADE 50 50 LL s9 l 39 Achizota Brevery Co. Ltd 2 Yes 71 I | 40 Adidome Brick and ?ile Ltd. 2 30 41 Afanko Ltd. 2 51 IAl 42 Afrcan Tidber i Plywood Ltd. 41 Agricare Ltd. 25 LL 41 Agric. mechanisation Ltd. 20 LL I AU 15 Agritree Brck Aftenya Ltd. :5 16 Alnylinase Oil Hills Ltd. 100 417 Akuaba Tourmst Agency l8 Akyenkwal Brick and Ulle Ltd. 79 19 Alpha Fisheries Ltd. 2 51 5 Aluvorks Ltd. 2 HIS? 64 17 LL 297 1 5 Ankaful Brick & Tile Co. Ltd. 2 35.7 52 Anv:ankwata 01 Hill 100 53 Appiah Kenk Cceplex Ltd. 40 54 Ashanti GoldCields Cecrp. 55 Atetubu Hechanical Service ANNEX I Attachment 2 56 Bank fDr Credi: and Cs5er:e Page 2 pf 6 57 Benso 0il Palt ?lantations Li:sted 2 Se MHC forei Bureau 100 59 BSC Kechanical Repeir Visho; 100 A 60 Bibiani Industrial Compler Ltd 2 IS? 35 9 LL 232 61 Bogoso Oil mills Ltd. 2 20 L, 62 Bolga Brick & Tile Co. Ltd. 2 30 63 Bonsa Tyre Cozpany Ltd. ?es MIST i00 L 647 i SI EP(Gh) Ltd 20 I S 65 Bulpe Line Ltd. • AD 66 Buetu .uarry Ltd. 40 67 Cape Coast 2uarr Ltd. 70 NS 69 Caramafra MI 9 LL,2 69 Ceramica Cordero !Gh) Ltd. 60 NS 70 Clay Products (h) Ltd. 100 LL 71 Consol.dated DiEcount House 2' NS 72 Zctton Production Co. Ltd 73Cuntry vide Properties 120 74 Crewn Rice mill Cc.Ltd Ag 75 Crystal il Hills At 76 Dan,i Brick and Tie Ltd. 20 LL 77 Dezeo Ltd. 40 79 Developaent Mechan;sation Co. Ltd. 40 79 Devt. Finance & H-lding 100 80 Devt. Leasing Ltd. 2 100 -ku Ø! Ehvia Wood Produts Ltd 92 Eura ?arns Gh. ltd. 2 AGPIC 91 LL 94 93 Isquire Ltd. 25 LL, g 81 iveready Sh :,td.!Micn Carbide) 2 MIS? 33 33 LL 219 1 9! afais Mach!ne Shop !6 !ac:oz !VR) ,td. 2 2s 7 Faaz Trading Company Ltd g8 !bre Products Corpany Ltd AL, 89 Franco Vocd Process:ng C. Ltd. 2 20 g 90 !ulg:ip Asbestos 'Gh) Ltd. 10 91 Gaceo 92 Ghazot Ccapany Ltd. 2 ?es 93 Ghana Alu:iniuz Preducts Ltd. 2 FS? 40 LL 11 94 4hata Bausite Copany Ltd. 2 ANDS 55 ,, 596 95 Ghana Sottling Conpany 96 Ghana Consolidated Diaends Corp. 2 97 Ghana Cotton Colpany AGRIC 30 LL 361 92 Ghina Export Co. 2 90 99 Ghana !ertili:er Co. Ltd 50 11 100 'hana ,ivestock Co. Ltd. 40 At l',1 Ghana Manufacturlng Co. Ltd. 2 MIST 100 Li 5 122 Qhena Mnufacturing i ?radin; Co. Ltd. i U :33 Ghana National Nanganese Corp. 2 :AEDS 100 Cerp 1,321 121 Ghana telnsurance Corp. 105 3hana Rice Mills Co. Ltd. 2 les .t 106 Ghana lubber Zstates Ltd. 2 let MIT 100 LL 1,170 107 Ghana Sanyo !lectr:cal N!g. Co. 2 EIST50 LL '64 103 Ghina ttone Quarry Ltd. 51 109 Ghana Sugar Ustate .,td. !e! 110 Ghana lextile Manufacturing Co. NU? 50 10 Lt 1,0 i 111 Ghana lextile Prirting Co. Ltd. MIS! 55 LL 1,124 112 GLIna Tobao Co. Ltd. .s 113 Ghana-Libya Arab lod:ng Cc. Ltd. 40 LL !C6 Ill GllOC Boetyerd Co.-Sekcadi 115 GIROC Eoatyarfs Co.- ?esa 100 1L 2 ANNEX I Attachment 2 ::6 3:HOC SOttlitg Cc Ltd. . 2 e; Page 3 of 6 117 GIROC Bricks & Tiles Co.Ltd. 2 Yes 118 331OC Cannery Co. 2 les 119 GIROC Ce1tral Advertising Co. Itd.1CAC01 2 Yes NIS? 100 LL 120 GIROC Distilleries Co. Ltd. 2 Yes MIST 100 L 16 121 GIHOC Electroncs Co. Ltd. 2 Yes MIST 100 ,L 155 122 ;IHOC Fibre Product Co 2 Yes L . . U 123 930C rootvear Co : Yes AL 124 GIHOC Marble forks Co. Ltd. 2 Tes MIST :00 L, 75 125 GIHOC Heat Products.Co. Ltd. 2 Yes MIST 100 , 90 :26 GIHOC Hetal Industries :td. 2 Yes HIS? 100 L, 2 u 127 GIHOC Mosquito Coil 2 Yes 6C i2 GIHOC fotors & Machine Sto; 2 Yes 229 GICC N:e a ii! Hills Ltd. 2 Yes USD 3IH2C Paints Co. Ltd. 2 Yes HIST 100 ., 202 131 GIRCC Paper Conversion 2 Yes :32 32I0 Paper Products & Prnt:ng 2 Yes 21 132 GIROC Pharaceuticals C.td 2 Yes MIST 100 LL 550 .34 GIHOC Refrg. & H'seo1d Products CC. Ltd. 2 Yes 76 13. GIHOC Steelvorks CO. ,td. 2 Yes 135 GIHOC Vegetable Dfl Cc. Ltd. 2 Yi All 137 G:den Beach Resorts Ltd. 5 23 Grains Varehcusing Co. l0c 29 Gu1nness 'Gb) Ltd. 2IS? 40 IL 572 N3 140 ^yankotaa Gin;er Pro.ess:n, Cc. Ltd. AU 141 lntraveneous :2fusIons Ltd. 10 lZ2 Iran. Brothers Ltd. MIST 31 L 325 143 Irr:gation Co. Ltd. 141 Juapeng textiles Ltd ?IST 55 IL 1,327 t 14! Kabel Metal Ltd. 25 46 las Products Ltd. 147 Kpeshile Cathering Services 145 Ku1s rewery Ltd. 2 MIST 0 L: 550 149 Kumasi Glue Factory ,td. !!t luaes Xatchet Co. 25 151 Kuawj Industr:i Fars C:plex :,td. 63 152 Laadi P.easre Bea:h :ie 2 Yes 53 lever Brothers Gh. ltd. 2 ;IS? 55 IL 769 51 L'Air Liquide IGHI Ltd. 2 HIS? 25 L 95 1 155 Kachine shop Co. Ltd. 1ss Me:hanisetion i Transport Co. 2 257 mencilo Cc. Ltd. 2 10 59 MetallicD to Ltd. 159 Mi Ti:ber Co. Ltd. 2I, 100 L 2,t01 160 McHil Dil JG) Ltd. 2C 161 Nagsa Rice Ltd. s n 162 natioal Tobacco tbhandling Co. 2 IDS?'SB 10 42 IL 163 Kestle (h) Ltd. (tood Specialitet) 164 N: bre Bureau 10 155 NIC Syblos Cc. Ltd.l?åkcradf) 2 es 166 WC chealals i P:nts Co. Ltd. 2 Yes :37 NIC City Cestercial Ltd. 2 Tes 1c NO lectri fitting Accesory rectory 2 es W69 MIC !lectrical taps actory 2 tes 170 liC Establishaent Tatos Saba GR. Ltd. 2 Tes 171 NIc istate 2 Tes 172 NICh ood Industries :td. 2 Yes 173 NC P!. General !stablisuaant Yes 171 RIC Ecol Sctting ?actory U tet 175 NIC Tadng ANNEX I Attachment 2 1?s NIC veaving lactory 2 Yes Page 4 gf 6 177 NIC 'National !ndustr:al Co. Ltd.) 2 Yes NIS" 100 LL :1 178 Noble lest Investients Ltd. 40 ! 179 Novotes Ltd. 2 49 A 180 Nsenhere Quarry Ltd. 2 70 ! 191 Olyspic Industries Ltd. .20 A :82 Oti lice Ltd. 2 .00 I l 192 Pens & Plastics (Ghl Ltd. 2 KIST 0 42 LL 14 Pharco Laboratories Ltd. 2 • IS'/SB 40+14 L. 195 ?arco Production Ltd. SE 2 136 Ploneer AlutInlui Factory Ltd. 2 MIST I0 L, 240 197 Pioneer Toba:co Ccipany Ltd. 2 198 PoSadze Poultry Int. Ltd. 2 AGRIC 100 40 Li 210 199 Praspran grick & ?:le Co. Ltd. 15 ; 190 Prefab Concrete Products 191 Quallty keat Processin; 2 54 NS 192 leady N:xed Concrete Ltd. EgOHS 60 60 LL 19 1 192 Redeo Ltd. 60 'S 194 SCOA laras Ltd. 2 22 L. I 195 Sbai Bills Mattle Ranch 100 196 Shell Ghana Ltd.(Private Ltd) 2 - NS 197 Standard Cartered Bank 0,19 199 State 0:1 Pale Plan6ation | AV 199 Suame ioundry Ltd. 2 40 AU 200 Subir !ndustrial Planation Ltd. 2 100 AU 201 Takoradi Veneer & Lusber Co. Ltd. LANDS 100 ,L 202 Tauale Brick and Ille Co. 25 LL 23 laysee Construction Ltd. 67 204 laysee Froperties Ltd. 2 51 NS 205 ?esa Food Cciples corp. 2 ?es MIS? 100 LL 762 l 206 Tess Te.niles Ltd. 2 NIS? ,L 207 Tsos !Gh) Ltd. 2 HIS? 50 LL I 208 7ongu Rancb ltd. 2 51 I A 209 Tvifo 0.1 fal Plantation 0.3 I 210 United Laspi Ltd. 2 NIST 91 I I 211 Upper Quarry Ltd. 70 A 212 Vacums Salt Production 2 27 i AV 213 Vaff Trading Co. Ltd. 2 60 ,L. AL, 211 Western Casting Ltd. 2 A? 215 Western Clay Produets Ltd. 125 lAU 216 estern Tlaber Ltd. 2 LANDS 100 LL 217 Vulugu Livestock Co. 2 99.98 219 Agricultural Developtent Co. I 40 219 Architectural & Ingineering Services Corp. 4 les 220 Ashinti le;. Dev.Corp. I les FINANCE 100 Cerp 11 221 Bast Fibres Dey. leird I les AGRIC #65 222 Brong Ahafo leg. DeT. Corp. 4 Yes FIKNCI 100 Corp :05 l 223 Central Reg. £ey. Corp. 4 ?es FINANCE 100 Ccrp 15 :221 lastern Reg. Dev. Corp. 4 !es FINANCE 100 Corp 109 225 Fiters Services Ceepany Ltd Upper Reget i ARIC 966 ,L 24.o 226 ir.ers Servl:es Cospany Ltd Velte teglon I 227 fod Distribution Corpo:ation I !es AIRIC 010 C.rp 1,019 22 food frcductin Corporation 1 591 229 Ghana Highways Autbority I les y 0ADS 100 Corp 5,890 230 Mnt Natical ?rading Corpcrat.on I ?es ??ADE 100 COrp 2,9l1 i 231 Uhtna Oi Film Dev. Co. I ?es 1,340 - 232 Chaa Publ:shing Corp. 4 les N 100 Corp ,231 i 232 Ghana Seid Co. Ltd. 4 ?es 234 China turist Dev. Co. Ltd. 4 NCIC 100 20 LI 2: 235 Golden Club Casino ! ANNEX I Attachment 2 236 Greater A:era Reg. Dev.corp. Page 5 of 6 237 Irrigation 3ev. Authority 4 les AGRIC 100 C^rp 953 I :3 Meat Harketing Board 4 les TRADE 100 Corp 151 i 2!9 Northern Reg. Dev. Corp. 4 les 1INANC! 100 Corp 50 l 240 Opn Hanso Iron Ore Project 4 S :l! P.ant ?ool Ltd. 4 RIADS 21 50 LL 242 ?tecast & Spun Concrete Products Ltd. 4 voRIs ss LL 93 I 243 Pre:mous N;nerals Harketinn C^rp. 4 LANDS 10 Czrp 92 244 .tate C:r.struction Corp. 4 Yes WORKS 00 Corp 4,110 l '45 State Snterprises Audit Corp. 4 V!UtNCE 120 orp 3: l 245 State Housing Corp. 4 Yes V32 1 Corp ,382 : 247 State Insurance Corp. 4 24 ".ea Develepaent ^orp. 4 les von[S 11U Corp 595 249 Teta Shipyard & .ryd.ck Corp. 4 ?es 361 :50 Upper Reg. Dev. Corp. 4 Yes 1INANCE 10 Corp 23 :51 URDEP fasco) 4 22 251 Vl:a Lake Transpor: Co. Iltd. 4 eOTC 100 1., 32 :53 v ta Reg Dcev. eorp. 4 Yes FIHANCE 101 Corp 17 254 VORP 4 255 Western Reg. Dev. Corp. 4 ?es ?INANC! 100 Corp :56 D.L Steel Ghana Ltd [1 257 .aFekva ?rad.ng Colpany Ltd 5 25!9 Loyalty !nd»st,ies Ltd. 5 es 7D 259 Neoplan !Gh, ,t.. 5 tO 251 NC yarws 5 Yes ! :61 Overseas Knitwear 1L :62 State Farts Corp. 5 les 45 I D 2 State Fishin; Corp. 5 ;es 975 26l State Gold mlnng Corp. 265 State Notels Corp. 5 ?es 1.169 :66 Two Nerlds mg. Co. ltd 26? wi!lowbrock ish.) Ltd. 269 Ashanti 0:1 Mis Ltd. 3 L 269 Automotive & TechnIcal Services Ltd. 6 les NIS? 95 1.L 65 * Ghara Vetiele Asseably Plant JUna, 6 t Yasstobrer !GH) Ltd. 6 t IRMus M2tcrs Ltd. E L t R. 7. Erisce (Gb) Ltd. 5 :70 !veready Plasties "Gh) Ltd. 6 25 271 Fafia Auto Prcdu:ts 5 NIST 76 IL 22 I :7: Fulgrip P:pes å sheets Ltd. 6 <.3 '. :73 GEA and Associates 6 Tes * Sva Fares es IL * Ges chelicalt 6 les L * GZA Plctaging les t1 * Victery Ind. Ltd. 6 les IL 271 shalt Wnt. ltd. 6 les :7! Ghatet Istate 6 les 276 Ghaot Leather Productt Ltd. 6 es 277 1hasot Notor Ingineering Co. Ltd. 5 les 27! Gtat motors 6 esL 279 Gtamot ?etile 6 Res 2et Ghilot Vebi:le Asselbly IGHI Ltd. E ?es 21 Nwahu Dairy fares 6 :92 New Mtch factory ltd. 6 NIS? 55 LL :63 NIC rnittlng ?actory E lei :sl NC Nete: 13k1:at1on 6 !es 295 §C S teps 5 etergent 6 ?es 296 NIC ?eztiie fac:o:y T es :87 NIC Veile Assmby Plant e ANNEX I Attachment 2 238 katav Cuarry Ltj. Page 6 o 6 299 Saltpond Cerasirs Ltd. 6 38 290 rts Council of Ghana 7 i91 Bureau of Ghana !.anguage 7S 292 Council Scientific & industrial Research 7 293 Football Pool£ Authority 294 forest Products Inspection Bureau 7N :9 Forestry Coiii on 7N 296 Chana Atr24c Consision 7N 297 Ghana Export Council 7 298 Ghsta Inst:tute of Jcurnalls N 299 Ghana Institute of Language 7 NS 30 Ghana !nst.c! Hanagezent & Pub. Adm. NO 30! Ghana Investsent Centre NO lO2 Ghana library Board 7 303 4hana Museums & Konusent Board NO 304 Ghana National Fanfly Planning Prograe 7 113 305 Gana Nes Agency 7 306 Cinna ?ourlst Board 7 NO 307 ahanaan EnterprIses Dev. Conissior 7 ' NO 339 Grains & Legules Developent Board 7 AGRIC 100 L' 460 209 Lands Coslission -NS !10 Manageåent rev. & Pr:ductivity Inet. 7 i NS 31! Neteorological Services Departsent 7 1 NS 312 Nineral COaDissot 7 N !13 National Cm::issipn on Children ? NS 3' National Council on HIher Education 7 1 NS 315 Natonal Council on mozen & Dev. 7 q S 316 Nationm Inergy Board 7 FINANCE 100 81 317 National Fil3 & Television Inst. 7 I!S 318 Nati-nal Onchocemsiasis Se:retariat 7 NO 319 National S al! Scale Industries goard 7 NO 320 National Sport Council 7 1 NO 321 National Vcat4onal ?raining Inst 7 l NO 322 Cpp;rtunities Industrialisation Centre 7 N 223 P:ices & Incfes Board 7 .NO 324 Reg:£a aritime Acadesy 7 N! 225 Shipping & Navigational Department 7 .N 326 State nterprises Cosåission 7N 3:? Sugar Industries Board 7 1 32! Tieber Eport Vev. Board 7 ,ANDS 100 Corp 119 1 329 Vehicle Examination & Licentjn; Office TCTALS 103 !9,573 GHANA PUBLIC ENTERPRISE SECTOR REVIEW Financial Data on the PE Sector GRAMA RELIC ENTERPRISE SECTOR REVIEW ANNEX II TABLE B?: GHANA: FINANCIAL DATA ON CORE SOES: COCOAG0 (In thousand cedis) 1985 1986 1987 1988 1989 1. INITIAL CAPITAL SUBSCRIBED 24,000 24.000 3,932,909 3,932,909 3.932,909 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) 4,775,197 12,017,548 25,717,691 15,044,679 24,746,495 3. LOAN CAPITAL 59,147 216,820 3,593,003 6,614,857 8,265,199 4. TOTAL ASSETS EMPLOYED 10,061,322 23,730,454 37,055,848 28,736,816 47,285,302 S. NET ASSETS EMPLOYED 4,834,344 12,234,368 29,310,694 21,659,536 33,011,694 6. CURRENT ASSETS 7,900,307 19,897,654 29,240.741 18,823,561 34,550,015 7. CURRENT LIABILITIES 5,226,978 11,496,086 7,745,154 7,077,280 14,273,608 8. LIOUID ASSETS 5,766,721 18,039,820 25,644,782 13,471,245 28,334,282 9. SALES REVEMUE 12,670,471 28,248,040 40,844,938 61,123,570 87,627,264 10. COST OF SALES 4,624,853 14,199,709 20,601,908 27,488,538 52,372,180 11. CROSS PROFIT/(LOSS) 8,045,618 14,048,331 20,243,030 33,635,032 35,255,084 12. OTHER INCOME 20,289 2,782,420 13,950,597 1,711,366 1,244,360 13. GROSS OPERATING PROFITICLOSS) 8,065,907 16,830,751 34,193,627 35,346,398 36,499,444 14. ADIM., GENERAL AND DEPRECIATION EXPENSES 1,958,733 3,455.215 13,423,836 18,254,321 1S,622,745 15. EXTRAORDINARY ITEMS (6,661,096) (6,910,059) (8,132,776) (14,567,590)(11,253,143) 16. PROFIT/CLOSS) BEFORE TAX (553,922) 6,465,477 12,637,015 2,524,487 9,623,556 17. PROVISION FOR TAX - - 18. PRDFIT/CLOSS) AFTER TAX (553,922) 6,465,477 12,637,015 2,524,487 9,623,556 19. PRIOR YEAR ADJUSTMENTS 767,807 - (13,162,695) - 20. TAX PAID DURING YEAR - . . . 21. DIVIDENDS PAID DURING YEAR - . . . . 22. CURRENT RATIO 1.51 1.73 3.78 2.66 2.42 23. ACID TEST RATIO 1.10 1.57 3.31 1.90 1.99 24. X GROSS PROFIT/(LOSS) TO SALES 1 49.73% 49.56% 55.03% 40.23% 25. Z NET PROFIT/CLOSS) TO SALES -4.37% 22.89% 30.94% 4.13% 10.98% 26. X NET PROFIT/CLOSS) TO TOTAL ASSETS EMPLOYED -5.51% 27.25% 34.10% 8.78% 20.35% 27. 2 NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED -11.46% 52.85% 43.11% 11.66% 29.15% 28. % NET PROFIT/CLOSSV TO CAPITAL SUBSCRIBED -2308.01% 53.80% 321.31% 64.19% 244.69% 29. % NET PROFIT/MLOSS) TO SHARE HOLDERS INTEREST -11.60% 53.80% 49.14% 16.782 38.89% 30. DEBT/EQUITY RATIO 1/99 2/98 1288 31/69 25\75 ANNEX I1I Page 2 of 19 TABLE 82: GHANA: FINANCIAL DATA ON CORE ENTERPRISES: ELECTRICITY CORPORATION OF GHANA (In thousand cedis) 1985 1986 1987 1988 1989 **------------------------------------------------------------------- 1. INITIAL CAPITAL SUBSCRIBED 17,313 17,313 17,313 17,313 10.766,167 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) (441,880) (4,849,163) 5,040,122 5,976,710 20,134,391 3. LOAN CAPITAL 1,197,154 3,371,316 6,280,509 9.614.549 17,569.973 4. TOTAL ASSETS EMPLOYED 4,994,768 10.044,762 24,813,951 34,254,429 41,410,681 5. NET ASSETS EMPLOYED 755,274 (1,477,847) 11,320,631 15.591,259 37,704,364 6. CURRENT ASSETS 3,233.062 5,722,494 5,526,580 9.848,640 9,156,125 7. CURRENT LIABILITIES 4,239.394 11,522,609 13,493,320 18.663,170 3,706,317 8. LIQUID ASSETS 2,973,637 5,359,353 4,421,071 8,172,463 7,335,363 9. SALES REVENUE 2,387,272 3,960,064 5,275,849 7,995,542 9,633,151 10. COST OF SALES 923,601 2,566,481 3,499,979 3,734,787 4,275,870 11. GROSS PROFIT/LOSS) 1.463,671 1,393,583 1,775.870 4,260,755 5,357.281 12. OTHER INCONE 13.153 524,461 115,745 137,801 213,008 13. GROSS OPERATING PROFIT/(LOSS) 1,476,824 1,918,044 1,891,615 4,398,556 5,570,289 14. ADMN.. GENERAL AND DEPRECIATION EXPENSES 1,351,711 6,325,327 6,899,535 8,861,956 5,264,686 15. EXTRAORDINARY ITEMS - 16. PROFIT/(LOSS) BEFORE TAX 125,113 (4,407,283) (5,007,920) (4,463,400) 305,603 17. PROVISION FOR TAX - 18. PROFIT/(LOSS) AFTER TAX 125,113 (4.407,283) (5,007,920) (4,463,400) 305,603 19. PRIOR YEAR ADJUSTMENTS - - 20. TAX PAID DURING YEAR - . - - 21. DIVIDENDS PAID DURING YEAR * * - - - 22. CURRENT RATIO 0.76 0.50 0.41 0.53 2.47 23. ACID TEST RATIO 0.70 0.47 0.33 0.44 1.98 24. % GROSS PROFIT/(LOSS) TO SALES 61.31% 35.19% 33.66% 53.29% 55.61% 25. N NET PROFIT/(LOSS) TO SALES 5.24% -111.29% -94.92% -55.82 3.17% 26. 2 NET PROFIT/(LOSS) TO TOTAL ASSETS EMPLOYED 2.50% -43.88% -20.18% -13.03% 0.74% 27. % NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED 16.57% 298.22% -44.24% -28.63% 0.81% 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 722.65X -25456.50% -28925.78% -25780.63% 2.84K 29. K NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST -28.31% 90.89% -99.36% -74.68% 1.52% 30. DEBT/EQUITY RATIO 159/(59) (228)/328 55/45 62/38 47/53 Source: Audited Accounts Note: - zero ANNEX I I Page 3 of 19 TABLE 83: GHANA: FINANCIAL DATA ON CORE SOES: GRANAIAN ITALIAN PETROLEUM CORPORATION (In thousand cedis) 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 16,769 16,769 16,769 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) 23,057 38,202 185,897 3. LOAN CAPITAL 334,896 541,132 1,170,077 4. TOTAL ASSETS EMPLOYED 567,522 1.864,377 3,579,764 5. NET ASSETS EMPLOYED 357,953 579,334 1,355,974 6. CURRENT ASSETS 439,876 1,146,262 1,795,694 7. CURRENT LIABILITIES 209,569 1,283,043 2,223,790 8. LIQUID ASSETS 339,365 580,806 1,277,140 9. SALES REVENUE 360,306 747.646 1,535.181 10. COST OF SALES 70,797 704,327 1,046,467 11. GROSS PROFIT/(LOSS) 289,509 43,319 488,714 12. OTHER INCOME 6,283 55.471 58.847 13. GROSS OPERATING PROFITitLOSS) 295,792 98,790 547,561 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 284,908 69,223 250,880 15. EXTRAORDINARY ITEMS - * 16. PROFITItLOSS) BEFORE TAX 10,884 29,567 296,681 17. PROVISION FOR TAX 8,788 18,030 148,986 18. PROFIT/(LOSS) AFTER TAX 2,096 11,537 147,695 19. PRIOR YEAR ADJUSTMENTS . 5,704 20. TAX PAID DURING TEAR 5.390 9,838 7,000 21. DIVIDENDS PAID DURING YEAR 4,192 4,192 22. CURRENT RATIO 2.10 0.89 0.81 23. ACID TEST RATIO 1.62 0.45 0.57 24. 2 GROSS PROFIT/(LOSS) TO SALES 80.35% 5.79% 31.83% 25. 2 NET PROFIT/(LOSS) TO SALES 3.02% 3.95% 19.33% 26. % NET PROFITMLOSS) TO TOTAL ASSETS EMPLOYED 1.92% 1.59% 8.29% 27. % NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED 3.04% 5.10% 21.88% 28. X NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 64.91% 176.32% 1769.22% 29. % NET PROFIT/(LOSS) TO SHARE MOLDERS INTEREST 47.20% 77.40% 159.592 30. DEBT/EQUITY RATIO 94/6 97/3 86/14 Source: Audited Accounts Note: = zero ANNEX I I Page 4 of 19 TABLE 04: GHANA: FINANCIAL DATA ON CORE SOES: GHANA AIRWAYS CORPORATION (In thousand cedis) 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 19,047 19,047 19,047 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) 53,221 48,664 (57,284) 3. LOAN CAPITAL 64,072 4. TOTAL ASSETS EMPLOYED 3,397,317 3,397,317 3,397,317 5. NET ASSETS EMPLOYED 117,293 48,664 (57,284) 6. CURRENT ASSETS 1,219,987 2,802,470 5,004,757 7. CURRENT LIABILITIES 1,570,456 3,288,653 5,654,140 8. LIQUID ASSETS 1,154,011 2,615,497 4,703,062 9. SALES REVENUE 2,377,997 5,305,866 .443,663 10. COST OF SALES 2,108,540 4,743,341 7,883,720 11. GROSS PROFIT/MLOSS) 269,457 562,525 559,943 12. OTHER INCOME 13. GROSS OPERATING PROFIT/(LOSS) 269,457 562,525 559,943 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 219,180 542,308 541,891 15. EXTRAORDINARY ITEMS - (124,000) 16. PROFIT/(LOSS) BEFORE TAX 50,277 20,217 (105,948) 17. PROVISION FOR TAX (42,335) (4,774) 18. PROFIT/MLOSS) AFTER TAX 7,942 15,443 (105,948) 19. PRIOR YEAR ADJUSTMENTS - 20. TAX PAID DURING YEAR 25,487 30,427 64 339 21. DIVIDENDS PAID DURING YEAR 20,000 22. CURRENT RATIO 0.78 0.85 0.89 23. ACID TEST RATIO 0.73 0.80 0.83 24. X GROSS PROFIT/MLOSS) TO SALES 11.33 10.60 6.63 25. Z NET PROFIT/LOSS) TO SALES 2.11 0.38 -1.25 26. S NET PROFIT/CLOSS) TO TOTAL ASSETS EMPLOYED 1.48 0.60 -1.86 27. X NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED 42.86 41.54 184.95 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 263.96 106.14 -556.25 29. X NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST 94.47 41.54 184.95 30. DEBT/EQUITY RATIO 55/45 Source: Audited Accounts Note: - a zero NNEX I I Page 5 of 19 TAILE 0S: GHANA: FINANCIAL DATA ON CORE SOES: GHANA NATIONAL PROCUREMENT AGENCY (In thousand cedia) 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 80 80 80 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) 1,082,132 3,135,546 4,537,741 3. LOAN CAPITAL 4. TOTAL ASSETS EMPLOYED 2,192,222 4,621,850 6,149,009 5. NET ASSETS EMPLOYED 1,082,132 3,135,546 4,537,741 6. CURRENT ASSETS 2,168,621 4,574,913 6,071,060 7. CURRENT LIABILITIES 1,110,090 1,475,895 1,608,577 8. LIQUID ASSETS 1,249,597 2,270,171 4,621,606 9. SALES REVENUE 1,867,778 3,332,871 4,717,020 10. COST OF SALES 1,041,170 1,590,145 2,926,143 11. GROSS PROFIT/MLOSS) 826,608 1,742,726 1,790,877 12. OTHER INCOME 2,283 233,135 193,058 13. GROSS OPERATING PROFIT/(LOSS) 828,891 1,975,861 1,983,935 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 50,731 194,681 297,414 15. EXTRAORDINARY ITEMS 18,060 * - 16. PROFIT/(LOSS) BEFORE TAX 796,220 1,781,180 1,686,521 17. PROVISION FOR TAX 18. PROFIT/(LOSS) AFTER TAX 796,220 1,781,180 1,686,521 19. PRIOR YEAR ADJUSTMENTS 1,515 - 20. TAX PAID DURING YEAR 21. DIVIDENDS PAID DURING YEAR 22. CURRENT RATIO 1.95 3.10 3.77 23. ACID TEST RATIO 0.89 1.54 2.87 24. % GROSS PROFIT/(LOSS) TO SALES 44.26 52.29 37.97 25. S NET PROFIT/(LOSS) TO SALES 42.63 53.44 35.75 26. % NET PROFIT/(LOSS) TO TOTAL ASSETS EMPLOYED 36.32 38.54 27.43 27. X NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED 73.58 56.81 37.17 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 995275.00 2226475.00 2108151.25 29. % NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST 73.58 56.81 37.17 30. DEBT/EQUITY RATIO Source: Audited Accounts Note: * = zero ANNEX II Page 6 of 19 TABLE B6: GHANA: FINANCIAL DATA ON CORE SOES: GHANA NATIONAL PETROLEUM CORPORATION (In thousand cedis) 1984 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 2. SHAREHOLDERS INTREST (CAPITAL AND RESERVES) 1,278,341 942,175 4,173,885 1,191,330 3. LOAN CAPITAL - - 20,839 4. TOTAL ASSETS EMPLOYED 5,067,783 6,532,745 7,117,132 15,492,997 5. NET ASSETS EMPLOYED 1,278,341 942,175 4,173,885 3,412,169 6. CURRENT ASSETS 4,791,876 6,183,467 6,628,415 14,787,595 7. CURRENT LIABILITIES 3,789,442 5,590,570 2,943,247 12,080,828 8. LIQUID ASSETS 2,213,293 3,809,650 3,927,321 8,730,970 9. SALES REVENUE 6,446,943 14,511,116 16,014,245 26,763,899 10. COST OF SALES 6,914,720 13,765,310 11,321,391 26,401,754 11. GROSS PROFIT/(LOSS) (467,777) 745,806 4,692,854 362,145 12. OTHER INCOME 556,519 64,767 472,222 144,573 13. GROSS OPERATING PROFIT/(LOSS) 88,743 810,573 5,165,076 506,718 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 289,896 1,124,527 1,381,781 1,294,827 15. EXTRAORDINARY ITEMS 16. PROFIT/(LOSS) BEFORE TAX (201,309) (336,166) 3,783,295 (788,109) 17. PROVISION FOR TAX - . 18. PROFIT/(LOSS) AFTER TAX (201,309) (336,166) 3,783,295 (788,109) 19. PRIOR YEAR ADJUSTMENTS (156) (22,212) (551,585) 5,554 20. TAX PAID DURING YEAR 21. DIVIDENDS PAID DURING TEAR 22. CURRENT RATIO 1.26 1.11 2.25 1.22 23. ACID TEST RATIO 0.58 0.68 1.33 0.72 24. 1 GROSS PROFIT/(LOSS) TO SALES -7.26% 5.14% 29.30% 1.35% 25. % NET PROFIT/(LOSS) TO SALES -3.12% -2.32% 23.62% -2.94% 26. X NET PROFIT/(LOSS) TO TOTAL ASSETS EMPLOYED -3.97% -5.15% 53.16% -5.0 27. % NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED -15.75% -35.68% 90.64% -23.10% 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED . 29. 1 NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST -15.75% -35.68% 90.64% -23.24% 30. DEBT/EQUITY RATIO - .61/99.39 Source: Audited Accounts Note: - = zero ANNEX I I Page 7 of TABLE 87: GHANA: FINANCIAL DATA ON CORE SOES: GHANA OIL COMPANY (in thousand cedis) 1986 1987 1988 1. INITIAL CAPITAL SUBSCRIBED 1,900 1,900 1,900 2. SHARE HOLDERS INTEREST (CAPITAL AND RESERVES) 499,413 639,027 547,381 3. LOAN CAPITAL * * - 4. TOTAL ASSETS EMPLOYED 2,898,704 4,128,091 4,811,794 5. NET ASSETS EMPLOYED 499,413 639,027 847,381 6. CURRENT ASSETS 2,722,430 3,276,360 3,758,674 7. CURRENT LIABILITIES 2,291,921 3,160,096 3,599,772 8. LIQUID ASSETS 1,445,473 2,294,777 2,401,165 9. SALES REVENUE 6,340,797 8,066,466 11,498,638 10. COST OF SALES 5,474,850 6,777,131 9,928,058 11. GROSS PROFIT/(LOSS) 865,947 1,289,335 1,570,580 12. OTHER INCOME 46,300 126,376 80,929 13. GROSS OPERATING PROFIT/(LOSS) 912,247 1,415,711 1.651,509 14. ADNN., GENERAL AND DEPRECIATION EXPENSES 676.695 1,098,097 1,041,920 15. EXTRAORDINARY ITEMS 1,040 - 570 16. PROFITI(LOSS) BEFORE TAX 236,592 317,614 610,159 17. PROVISION FOR TAX 165,211 (148,000) (401,805) 18. PROFIT/(LOSS) AFTER TAX 71,381 169,614 208,354 19. PRIOR TEAR ADJUSTMENTS 20. TAX PAID DURING TEAR 571,248 572,145 211,148 21. DIVIDENDS PAID DURING YEAR 15,000 15,000 15,000 22. CURRENT RATIO 1.19 1.04 1.04 23. ACID TEST RATIO 0.63 0.73 0.67 24. % GROSS PROFIT/(LOSS) TO SALES 13.66Z 15.98% 13.66% 25. Z NET PROFIT/tLOSS) TO SALES 3.73% 3.94% 5.31% 26. 2 NET PROFIT/(LOSS) TO TOTAL ASSETS EMPLOYED 8.16% 7.69% 12.68Z 27. % NET PROFIT/(LOSS) T0 NET ASSETS EMPLOYED 47.37% 49.70% 72.01% 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 12452.21% 16716.532 32113.63% 29. 2 NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST 47.37% 49.70% 72.01% 30. DEBT/EQUITY RATIO Source: Audited Accounts Note: = zero 6NNEq II Page 8 o19 TABLE 88: GHANA: FINANCIAL DATA ON CORE SOES: GHANA PORTS & HARBOURS AUTHORITY (In thousand cedis) 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 88,269 88,269 2. SHARE HOLDERS CAPITALCCAPITAL AND RESERVES) 716,980 (1,009,956) 3. LOAN CAPITAL 591,497 2,826,794 4. TOTAL ASSETS EMPLOYED 4,481,556 7,422,659 5. NET ASSETS EMPLOYED 1,308,477 1,816,838 6. CURRENT ASSETS 2,258,877 4,975,690 7. CURRENT LIABILITIES 990,004 5,605,821 8. LIQUID ASSETS 1,874,067 4,199,097 9. SALES REVENUE 1,129,996 4,290,417 10. COST OF SALES 1,379,140 3,683,879 11. GROSS PROFIT/(LOSS) (249,144) 606,538 12. OTHER INCOME 383,285 94,535 13. GROSS OPERATING PROFIT/(LOSS) 134,141 701,073 - 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 605,525 2,100,358 15. EXTRAORDINARY ITEMS - - 16. PROFIT/LOSS) BEFORE TAX (471,384) (1,399,285) 17. PROVISION FOR TAX 18. PROFIT/LOSS) AFTER TAX (471,384) (1,399,285) 19. PROIR YEAR ADJUSTMENTS 20. TAX PAID DURING YEAR 34,667 (5,739) 21. DIVIDENDS PAID DURING YEAR 22. CURRENT RATIO 2.28 0.89 23. ACID TEST RATIO 1.89 0.75 24. % GROSS PROFIT/(LOSS) TO SALES -22.05% 14.14% 25. X NET PROFIT/(LOSS) TO SALES -41.72% -32.61% 26. % NET PROFIT/(LOSS) TO TOTAL-ASSETS EMPLOYED -10.52% -18.85% 27. % NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED -36.03% -77.02% 28. X NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED -534.03% -1585.25% 29. % NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST -65.75% 138.55% 30. DEBT/EQUITY RATIO 45/55 156/(56) Source: Audited Accounts Note: z * zero ANNEX 11 Page 9 of 19 TABLE 89: GHANA: FINANCIAL DATA ON CORE SOES: POSTS AND TELECOMMUNICATIONS CORPORATION (In thousand cedis) 1985 1986 1937 1988 1. INITIAL CAPITAL SUBSCRIBED 51,816 51,816 51,816 51.816 2. SHARE HOLDERS CAPITAL(CAPITAL AND RESERVES) 450,961 3,326,256 5,042,278 6,473,548 3. LOAN CAPITAL 2,781,827 6,291.992 13,643,606 23,622,613 4. TOTAL ASSETS EMPLOYED 3,972,457 10,916,761 21.160,229 34,260,159 S. MET ASSETS EMPLOTED 3.232,788 9,618,248 18,685,884 30,096,161 6. CURRENT ASSETS 716,655 1.541.450 2,903,400 6,099,862 7. CURRENT LIABILITIES 739,669 1,298,513 2,474.345 4,163,998 8. LIUID ASSETS 552,521 1,238,453 2.424.607 5,386,042 9. SALES REVENUE 707,583 1,851,346 2,949,018 6,091,238 10. COST OF SALES 337 1,u49,997 2,307.801 4.503,596 11. GROSS PROFIT/(LOSS) 707,246 401,349 641,217 1.587.642 12. OTHER INCOME 24.792 227,898 206,366 13. CROSS OPERATING PROFITICLOSS) 732,038 629.247 847,583 1,587,642 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 683,108 2,716 214,633 414.180 15. EXTRAORDINARY ITEMS 16. PROFIT/CLOSS) BEFORE TAX 47,387 626,531 632.950 1,173,462 17. PROVISIOU FOR TAX 18. PROFITtCLOSS) AFTER TAX 47,387 626,S31 632,950 1.173.462 19. PRMIR YEAR ADJUSTMENTS (1,543) * 12.756 20. TAX PAID DURING YEAR 21. DIVIDENDS PAID DURING YEAR * - * * 22. CURRENT RATIO 0.97 1.19 1.17 1.46 23. ACID TEST RATIO 0.75 0.95 0.98 1.29 24. % GROSS PROFIT/CLOSS) TO SALES 99.952 21.68Z 21.74% 26.06% 25. Z NET PROFITI(LOSS) TO SALES 6.70% 33.84% 21.46% 19.26% 26, 2 MET PROFIT/CLOSS) TO TOTAL ASSETS EMPLOYED 1.19% 5.74% 2.99% 3.43% 27. % MET PROFITItLOSS) TO NET ASSETS EMPLOYED - 1.472 6.51% 3.39% 3.90% 28. % NET PROFITI(LOSS) TO CAITAL SUBSCRIBED 91.45% 1209.15% 1221.53% 2264.672 29. 2 MET PROFITiCLOSS) TO SHARE HOLDERS INTEREST 10.51% 18.84% 4.64% 18.13% 30. DEBT/EQUITY RATIO 86/14 65/35 73/27 78/22 Source: Audited Accounts Note: zero ANNEX I I Page 10 of 19 TABLE 110: GHANA: FINANCIAL DATA ON CORE SOES: GHANA RAILWAY CORPORATION (In thousand cedis) 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 50,000 50,000 50,000 2. SHARE HOLDERS INTERESTCCAPITAL AND RESERVES) 491,974 1,344,020 8,242,099 3. LOAN CAPITAL 440,393 1,491,053 3,513,371 4. TOTAL ASSETS EMPLOYED 1,193,141 3,129,790 12,229,350 5. NET ASSETS EMPLOYED 932,367 2,835,073 11,755,470 6. CURRENT ASSETS 619,383 972,034 2,952,190 7. CURRENT LIABILITIES 260,774 294,716 473,880 8. LIOUID ASSETS 250,167 624,125 1,047,306 9. SALES REVENUE 356,270 618,666 1,202,709 10. COST OF SALES 522,741 1,001,904 1,368,331 11. GROSS PROFIT/CLOSS) (166,471) (383,238) (165,622) 12. OTHER INCOME 11,863 14,500 40,229 13. GROSS OPERATING PROFIT/(LOSS) (154,608) (368,738) (125,393) 14. ADMM., GENERAL AND DEPRECIATION EXPENSES 245,624 381,515 757,711 15. EXTRAORDINARY ITEMS 333,600 716,950 614,900 16. PROFIT/(LOSS) BEFORE TAX (66,632) (33,303) (268,204) 17. PROVISION FOR TAX 18. PROFIT/(LOSS) AFTER TAX (66,632) (33,303) (268,204) 19. PRIOR YEAR ADJUSTMENTS * 20. TAX PAID DURING YEAR 21. DIVIDENDS PAID DURING YEAR * 22. CURRENT RATIO 2.38 3.30 6.23 23. ACID ]EST RATIO 0.96 2.12 2.21 24. % GROSS PROFIT/(LOSJ) TO SALES -46.73% *61.95% -13.77% 25. X NET PROFIT/(LOSS) TO SALES *18.70% *5.38% -22.30% 26. 1 NET PROFIT/(LOSS) TO TOTAL ASSETS EMPLOYED -5.58% -1.06% -2.19% 27. X NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED -7.15% *1.17U -2.28% 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED *133.26% -66.61% *536.41% 29. U NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST *13.54% *2.48% *3.25% 30. DEBT/EQUITY RATIO 47/53 53/47 30/70 Sourcet Audited Accounts Note: - a zero ANNE II Page 11 of 19 TAILE 811: GRANA: FINANCIAL DATA ON CORE SDES: GHANA SUPPLY COMMISSION (In thousand cedis) 1985 196 1987 1988 1989 1. INITIAL CAPITAL SUBSCRIED 2.000 2.000 2.000 2,000 2,000 2. SHWARMLERS INTEREST (CAPITAL AND RESERVES) 31,334 45,900 133,217 120,730 176,531 3. LON CAPITAL - - 4. TOTAL ASSETS EMPLOYED 747.426 1,126,406 1,583,353 2.680.687 1.837,737 5. NET ASSETS EMPLOYED 31.334 55,900 133,217 120,730 176,531 6. CURRENT ASSETS 525,631 648,332 881,177 2,175,476 1,620,869 . CURRENT LIABILITIES 76,092 1.080,505 1,450,136 2,559,957 1,661,206 8. LIQUID ASSETS 522,883 645.943 878,074 2,171,192 1,614,203 9. SALES REVEME 108.433 98.954 109.063 107.743 202,532 10. COST OF SALES - - - 11. GROSS PRDFITI(LUSS) 108.433 98.954 109,063 107,743 202,532 12. OTHER IpCN 13,602 14.571 99.443 99,963 104,520 13. RNOSS OPERATING PROFIT/(LOSS) 122,035 113,525 208,506 207.706 307,052 14. ADM.. GENERAL AND DEPRECIATION EXPENSES 65.810 79,762 155,455 206,294 229,721 15. EXTRAORDINARY ITENS 16. PROFIT/(LOSS) BEFORE TAX 56,225 33.763 53.051 1,412 77,331 17, PROMISION FOR TAX (33,735) (14,567) 38,992 78. PROFITICLOSS) AFTER TAX 22,490 19,196 53.051 1.412 38,339 19. PRIOR TEAR ADJUSTMENTS (4,628) * (4,583) 653 20. TAX PAID MUING YEAR 8,345 298 11,546 12,475 5.308 21. DIVIDENDS PAID DURING TEAR . - 22. CURRENT RATIO 0.73 0.60 0.61 0.85 0.98 23. ACID TEST RATIO 0.73 0.60 0.61 0.85 0.97 24. K GROSS PROFITI(LOSS) TO SALES 100.00% 100.00 100.002 100.00% 100.00K 25. K NET PROFITitLOSS) TO SALES 51.85% 34.12% 48.64% 1.31% 38.18% 26. X MET PROFITI(LOSS) TO TOTAL ASSETS EMPLCTED 7.52% 3.00 3.35% 0.05% 4.21% 27. X NET PROFITI(LOSS) TO NET ASSETS EMPLOYED 179.44K 60.40% 39.82% 1.172 43.81% 28. % NET PROFIT/(LOSS) TO CAPITAL SUBSCRIBED 2811.25 1688.15% 2652.55% 70.60 3866.55 29. % MET PROFIT/tL055) TO SHARE HOLDERS INTEREST 179.44% 73.56K 39.82K 1.17% 43.81% 30. DEB/TIEUITY RATIO Source: Audited Accowts Note: z 2 tero Page 12 of 19 TALE E: G6zNAMAs FINANCIAL DATA ON CORE SOES: GNANA UATER AWD SEWERAGE CORPORATION (in thousal cedis) 1985 1986 1987 1988 1. INITIAL CAPITAL SUBSCRIED 173,423 1,03G,554 1,204,316 2,118.323 2. SWARENOILDES !tTERESTCCAPITAL AND RESERVES) 596,578 5,542,193 10.476,731 11,242,656 3. LOR CAPITAL 1.381,949 3,442,273 6,265,237 7,420,780 4. TOTAL ASSETS EIPLOTED 3,193,556 10,699,336 19,577,440 22,581,319 S. NET ASSETS EMPLOED 1,978,527 8,984,466 16,741,968 18,663,436 6. CURENT ASSETS 934.395 2,193,096 3,978,232 5.226,241 7. CWRENT LIABILITIES 1.215,028 1,714.873 2,835,472 3,917,383 8. LIWID ASSETS 655,398 1,717,247 3,342,774 4,062,346 9. SALES REVEWUE 526.765 2.710,305 3.578,926 5,157,912 10. COST Of SALES 1.015,549 2,251.777 3,008,284 4,681,692 1t. CROSS PROFITALOSS) (488,784) 458,528 570,642 476,263 12. OTE I cE * 18,043 13. ROSS OPERATING PROFITILOSS) (488,781) 458,528 570.642 494,306 14. ADMO., GENERAL AND DEMECIATIOI EXPENSES 11,952 94,436 721.782 733,610 15. EXTRAORDINART ITENS 1,468 16. PROFITICLOSS) EFORE TAX (502,234) 3WK,097 (151,140) (239,347) 17. PROVISION FOR TAX - . 18. PROFIT/(LOSS) AFTER TAX (502,234) 34,092 (151,140) (239,347) 19. PRIOR TEAR ADJUSTMENTS (82,291) (117,231) 64,789 186,057 20. TAX PAID DIMING TEAR 21. DIVIDENDS PAID OWING TEAR * - 22. CURENT RATIO 0.77 1.28 1.40 1.33 23. ACID TEST RATIO 0.54 1.00 1.18 1.04 24. 2 GROSS PROFITI(LOSS) TO SALES -92.79 16.92% 15.94% 9.23% 25. 2 NET PROFITICLOSS) TO SALES -95.34% 13.43% -4.22% -4.64% 26. X NET PROFITICLOSS) TO TOTAL ASSETS EMPLOYED -15.73% 3.40% -0.77 -1.06" 27. % NET PROFITI(LOSS) TO YET ASSETS ENPLOTED -25.38% 4.052 -0.90 -1.28% 28. Z NET PROFITi(LOSS) TO CAPITAL SUSCRIBED -289.60% 35.06% -12.55% -11.30% 29. X NET PROFITitLOSS) TO SNARE HOLDERS INTEREST -84.19% 6.57% -1.44% -2.13% 30. DEWTIEWITY RATIO 70/30 38/62 38/62 40/60 Source: Audited Acconts Note: * zero ANNM I I Page 13 of 19 TABLE 313: GHANA: FINANCl DATA ON CORE 50ES: STATE SHIPPING CORPORATION (In thousand cedis) 1985 1986 1987 1. INITIAL CAPITAL SUBSCRIBED 37,94 37,944 37,944 2. SHARE HOLDERS INTEREST(CAPITAL AND RESERVES) (252,694) 546,205 (1,162,349) 3. LOAN CAPITAL - * 2,644,078 4. TOTAL ASSETS EMPLOYED 2,306,333 6,174,897 8,478,272 5. NET ASSETS EMPLOYED (252,694) 546,205 1,481,729 6. CURRENT ASSETS 2,306,333 5,886,080 8,207,415 7. CURRENT LIABILITIES 765,123 5,339,875 6,996,544 8. LIQUID ASSETS 2,303,865 5,873,993 8,202,392 9. SALES REVENUE 516,389 1,292,141 1,835,623 10. COST OF SALES 769,043 1,336,773 1,730,076 11. GROSS PROFIT/LOSS) (252,654) (44,632) 105,547 12. OTHER INCOME 74,807 161,078 129,447 13. GROSS OPERATING PROFIT/LOSS) (177,867) 116,446 234,994 14. ADMN., GENERAL AND DEPRECIATION EXPENSES 216,517 248,845 256,525 15. EXTRAORDINARY ITEMS (31,200) (95,240) (103,275) 16. PROFIT/(LOSS) BEFORE TAX (425,564) (227,639) (124,806) 17. PROVISION FOR TAX 18. PROFIT/AOSS) AFTER TAX (425,564) (227,639) (124,806) 19. PROIR YEAR ADJUSTMENTS * * 28,974 20. TAX PAID DURING VEAR - - 21. DIVIDENDS PAID DURING YEAR * * 22. CURRENT RATIO 3.01 1.10 1.17 23. ACID TEST RATIO 3.01 1.10 1.17 24. % GROSS PROFIT/(LOSS) TO SALES -48.03% -3.45% 5.75% 25. X NET PROFIT/(LOSS) TO SALES *82.41X -17.629 -6.80% 26. X NET PROFIT/LOSS) TO TOTAL ASSETS EMPLOYED -18.44 -3.69% *1.47% 27. % NET PROFIT/(LOSS) TO NET ASSETS EMPLOYED 168.4"X -41.68% -8.42K 28. X NET PROFIT/tLOSS) TO CAPITAL SUBSCRIBED -1121.515 *599.93% -328.92K 29. K NET PROFIT/(LOSS) TO SHARE HOLDERS INTEREST 168.41% -41.68% 10.74% 30. DEBT/EUITY RATIO - * (178)/78 Source: Audited Accounts Note: * * tero Page 14. of 19 TABLE 814: GVANA: FINANCIAL DATA ON CORE SOES: VOLTA RIVER AUTHORITY (In thousand cedis) 1985 1966 1987 1988 1989 1. !ITIAL CMOITAL SUBSCRIBED 137,127 374,459 374,459 374,459 374,459 2. SMAR t DERS INTERESI(CPTAL REERS) 32.306.935 89.286.281 92,648,768 162,317,402 223,106.998 3. LOA CAPITAL 10,594.525 26,305,950 30,841,536 39,744,375 60,444,723 4. TOTAL ASSETS EMPLOTED 44.783.331 119,453,617 128,779,229 211,720.054 293.145,360 5. NET ASSETS EMPLOTED 42,901,460 115,592,231 123.490,304 202,061.777 283,551.721 6. CURRENT ASSETS 1,996,001 30,722.237 37,984,947 10,820,401 14.840,127 7. CUR%ENT LIABILITIES 1,681,871 3,861.386 5,288,925 9,658,277 9,593.639 8. LIQUID ASSETS 1,833,556 30,340,778 37,218,024 9,657,278 12,908.180 9. SALES REVENUE 3,066,386 8,465,083 12,375,843 20,601,638 28,899,008 10. COST OF SALES 196,182 4,109,619 996,736 1,036,347 1,406,798 1I. GROSS PROFITiCLOSS) 2,870,204 4,355,464 11,379,108 19,565,291 27,492,210 12. OTHER INCo 112.672 571,600 49,355 343,534 451,344 13. GROSS OPERATING PROFIT/CLOSS) 2,982,876 4,927,064 11,428.463 19,908,825 27,943,554 14. ADM., GENERAL AND DEPRECIATION EXPENSES 2,771,819 4,436,106 8,284,019 14,218,605 18,316,437 15. EXTRAORDINARY ITEMS 93,040 64,183 (163,432) 2,814,385 16. PROFITILOSS) BEFORE TAX 304,096 490,958 3,208,627 5,526,788 12,441,502 17. PROVISION FOR TAX - - M8. PROFITitLOSS) AFTER TAX 304,096 490.958 3,208,627 5,526,788 12,441,502 19. PRIR TEAR ADJUSTMENTS * 63,710 20. TAX PAID DURING YEAR * * * - 21. DIVIDENDS PAID DURING TEAR * - - 22. CURRENT RATIO 1.06 7.96 7.18 1.12 1.55 23. ACID TEST RATIO 0.97 7.86 7.04 1.00 1.35 24. % GROSS PROFIT/(LOSS) TO SALES 93.602 St.45X 91.95% 94.972 95.13% 25. X NET PROFITi(LOSS) TO SALES 9.922 5.80% 25.93% 2C.83% 43.05% 26. 2 NET PROFITItLOSS) TO TOTAL ASSETS EMPLOYED 0.682 0.412 2.49% 2.61% 4.242 27. 2 NET PROFITI(LOSS) TO NET ASSETS EMPLOYED 0.712 0.422 2.60% 2.74X 4.392 28. 2 NET PROFITI(LOSS) TO CAPITAL SUBSCRIBED 221.76% 131.11% 856.875 1475.94% 3322.532 29. 2 NET PROFIT/LOSS) TO SRARE 1OLDERS INTEREST 0.942 0.55% 3.46% 3.40% 5.58 30. DEBTIEQUITY PATIO 24/76 23/77 25175 20/80 21/79 Source: Audited Accotss Note: zero ANNEX II Page 15 of 19 Hts: The SEC survey was carried out during 1990-1991 and collected data from PEs for the year 1987. By March 1991, 127 PEs had responded to the survey. Tables B15-21 are constructed on the basis of data from these 127 enterprises. TABLE B15. GHANA: MAJOR PEs IN TERMS OF SALES REVENUE IN 1989 Enterpris Sales revenue in 1989 (in million cedis) 1. Ghana Cocoa Board 87627 2. Ghana National Petroleum Corporation 44000 3. Volta River Authority 28899 4. Ghana Airways Corporation 19515 5. Ghana Oil Company 15510 6. Department of National Lotteries 13806 7. Social Security and National Insurance Trust 13200 8. Lever Brothers (Ghana) Ltd. 13727 9. Ghana Ports and Harbours Authority 9714 10. Electricity Corporation of Ghana 9633 11. Ghana National Trading Corporation 9500 12. Ghana Posts and Telecommunications Corp. 7000 Source: Audited accounts of enterprises and SEC survey of PEs. ANNEX II Page 16 of 19 TABLE B16. GHANA: MAJOR PROFIT-EARNING AND LOSS-MAKING PEs IN 1989 Maior profit-earners Enterprise Amount of profits earned (in million cedis) 1. Ghana Cocoa Loard 19623 2. Volta River Authority 9176 3. Department of National Lotteries 2613 4. Lever Brothers (Ghana) Ltd. 2548 5. Ghana Ports and Harbours Authority 2285 6. Ghana Posts and Telecommunications Corp. 1997 7. Agricultural Development Bank 1615 8. Ghana National Procurement Agency 1354 9. Social Security and National Insurance Trust It) 10. State Insurance Corporation 1048 Major loss-makers Entrs Amount of loss incurred (in million cedis) 1. State Gold Mining Corporation 3514 2. Cocoa Processing Company Ltd. 3280 3. Ghana National Petroleum Corporation 2300 4. National Investment Bank 2240 5. Bank for Housing and Construction 1696 6. Aluworks 1500 7. African Timber and Plywood (Ghana) Ltd. 1489 8. Ghana Railway Corporation 1113 9. Ghana Consolidated Diamonds 1037 10. Electricity Corporation of Ghana 4601 (1988) Source: Audited accounts and SEC survey of PEs ANNEX H Page 17 of 19 TABLE DL7. GHANA: MAJOR PUBLIC ENTERPRISES IN TERMS OF LOANS OUTSTANDING TO GOVERNMENT AT END 1989 (figures in million cedis) Enterise Loans Outstanding at end 1989 1. Posts and Telecommunications Corp. 6073.3 2. State Shipping Corporation 5211.1 (Black Star Shipping Line) 3. Twifo Oil Palm Plantation 1045.8 4. GIHOC Ltd. 919.5 5. Ghana Consolidated Diamonds 668.5 6. Ghana Water and Sewerage Corporation 600.2 7. State Gold Mining Corporation 500.1 Source: MFEP TABLE B18. OHANA: MAJOR PES PAYING DIVIDENDS DURING 1985-89 (figures in million cedis) 1. Ashanti Goldfields Corp. 168.5 137.5 1095.9 687.5 2. Lever Brothers (Ghana) Ltd. 94.3 133.8 305.3 347.9 - 3. Pioneer Tobacco Co. 20.2 23.4 40.8 72.0 120.0 4. Bemo Oil Palm Plantation 29.8 43.4 59.0 70.5 60.2 5. State Insurance Corp. 25.0 50.0 75.0 100.0 80.0 6. GHACEM Ltd. 6.0 75.0 150.0 150.0 7. Accra Bewery Ltd. 7.2 10.8 21.6 43.2 54.0 Source: MFEP ANNEX II Page 18 of 19 TABLE B19. GHANA: MAJOR PEs IN TERMS Of INCOME TAX PAYMENTS IN 1989 (figures in million cedis) Enterprise Tax payments 1. Lever Brothers (Ghana) Ltd. 1011.3 2. Irani Brothers 346.3 3. Accra Bewery 307.2 4. Guiness (Ghana) Ltd. 267.1 5. State Hotels Corporation 218.4 6. Ghana Bauxite Co. Ltd. 182.6 7. Ghana National Trading Corporation 125.0 8. Ghana Textile Mfg. Co. Ltd. 108.5 9. Juapong Textiles Ltd. 106.7 10. Tema Food Complex Co. Ltd. 85.0 Source: SEC Survey of PEs 1990. TABLE B20. GHANA: INCOME TAX PAYMENT RECORD OF CORE PES DURING 1985-89 Core PEs which paid no Core PEs which paid taxes during 1985-89 some.taxes during 1985-89 1. COCOCBOD 1. Ghana Airways Corp. 2. Electricity Corp. of Ghana 2. Ghana Italian Petroleum Corp. 3. Ghana National Procurement Agency 3. Ghana Oil Co. 4. Ghana National Petroleum Corp. 4. Ghana Supply Commission S. Ghana Water and Sewerage Corp. 5. Ghana Ports and Harbours 6. Posts and Telecommunications Corp. Authority 7. State Shipping Corporation 8. Volta River Authority 9. Ghana Railways Corp. Source: Audited accounts ANNEX II Page 19 of 19 TABLE D21. GHANA: DIVIDEND PAYMENT RECORD OF CORE PES DURING 1985-89 Core PEs which paid no Core PEs which paid some dividends during 1985-89 dividends during 1985-89 1. COCOBOD 1. Ghana Airways Corp. 2. Electricity Corp. of Ghana 2. Ghana Oil Co. 3. Ghana National Procurement Agency 3. Ghana Italian Petroleum Co. 4. Ghana National Petroleum Corp. 5. Ghana Ports and Harbours Authority 6. Ghana Water and Sewerage Corp. 7. Ghana Railways Corp. 8. Ghana Supply Commission 9. Posts and Telecommunications Corp. 10. State Shipping Corporation 11. Volta River Authority Source: Audited accounts GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX III FINANCIAL FLOWS BETWEEN THE GOVERNMENT AND THE PE SECTOR: CONCEPTUAL ISSUES AND DATA AVAILABILITY: Financial flows between the government and the PE sector can be either direct or indirect. Direct transfers from the government to PEs usually take the form of subsidies, both current as well as capital, equity contributions, which include conversion of PE debt into equity, and loans. Direct transfers from the PEs to the government include tax, dividend and interest payments, repayment of loans and transfer of net profits. In most analyses of financial flows between the government and PEs, attention is focussed on the direct flows, primarily because data on these are relatively easier to obtain. A substantial component of the financial flows may, however, be indirect or implicit. The most important types of indirect flows from government to PEs result from the latter's non-payment of taxes, dividends and interest and non- repayment of loans. In any given year, the difference between taxes, dividends and interest due and that actually paid by PEs constitute an indirect flow to the enterprises. The same is true with regard to accumulations in loan ammortization arrears. Tax exemptions and write-off of PE debts to government also represent indirect flows in the same direction. Contingent liabilities, such as PE loans guaranteed by governrients do not constitute such a flow as long as the PEs meet their obligations but generate an indirect flow to them when they default and the government, as guarantor, has to make the payments on their behalf. Subsidized provision of goods and services constitute another important type of indirect flow, which could be in either direction. A common type of subsidized service provided by government to PEs is subsidized credit. Government-owned banks often provide loans at concessionary interest rates, i.e. at rates below the market rate or the rate charged on loans given to the private sector. Governments also often on-lend loans obtained at concessionary rates from foreign creditors without adding an adequate mark-up. The interest savings thus accruing to the PEs constitute an indirect flow from government to these enterprises. Similarly unrequited services, such as the use of free office space in government owned buildings, and non-delivery of pre-paid goods and services represent other examples of indirect transfers from government to PEs. Indirect transfers from PEs to the government include arrears on payment by government for goods and services provided by PEs and the subsidy element in goods and services provided at subsidized rates by PEs to governments. For a given period of time, the arrears in payments represent flows between the government and the PEs while at any particular point in time, the accumulated arrears in payments constitute the stock of debt of each party to the other. Given that both direct and indirect flows are important, a comprehensive analysis of financial flows between the government and the PB sector and the financial burden of the PEs on the government budget should include a quantification of both kinds of flows. Data limitations, particularly the paticity of data on indirect flows, however, often preclude such an analysis. Similar problems were faced by the mission in Ghana, where a centralized, comprehensive and rigorous system of monitoring the financial flows between the government and the PE sector has not yet been developed. For some variables, the data simply do not exist while for others, data exist but are scattered in various government offices, often buried in ledgers and files, with no systematic effort made to extract them on a regular basis, check ANNEX III Page 2 of 4 consistency and aggregate them in order to obtain a comprehensive picture of the financial relationship between the government and the PE sector. Before describing how data problems have constrained our analysis it may be useful, at this stage, to describe briefly the major sources of data in Ghana on financial flows between the government and the PE sector and the state of data availability. Sources of data and the state of data availability: Of the roughly 300 enterprises on the master list of the State Enterprises Commission (SEC), audited accounts were available for only about 70 enterprises. For most of the enterprises, moreover, the latest year for which accounts are available is 1986; only a handful has accounts updated till 1989. The situation is slightly better with the core enterprises. Of the 14 core enterprises, audited accounts were available upto 1989 for five enterprises and upto 1988 for another five. The SEC data base, however, contains information upto 1989 for all but one core enterprise. Wherever audited accounts were not available for core enterprises, this data base was used to supplement the audited accounts' data. Another source of data is the 1990 SEC survey to which about 125 enterprises have responded to date and which provides information on a large set of variables, albeit for a single year only, i.e. 1989. Other important sources of data were the various divisions of the Ministry of Finance and Economic Planning (MFEP), the office of the Controller and Auditor General (CAG), the Internal Revenue Service (IRS) and the Bank of Ghana (BOG). The sources used and the state of data availability for different categories of financial flows are described below. Subsidies. For the core enterprises, data on subsidies were obtained from the data base of the SEC, including the audited accounts. For other enterprises, data were obtained from the Budget division of the MFEP. Equity and loans. The Investment Analysis and Projects Division of the MFEP was the source of data for equity contributions by government in PEs, new loans disbursed to PEs and repayment of loans by PEs. Enterprise specific data were obtained for the period 1985-89. Although the data are fairly comprehensive, in terms of the number of enterprises covered, there are some limitations. The information on equity contribution, for example, does not provide any clue as to the underlying purpose of the transfers. No distinction is made between "genuine" equity contributions, i.e. that which follow from an autonomous decision to increase the government's investment in an enterprise, the conversion of loans to equity following an enterprise's inability to service the debt and other transfers made to help distressed enterprises which are classified as equity transfers. In the case of loans, the major limitation of the data is the absence of any information on the amount of loan repayment due from each enterprise during a particular year. Lack of this information meant that it was not possible to compare the figures on actual repayment of loans with what was due ano thereby estimate the amount of overdue loans or arrears in loan repayment. Data are available on the amount of loan outstanding at the end of each year but not on the amount of loan which is overdue for repayment. Another problem is that the figures on loan repayment lump together interest payment and principal repayment so that it was not possible to estimate the amount of interest payments or arrears in interest payments separately from principal repayments. ANNEX III Page 3 of 4 The major reason for the lack of data on "loan repayments due" is the absence of properly drawn up schedules for loan repayment. The Controller and Auditor General's (CAG) office, which is the primary agency for recording financial transactions between the government and the PEs, and the ultimate source for data provided by the MFEP, complained that they do not have, in their possession, any of the loan agreements relating to loans provided by government to PEs and hence cannot draw up the repayment schedules. The loan agreements should be available in the MFEP but, in most cases, these have not been used to construct the repayment schedules. In some cases, loan agreements simply did not exist. Officials admitted that, for many loans, not only the enterprises but also the government, effectively assumed, often right when the loan was given, that these would not be repaid or, at most, repayments would be of a token nature. Such an attitude explains why in many cases even the necessity of drawing up loan agreements was not felt. Loan Guarantees. Related to the issue of loans is the issue of loan guarantees. The IPA provided data on loans guaranteed by the government for the years 1988-90. The audited accounts of the enterprises also have some information on this. Data are, however, not readily available on the amount government has had to pay due to defaults on loans. The CAG's annual report has an item called debt service which most probably includes these payments but this was of ittle help since all types of debt service are lumped together with no distinction made between repayments on governments's own loans, and repayments due to defaults on guaranteed loans. The mission was, however, able to compile primary data, directly from the ledgers at the CAG's office, on payments made by government on behalf of PEs following defaults on guaranteed loans. It is, however, not possible to infer from these data if defaulting PEs subsequently reimbursed the government for these payments. The data provided by IPA on loan repayments do not make any distinction between repayment of loans which represent such reimbursements to gove*nment and repayment on other loans. Taxes and Dividends. The audited accounts of the enterprises provided data on income taxes and dividends paid but nothing on arrears in tax and dividend payments. The Internal Revenue Service (IRS), another source of information on income taxes paid by PEs, also provided data on their estimates of the tax due from each enterprise and the amount of tax arrears. These estimates could, however, be misleading because in many instances, they were provisional, i.e. based on the IRS's provisional assessment of the taxable income of each PE. We, therefore, made our own estimates of the amount of taxes due from each enterprise from data on not profits given in the audited accounts. Since an adequate time-series was not available for most enterprises, this exercise was confined to the core enterprises. Data on dividend payments were available from the IAP division of the MFEP as well as from the audited accounts for some enterprises. Data on the amount of dividends declared was patchy so that it was not possible to estimate the amount of arrears in the payment of declared dividends. The MFEP also does not appear to have readily available data on arrears in the payment of declared dividends. We have thus made our own estimates of arrears in dividend payments (see para 33). Arars in payments for goods and services. Systematic data on arrears in payments for goods and services whether by government to PEs or by the latter to government is not currently available. The accounts receivable and accounts payable data in the audited accounts of the enterprises do not usually make a distinction between different types of creditors and debtors. The only readily available source of data on these variables, as well as on arrears in tax and dividend payments, is the cross-debt study ANNEX HI Page 4 of 4 carried out in 1987. This study provides detailed data on the cross-debts between the government and 18 PEs and the PEs themselves as at June 30, 1986. The limitation of the study is that it provides information on only the i"k position at a particular point in time and not annual &rs over a number of years, thus making it impossible to evaluate inter-temporal changes in the flows. Such an analyis would have been possible had similar cross-debt studies been carried out each year. In practice, however, the 1987 study is yet to be updated. A fresh study has been under consiaeration for some time and some preparatory steps already taken but the launching of the study has fallen behind schedule. Other catEaa. No data were available on indirect flows associated with the provision of subsidized goods and services by government to PEs and vice-versa, or on non-delivery of pre-paid goods and services. For some enterprises, some data are available on the terms and conditions at which loans, direct or on-lent, were provided by government from which an, albeit incomplete, picture of the extent of subsidized credit can be obtained. ANNEX 11I Attachment I Page 1 of 4 GHANA: Data Requirements for a Comprehensive System to Monitor Financial Flows Between Government and Public Enterprises Enterprise level data would need to be collected on an annual basis on the following sets of variables: 1) Total subsidies a) current subsidies b) capital subsidies With a short explanation of why the subsidies were given. 2. Equily.-Contribution: i) Total equity contribution, of which: a) equity contribution which represents genuine investment by government in the enterprise b) equity contribution which is merely a transfer to help distressed enterprises c) equity transfers which represent conversion of loans into equity If loans converted into equity are classified as reduction in loans (see below) and entered into the accounts as an indirect outflow from the government then they should not be entered again under equity contribution as this would involve double-counting. 3. J&n: i) amount of loan overdue at the beginning of the year (i.e. which was due for repayment in the past but not paid) ii) additional amount which fell due during the year iii) total amount due for repayment during the year (i + ii) iv) total repayment during the year v) total amount overdue at end of year (iii - iv) vi) increase in loan repayment arrears during the year (v - i) While the amount under item (iv) would enter the aggregate flow of funds table as a direct flow from PEs to the government the amount under item (vi) would enter the table as an indirect flow from government to PEs. In addition to the above, data should also be collected on the following: ANNEX III Attachment 1 Page 2 of 4 vii) total amount of loan outstanding at the beginning of the year (this includes loan outstanding but not yet due and loans overdue) viii) new loans disbursed during the year ix) loans forgiven during the year or converted into equity x) total repayment during the year (same as iv above) xi) total amount of loan outstanding at the end of the year (vii + viii - ix - x) Items (viii) and (ix) would enter the flow of funds table as a direct flow from government to PEs. The difference between x and vii which represents the not addition in the loan outstanding shows the change in the stock of debt; this is different from a net outflow. 4. Injerest rates: For each enterprise the following data should be compiled. i) For each outstanding loan (direct or on-lent) an estimate should be made of what the appropriate rate of interest should be. For direct loans, this could be the market rate of interest. For on-lending this could be the rate of interest charged by the creditors from the government plus some appropriate mark-up. This appropriate interest rate should then be applied to the amount of loan outstanding to obtain an estimate of the appropriate interest payments which each PE should have made on each loan. For each PE these estimates may then be aggregated over all outstanding loans to get an estimate of the total amount of interest which the enterprise should have paid. ii) An estimate of what interest amount they were required to pay given the actual interest rates which are being charged (this may be called interest actually due). iii) Actual interest paid The difference between (ii) and (iii) represents an indirect flow from the government to FEs on account of arrears in interest payments while the difference between (i) and (ii) represents an indirect flow from government to PEs on account of the charging of concessionary interest rates. S. Loan euaantees: Two types of information, one of a stock nature and the other of a flow nature need to be collected on loan guarantees. Stock data: i) For each PE, a list of loans which the government has guaranteed, giving the name of .je creditor, the amount of loan given, the interest rates and other charges, and the schedule of repayments. Flow daa: ii) Amount of repayment due during each year ANNEX III Attachment I Page 3 of 4 iii) Amount actually repaid by PE to original creditor iv) Amount overdue (ii - iii) v) Amount paid by government to creditors on behalf of PEs vi) Amount paid by PEs to government to reimburse earlier payment by government on behalf of the PE. vii) Net payment by government on behalf of PEs during the year (v - vi) Here item (vii) would enter the flow of funds table as an indirect flow from the government to the PE sector. Note here that item (vi) above is different from item 3 (iv) which relates to repayment on direct loans. Unfortunately, the data as it exists now does not make this distinction. 6. Iffu: For each enterprise data on the following: If not-exempt from income taxation: i) Total amount of taxes due ii) Amount actually paid iii) Arrears in tax payments (i - ii) If exempt from income taxation: iv) Amount which would have been due if not exempted Items (iii) amd (iv) would enter the flow of funds table as indirect flows from government to PEs on account of arrears in tax payments and tax foregone due to exemptions. 7. Dividends: For each enterprise data on the following: i) An appropriate amount of dividend which the PE shouid have declared and paid to the government. What the amount would be would depend on the amount of equity investment of the government in the PE, the amount of profits earned and the "appropriate" rate of dividend payments. ii) amount of dividend actually declared iii) amount of dividend actually paid ANNEX III Attachment 1 Page 4 of 4 iv) arrears in dividend payment: definition A (ii - iii) arrears in dividend payment: definition B (i - iii) Depending on what definition one prefers (I would prefer definition B), the appropriate amount in item (iv) would enter the flow of funds table as an indirect flow from government to the PE sector. 8. Total outstanding payments from government for goods and services provided by PEs. i) total outstanding amount at the beginning of the year ii) total outstanding amount at the end of the year hi) net increase in the outstanding amount (ii - i) Item (iii) represents an indirect flow from PEs to the government. 9. Provision of goods and services by PEs to the government at subsidized prices and vice versa (excluding subsidized credit which has been dealt with above). GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX IV PRICING AND PROCUREMENT POLICY A. PRICING POLICY Pricing Policv under the Economic Recovery Program Mechanisms of Government intervention to control prices can be traced to the establishment of the Prices and Incomes Board (PIB) in 1972. Price Control Squads of the Ghana Police Service and Price Tribunals also have operated as agencies to regulate, monitor and enforce the prices of a broad range of commodities. In conjunction with the Economic Recovery Program it has been the policy of Government to progressively reduce the role played by Government in price administration and control. Measures taken through 1990 to implement these undertakings include: (a) stipulating that cost reviews and price determinations by the PIB are advisory only, not binding on producers or traders; (b) reducing the monitoring and enforcing authority of the Price Control Squads of the Ghana Police, effected in 1985; (c) discontinuing the Price Tribunals, effected in 1984; (d) reviewing price controls on a number of commodities in the framework of a policy commitment to allow full cost and margin of profit to be passed on to consumers. (e) reducing the number of items for which PIB determines prices. In the first quarter of 1991 this specific list included three items: cement, wheat flour and printed cotton textiles. The Situation in late 1990-early 1991 As important as reductions in the scope and authority of centralized price setting and regulating agencies have been there remain several a: as in which Government intervention distorts domestic price structures and poses problems for enterprise viability. In the course of 1990 and continuing into the first quarter of 1991, Government has made several changes in pricing policy frameworks and practice. The present situation is best understood as a period of transition. A significant degree of price administration and regulation continued to be exercised throughout 1990 by sector ministries, the Prices and Incomes Bard (PIB), the National Energy Board (NEB), and the Revenue Secretariat. Mechanisms for price administration vary for different economic sectors and affect the competitive environment for public enterprise operations in different ways. The sectors, and the principal state-owned enterprises affected in each, are considered in turn. ANNX TY Page 2 of 21 Agricultural Sector Interventions by the Ministry of Agriculture to administer prices have been motivated by two predominant policy concerns: (a) to set a level of producer prices that will motivate farmers to produce the volume of food and export commodities required to meet national food security and export earnings objecives; and (b) to set a consumer price for basic food staples at a level that is affordable to low income segments of the urban and rural population, a price stabilization objective. Government's involvement in price regulation in the agricultural sector can be understood as an attempt to reconcile these two frequently conflicting policy objectives although historically the emphasis has been more on keeping food prices down and tax revenues on export crops up. The central instrument employed by government for price determination in the agricultural sector was the Committee for the Pricing of Agricultural Commodities established in the Ministry of Agriculture in 1983. The work of this Committee was tacitly discontinued in the course of 1990. The committee included representation from the University, The Prices and Incomes Board (PIB), Ghana Food Distribution Corporation (GFDC), National Womens' Council and the Ghana National Procurement Agency (GNPA) as well as Government. This committee considered recommendations and proposals solicited from Farmers organizations, agricultural field staff and the regional and district administrations. Their conclusions with respect to producer and consumer prices were, officially, "recommended prices" rather than mandatory or controlled prices, although it was the general practice of PEs to treat the Committee's determinations as binding for their operations. In the case of cocoa prices, intervention in recent years has taken the form of implementing agreements with the World Bank/IDA on producer returns. Two large public enterprises have been affected by price administration practises: The Ghana Cocoa Board and its subsidiaries (COCOBOD), and the Ghana Food Distribution Corporation (GFDC). Both are public enterprises that are deemed to fulfill important policy functions, roles that are argued to warrant a closer Government control over pricing decisions and marketing behaviour than might be considered appropriate in other cases. CQCOBOD. The Ghana Cocoa Board and its subsidiary companies are accountable to the Office of the PNDC and enjoy a state conferred monopoly in the buying and selling of cocoa and coffee. They are also a major marketing channel for sheanuts, handling an estimated 25% of production. From the perspective of pricing policy the COCOBOD is subject to agreements reached from time to time between Government and the World Bank/IMF to increase the proportion of earnings generated through export sales that is passed through to producers. The importance of cocoa exports as a source of Government revenue and of foreign exchange is argued to warrant direct public ownership in the cocoa sector. The pricing issue here reduces to the determination of the respective shares in revenues for cocoa sales accruing to producers and Government respectively. Continuing efforts to improve the efficiency of COCOBOD operations are stimulated in important measure by the desire to maximize net revenues available for distribution to producers and to Government. ANNEX IV Page 3 of 21 The recently completed Restructuring Plan for COCOBOD aims to achieve five objectives over the 1991/93 period. These include the grant of operational and financial autonomy to the Produce Buying Company (PBC) and the Cocoa Marketing Company (CMC), and the continuing divestiture of processing factories and plantations. In the course of the AGSAC negotiations with the Bank in early 1991 Government described the next generation of COCOBOD reforms as possibly including the opening up of the share capital of PBC to the local private sector and allowing competition to PBC by companies in which the Government might take a minority shareholding. Earlier (1970s) attempts to privatise COCOBOD functions failed when private owners abused their market position and Government intends to proceed cautiously. As a first step, COCOBOD's monopoly in trading coffee and shea nuts has been opened to competition from private traders. Government is of the view that any decision allowing multiple domestic marketing intermediaries would depend upon experience with the proposed liberalization of coffee and shea nut marketing. Ghana Food Distribution Corporation (GFDC. GFDC buys food crops from farmers, imports some food from abroad, provides limited in-countr* storage, undertakes some processing, distributes and sells from inventory to the public. In 1989/90 GFDC also engaged in the export of surplus maize. About 60% of the corporation's annual turnover is in maize. For the Ghana Food Distribution Corporation prices recommended by the Committee for the Pricing of Agricultural Commodities were, through 1990, the producer prices paid by the Corporation. The central problem for GFDC has been the conflict between principles of profitable commercial operation and the demands of Government policy exercised through the Ministry of Agriculture. Frequently, the Corporation was required to buy at above market prices (to suppon the producer price) or to sell at below market prices to slow a rise in consumer prices. In either case GFDC would incur substantial losses on its trading activity. The situation warranted a reassessment of GFDC's functions and relations to Government. In the course of AGSAC negotiations in early 1991 a revised set of functions and objectives has been agreed for GFDC: 1. to acquire, maintain, store, sell and distribute food items: particularly, grains for food security and emergency purposes and for domestic food price stability; 2. to make strategic purchases of foodstuffs during glut periods from designated locations and to sustain production incentives to farmers; 3. to establish or assist to establish food storage and handling infrastructure at needy places and to provide such expertise to farmers' cooperatives and other private sector operators; and 4. to pioneer and promote innovations in food marketing techniques and to provide expert advice on marketing functions to the public and to advise Government on appropriate marketing policies and strategies. The present situation of GFDC is one in which important policy objectives of Government ANNEX IV Page 4 of 21 have been delegated to a public enterprise. It is not clear in the present agreements how the financial resources necessary for their successful implementation will be provided. It is worth repeating two observations in a reiort on pricing and procurement issues prepared by the State Enterprises Commission with reference to GFDC: (a) that the cost to Government of the food security, producer and market price stabilization objectives established for GFDC should be fully transparent and funded through the Ministry budget; and (b) that Government should set aside the illusion that these expensive programs can be financed out of the trading profits of a public enterprise. The nature of functions and objectives now agreed for GFDC make it appropriate to consider dissolving GFDC as a separate corporation and the reabsorption of its (mainly policy) functions in a new Department of the Ministry of Agriculture. Any tangible assets surplus to the residual policy purposes served by a reconstituted GFDC would be liquidated. Alternatively, GFDC should be incorporated in the performance contract system and the commitment from Government to cover trading losses incurred in Implementing policy made explicit, perhaps in the form of a fee for managing strategic reserves, purchases and sales. Purchases might be funded through the Ministry budget and sales revenues lodged with the Consolidated Fund. Energy S Public enterprises occupy dominant or monopoly positions in the importation and refining of crude petroleum and in the generation and distribution of electric energy. In the retail distribution of petroleum products one PE (GOIL) competes with several private enterprises. It is government policy that energy products be available throughout the country at a standard national price and at no net cost to the Treasury; i.e. full costs passed through to users. Petroleum products It remains Government policy that petroleum products be distributed nationally at uniform prices and that full costs be borne by consumers. This policy objective requires centralized price administration, exercised in Ghana by the National Energy Board (NEB) until March, 1991. At that date NEB was disolved and its staff and functions reabsorbed in the Ministry of Fuel and Power, redesignated as the Ministry of Energy. The Ministry, formerly the NEB, sets ex-refinery prices, transport rates and retail prices. Transportation rates are referenced to a basing point (Kumasi) with distribution north of the basing point subsidized by above cost rates levied south of Kumasi. The basing point system for transport costs is organized in a fund managed by the marketing companies. The Ministry sets allowable margins for all levels of the system and factors costs of each level into the price determination. In principle, current practice incorporates full costs and margins into the price at each level of the system. The significant distortions in this system are the use of a basing point system for recovering the costs of distribution of petroleum products and the way in which costs are allocated across product lines. Government uses this system to set the price of certain products at a level below cost: kerosine and premix (1/20) fuel for fisherman. Premix, for example, is priced at less than half of input costs and specially priced ex-refinery shipments for this product have been directed by the ANNEX IV Page 5 of 21 Ministry. There continue to be difficulties at the enterprise level in the estimation of costs and necessary operating margins. The viability of producers and transporters depends, in the medium and longer term, on the adequacy of provisions for fixed costs (capital consumption) in the pricing formula and in the setting of margins that generate an adequate level of retained earnings. It is the case that several energy sector PEs have not valued their assets on a current basis, and it would appear that price administration practise has tended to seriously underestimate the capital costs of production in pricing decisions. The PEs involved with petroleum products have reported that the allowable margins in Ghana are lower than those in neighbouring countries. At present the substantial premium over world market prices for crude oil that is built into the pricing structure for petroleum products accrues almost exclusively to GNPC, while provisions for capital consumption and margins remain inadequate for other enterprises in the system. Electrical energy. The Ministry of Fuel and Power sets prices for electrical energy on a full cost recovery basis. The problem with present price structures is that while the Volta River Authority (VRA) price for bulk electricity sold to the Electricity Corporation (ECG) is set to fully recover VRA's production and distriti tion costs, the price that ECG has been allowed to charge consumers is set below a level that would fully recover ECG costs, representing an implicit subsidy on consumption. It should be noted that the position of the Ministry on this question is that ECG's costs are at present too high and current allowable tariffs are sufficient to meet the costs of a rationalized operation. ECG continues to contest this assertion, but the relationship between allowable tariffs and enterprise efficiency is one common to enterprises in several sectors. The present situation is that ECG does not fully recover its costs and its financial viability is compromised. Since it is Government's stated policy to eliminate consumer subsidies under the Economic Recovery Program it might be suggested that where real concerns exist about ECG's cost and functional structures the appropriate intervention would take the form of a performance contract between the Ministry of Fuel and Power and ECG. The present (1990 and 1991) performance contracts are inadequate for this purpose and their strengthening should be a high priority for 1991/92. It is only through a negotiated agreement between Ministry and ECG that a cost structure acceptable to both parties can be defined. Surface Transoortation Road and rail transport rates and fares are set by the Ministry of Transport and Communications and announced annually in conjunction with the budget of Government. Allowable rates and fares may be adjusted at other times as necessary in response to unanticipated increases or decreases in operating costs. Road Transportation. The state enterprises affected by price administration in this sector are City Express, Omnibus Services Authority and the State Transport Corporation. Rates set by the Ministry are enforced on private and public suppliers of ground transportation services. The basis for Ministry decisions about fares is not clear to affected enterprises. All report that they are not asked to provide cost information to the Ministry; certainly tariffs for specific routes and services are set without reference to any analysis of the costs of that service. It would appear that the rates ANNEX IV Page 6 of 21 established by the Ministry are based on considerations oJher than the costs of providing the service. On some routes and services the public enterprise carriers charge less than the allowable fare maxima, a policy they relate to the need to be competitive with private carriers who have superior equipment. Moreover, all road transport enterprises report that they are required by Government to maintain uneconomic routes and to provide uneconomic services such as the free transportation of handicapped persons or the provision, without adequate compensation, of transportation for Government purposes. Examples of this last include assistance in the mobilization of ECOMOG forces, and the provision of buses to transport school children for Independence Day celebrations. Government's commitment to transparency and full cost recovery under the ERP would require that the fully costed service be related to whatever level of fares and revenue generation may be approved and the difference financed by an explicit subsidy through the budget of the Ministry of Transport and Communications. At the present time all three PEs are running operational losses because of the gap between their assigned responsibilities and the financial support provided by Government. All public road transport enterprises are experiencing financial difficulties at present and a full analysis of their restructuring requirements is required before any conclusion about the adequacy of current allowable fares and rates can be reached. None of the enterprises is currently in a position to estimate the fully distributed costs of different routes and services, although they are preparing documentation on the variable costs of specific routes. An idiosyncrasy common to most regulated enterprises is that labour is treated as a fixed cost and not factored into analyses of the variable costs of providing a service. Because some notional indicator of variable costs, so defined, is factored into tariff determination, tariffs tend to be well below real costs on a fully distributed basis. Restructuring studies for the State Transport Corporation, the Omnibus Authority and City Express could be financed under the Public Enterprise Project. It is only on the basis of such studies that the impact of price regulation on the financial and functional viability of these state-owned enterprises can be assessed with any confidence. The participation of the Ministry of Transport and Communications in the carrying out of this e.nercise and in the negotiation of Performance Contracts to implement the recommendations of the studies is essential. The Ministry has completed a study and developed recommendations for a rationalization of the operations of three PEs: City Express, State Transport Corporation, Omnibus Services Authority. Documents available in SEC do not provide any indication of the costs of the recommendations, nor of the level of fares that would be required to pay for them. In the case of road transportation services it is not clear what policy purpose is served by fare regulation. Most inter- and intra-city routes are served by both public and private sector operators; no monopoly situation exists to justify price regulation. Rail I sportation. Freight rates and tariffs are based on the principle of full cost recovery. Passenger fares are set to recover 60 percent of fully distributed costs and Government provides a subvention to cover the operating deficit. ANNEX IV Page 7 of 21 OCer ransraion. Rates and tariffs for international services provided by Ghana Airways and The State Shipping Corporation (Black Star Line) are set in association agreements. Manufacturing and Trading Sectors The current position of the Prices and Incomes Board (PIB) is that, with effect from 1990, price administration and regulation is limited to cement, wheat flour and printed cotton textiles. Enterprises are no longer required to submit analyses of cost structures for determination of an "advisory" or "recommended" price by PIB. Nevertheless, many public enterprises continue to follow this procedure, noting that the legal requirement continues although it is not enforced at present. In March 1991, PIB was conducting a survey of enterprises complaining of hardship and unfair competition under the liberalized trade and pricing regime and who wished to apply for official relief and support. The basic process followed by PIB for the exercise of price regulation in manufacturing sector and importer/trading PEs is as follows: 1. PE completes a "price structure" questionnaire and forwards it to PIB; together with a proposed price structure. The documentary evidence (suppliers invoices, customs entry forms, etc) to support this cost analysis emphasizes retrospective c.i.f. costs as the basis for price determination, although replacement costs are sometimes used; 2. PIB reviews completed questionnaires and proposed margins and sets an "approved" margin and f.o.b. price. Generally, PEs report that the producer margins allowed by PIB are inadequate; 3. The approved price structure is forwarded to the PE as a "recommended" price. While price determination by the PIB is stated, at present, to be advisory it is the case that PEs generally accept PIB advisory approvals as mandatory. While this process applies to only 3 commodities at present, it continues to be the dominant approach to product pricing by public enterprises. Thus, defects in the system as exercised by PIB continue to be a problem for many enterprises. The major problems with this methodology have been: (a) "Approved" prices tend to reflect current costs of material inputs not replacement costs. One consequence is an intensified cash flow squeeze as revenues do not cover the costs of replenishing the materials inventory; (b) "Approved" prices fail to incorporate realistic allowances for capital consumption (depreciation) as a cost of production. Coupled with the general PE practise of valuing assets at historic cost the result is a systemic failure to provide adequately for maintenance and replacement of productive assets; (c) Emphasis on cost plus margin as basis for price determination provides no incentive to ANNEXIV Page 8 of 21 PE management to constrain or control production costs; efficiency improving reductions in costs are applied to reduce the ex-factory price, not to improve producer margins; (d) PIB intervention has been, essentially, Government intervention to regulate producers' margins, a discipline that in a regime of *advisory" prices affects PEs more than private sector companies, and which operates to make it impossible for enterprises to generate significant retained earnings. Pricing Policy Issues Residual Price Control by PIE As of early 1991, PIB continues to approve prices for cement, wheat, flour and cotton printed textiles. Apart from wheat, private sector importers and producers deal in all of these. PIB "approved prices" are applied at the factory gate. For items still subject to price control "approved" margins are neither regulated nor enforced at wholesale or retail levels. Two consequences have significance for policy : (a) adoption of "approved" prices by PEs at the factory gate does not operate to reduce the price paid by consumers below the level determined by supply and demand in the marketplace; and (b) wholesale and retail margins are enriched substantially above margins allowed to producers which distorts the value added pattern is the industry/marketing chain to favor investment in marketing rather than production. There zppears to be no consistent rationale for a continued role by PIB in price determination for these conmodities. There appears to be significant capacity and competition within the private sector; stiff competition is reported by ONPA across virtually their whole line of commodity imports. Moreover, PIB intervention has not operated to constrain retail or consumer prices below levels determined by supply and demand in ther market place. Its principal visible effect has been to shift margins from producers to traders. Problems of Transition from PIB Administered Pricing Regime There have been a number of problems associated with the system of determining prices by way of PIB review and approval of proposals prepared by a public enterprise. Because this has been the system for so many years, and because many PEs have depended completely upon PIB and Ministries to determine prices, it remains the method most familiar to enterprise managers. There is also a reluctance on the part of Government agencies to change their ingrained habits and allow PEs to make their own pricing decisions. Problems associated with the method can be expected to continue even though PIB is no longer formally involved. A critical factor in the transition to enterprise autonomy in pricing decisions is the perception of what a proper basis for that decision is. The prevalent perception emphasizes cost recovery, ANNEX IV Page 9 of 21 particularly recovery of the variable costs of production and, generally, treats labour as a fixed rather than a variable cost. Missing from the general perception is a recognition of considerations such as a return on capital or equity, the need to generate retained earnings for new investment or efficiency improvements, or a consideration of the supply and demand characteristics of the market for the enterprise's goods or services. This is to say that enterprise management is not, in general, encouraged, and has not been allowed, to adopt a commercial orientation to the making of pricing decisions. A considerable effort is required to break the pattern of intervention by external bodies in pricing decisions and, at enterprise level, to prepare managers for operating in a competitive, commercial environment. The widespread tendency to treat labour costs as fixed rather than a variable cost of production, the lack of data and analyses required to allocate fixed costs across product lines, and the novelty of the notion of setting prices to generate acceptable rates of return on assets or equity are indicative of the substantial problems of transition at the enterprise level. Transparency in the Case of Subsidized Goods and Srvices A number of PEs are required, as a matter of policy, to provide goods or services below cost to some or all consumers. In most cases involving core PEs Government is committed to the payment of any difference between actual cost and the price of the subsidized good or service. This commitment is not supported generally by a financial provision in Ministry budgets and public enterprises typically receive little or no compensation from Government. Government continues to intervene to set the prices for some products at levels below cost and in a way that lacks transparency. For example, Government appears to have taken advantage of the recent Gulf crisis, to base domestic petroleum prices at levels substantially above cost, the premium accruing in the present structure to GNPC and Government; no benefit is passed through to the refinery or marketing enterprises. In other cases, such as GWSC, tariffs are set substantially below rates required for full co. recovery in order to maintain a standard national price and so as to keep water costs at a level ,'ordable by the major part of the population. The policy issues involved in this area are straight forward: (a) to assure that production costs are accurately and completely captured in pricing formulas applied; and (b) that the difference between fully distributed costs and established tariffs be paid to the enterprise by Government. There are, in addition to the core PEs, a number of other PEs required to sell or deliver goods or services at subsidized or administered prices. These include the textiles complex, cement, wheat and flour, enterprises still subjet to PIB control and others required from time to time to allocate commodities by directive from a ministry. Generally, there remains a lack of transparency in the relations between enterprises and ministries. ANNEX IV Page 10 of 21 Deociencils in Flnancial In-formnationi atEnterprise Level A recurring theme raised by enterprises, PIB and Government is the problem of basing pricing decisions on inadequate financial information, particularly inadequate in the area of cost accounting. The most obvious 4ifficulties have been noted in preceding sections: inappropriate valuation and depreciation of capital assets, inconsistent or inadequate consideration of inventory replacement costs, inconsistent assessment of market demand and competition from imports or domestic producers. The very poor state of financial as d management information systems makes it virtually impossible to estimate O'e unit costs of production let alone to assess the returns under various marketing and pricing assumptions. PE managers needs to be able to base pricing decisions on market demand as well as cost considerations. To do this financial and management information systems need to be strengthened substantially. Relationship between Effigiency and Polic" Among the issues raised between enterprises subject to price determination and their parent ministry is that of efficiency. Ministries argue that tariff levels are adequate to cover the costs of an efficient operation; enterprises counter with the argument that so long as they are unable to generate revenues sufficient to cover current costs they are unable to finance efficiency improvements, including the rationalization of workforce structures and complements. In order to escape from this impasse a suitable proxy for "market discipline" must be institutionalized, a proxy that will ensure continuing efficiency improvements in price regulated industries. Simultaneously, tariff structures based on the principal of full cost recovery must be adjusted to take account of the need to finance efficiency improvements. B. Procurement Policies and Practice Government interventions affecting the procurement and marketing behavior of public enterprises occur in three forms: 1. Centralized procurement agencies, themselves constituted as PEs; 2. Enterprises established in earlier years as sole source or market for other industries in an Integrated input/output complex; and 3. Ministerial interventions to allocate commodities to public and private enterprises or individuals. For each form nf intervention characterisic problems are raised for the PE reform program. ANNEX IV Page 11 of 21 Centralized Procurement Agencies: A number of PEs enjoy a variable degree of monopoly in their market positions as centralized procurement agencies: Ghana National Procurement Agency (GNPA) Ghana National Petroleum Corporation (GNPC) Ghana Supply Commission (GSC) Ghana Publishing Corporation (GPC) Ghana National Procurement Agency (ONPA). GNPA undertakes the bulk procurement of commodities designated by the Ministry of Trade and Tourism to be essential and from both domestic and foreign sources. Imports by GNPA have ranged between US$ 36.4 million and 64.0 million over the past 5 years. The principal commodities (by volume) imported are clinker, wheat, and sugar; these represented 83 percent of total GNPA imports by value in 1990. Only in the case of wheat does GNPA enjoy a de facto monopoly. All other commodities are also imported through the private sector. Ghqna National Petroleum Corporation (GNPC). GNPC has a monopoly position as importer of crude petroleum and refinWl petroleum products other than lubricants; these are imported freely. It also handles the distribution of products ex-refinery. GNPC was originally established to handle petroleum imports under barter deals negotiated by Government, at the same time that ENI's interest in GHAIP (the refinery operation) was nationalized. Ghana Suoly Commission (GSC). The GSC was established in 1960 for the purpose of assuming procurement functions previously carried out by the Crown Agents in the procuring of supplies and stores "which are payable out of public funds". This original act of establishment was replaced in October, 1990 by the Ghana Supply Commission Law, 1990. Under the terms of the new law the GSC has a monopoly for the procurement of all supplies and stores by Government and PEs. The passing of this 1990 law was in response to complaints by the GSC that Government departments and public enterprises were bypassing the Corporation to procure supplies and stores from other sources. The 1990 law is, essentially, a reaffirmation of GSC's monopoly position. The Corporation continues to have a business association with the Crown Agents who maintain an office in Accra. GSC also claims to be exempt from contract review by the Public Agreements Board (PAB). Such reviews are a major delay for direct enterprise procurement. Ghana Publishing Corooration (GPC). GPC was established to print, publish, or import and distribute and market books and other reading materials, including educational materials. Since at least 1984, GPC has been given, by Treasury circular, a monopoly in respect to all Government printing and stationery procurement including printing for public enterprises on subvention. Prior to 1984 it was apparently possible for Government departments and public enterprises to btain from GPC a "Certificate of Non Availability" and then obtain their requirements from other sources. The Treasury circular of 1984 explicitly prohibited this practise. ANNEX-I Page 12 of 21 Integrated PE Complexes There are a n6mber of PEs originally conceived as components In a vertically integrated operation. The major such complex in economic or value added terms is in the petroleum sector and includes GNPC, GHAIP,'GOIL and private sector marketing companies. STC plays a role in this complex as the transporter of petroleum products, a role currently shared with fleets owned by the marketing companies and with private sector common carriers. GNPC's role is that of sole importer of crude petroleum and as sole buyer of petroleum products ex refinery. GHAIP is exclusively a refinery operation with no procurement or marketing functions. Product allocations to marketers are managed by GNPC. GOIL competes with private enterprises in the retail marketing of petroleum products at administered prices. In other complexes, the liberalization of trading regimes and the relaxation of pre-reform sole supplier arrangements have undermined the sole supplier protection some PEs needed to be viable. One example illustrates the general situation. Three PEs are part of this complex: Bast Fibre Development Board, estab. 1970 (successor to the Kenaf Development Board, estab. 1969) GIHOC Fibre Products Company, estab. 1962 Ghana COCOBOD, estab. 1947 The GIHOC Fibre Products Company was set up to manufacture sacks from jute and allied fibres for the packaging of cocoa and other agricultural and industrial products. At the start and over the years the Ghana COCOBOD has been virtually the only buyer of sacks produced by this company. The Bast Fibre Development Board, and its predecessor the Kenaf Development Board, were established to produce in Ghana the raw materials, required for the factory operation, the only market for the Board. This complex bad never operated in a satisfactory manner. The Bast Fibre Development Board never succeeded in stimulating local production of jute; less than 1 percent of the factory's requirements have been provided from this source in most recent years, indeed at any time since 1970. In consequence, the factory has depended upon imports of jute raw material for upwards of 95 percent of its input requirements. Irregularities in the supply of imported raw materials have affected factory opertons and costs. The original design capacity of the factory was intended to be 12 million sacks per year. Maximum production ever realized was 6.5 million sacks (1977). Current factory capacity is 5.9 million sacks. Domestic demand is currently estimated at 14 million sacks, 12 million for COCOBOD, the balance for other agricultural users (maize mainly, a market also supplied by used sacks sold by the COCOBOD). In 1989 the company's sacks were priced at cedi 575 as compared to a landed price for imported sacks of cedi 260. At these price differentials COCOBOD refused to buy unless the company's products could be priced competitively with import alternatives. A review of factory operations carried out in 1991 concluded that feasible efficiency improvements, including substantial staff reductions and rehabilitation of plant and machinery, could reduce the production cost per sack to cedi 345.63, still substantially higher than the cedi 260 cost ANNEX IV Page 13 of 21 of the impoit alternative. What such studies confirm is, in essence, that the originally conceived framework for enterprise operations is not feasible under the liberalized trade regime introduced with the Economic Recovery Program. While the reasons for complex failure vary in detail from one situation to another, the strategy itself breaks down when any component in the planned complex is unable to meet the end demand for the product at a price that Is competitive with an import alternative. Ministerial intervention to allocate commodities The case of wheat and flour is illustrative of the market distorting effect of Government intervention in commodity allocation and distribution. The Ministry of Trade and Tourism directs GNPA wheat allocations to four flour mills (3 of which are state enterprises). It also directs the distribution of all flour produced by the Tema Food Complex Corporation (TFCC), 69% of TFCC's total product sales volume. Prices of both wheat and flour are administered by PIB. TFCC faces the further marketing complication that the distribution of wheat bran, a by-product, is controlled by the Ministry of Agriculture. TFCC requires a Ministry allocation of by-product bran for use in its own feed-mill subsidiary. The case of cement produced from imported clinker by GHACEM, a PE is similar. There are two prices for cement in Ghana. The controlled price in 1989 was GHC 1,400 per bag; the free market price ranged between GHC 1,900 and 2,000. Ordinary users are not able to purchase cement at the controlled price. In general, only cement sold by way of an allocation from The Ministry of Works and Housing is offered at the controlled price. In the cluster of PEs involved in the importation, production and marketing of cement, wheat and flour there is a complete lack of autonomy in both pricing and marketing decisions. Effective control by Government over raw material sourcing, pricing and product distribution, means that the performance of GNPA, GHACEM, TFCC as well as bakeries and feed mills dependent upon TFCC for raw materials remains highly controlled and constrained. PE management has no control over these critical business parameters. Procurement Policy Issues Role of Centralized Procurement Agencies The continuing role and preferential position of centralized procurement agencies relates to Government concerns for 'suspected irregularities' in procurement, including over invoicing, favoritism in the award of contracts, irregularities in tender calls and review of bids. These concerns remain and are the basic argument for channelling Government procurement through centralized PEs established for this purpose. The most recent evidence suggests that about one-third of PEs regularly use the procurement services of GNPA and GSC. The monopoly position enjoyed by centralized procurement agencies has meant that mar nterprises lack skills and experience in procurement. GNEC. Given that the historic reasons for establishing separate PEs to handle petroleum imports, refining and domestic distribution no longer hold, and that it is the expressed intention of ANNEX IV Page 14 of 21 Government to privatize the GHAIP refinery operation, there appears to be no substantial rationale for the continued existence of GNPC as a PE. Its present importing function might well be subsumed in a privatised GHAIP'and its domestic distribution role-assigned to the domestic retailing companies dealing directly with the refinery. Q . GNPA competes directly with private sector enterprises in the importation of a number of commodities. As a state-owned enterprise GNPA submits its cost structure and proposed margins to PIB for price determination. GNPA is constrained on the marketing side because it is the Ministry of Trade and Tourism that directs the allocation of a number of commodities including sugar, wheat and flour. M. The difficulty presented for PE procurement relates to GSCs assertion of a monopoly on procurement of supplies and stores for these as well as Government and in their definition of supplies and stores to include everything except industrial raw materials. Should this assertion of claim be successful, and its breadth of opplication is being resisted by both PEs and some Government departments, there is little doubt that enterprise accountability would be affected by the loss of control over procurement. Most PEs complain that the flat rate 4 percent margin levied by GSC is excessive, particularly since specifications are prepared and tenders evaluated by the PE and not by GSC. Moreover, to manage well the procurement of parts and equipment (included in the GSC definition of stores and supplies) for enterprises as varied as the Electricity Corporation of Ghana (meters, transformers) and the State Shipping corporation (cordage and lubricants), GSC would have to greatly increase its technical staff for drafting specifications and evaluating tenders. Since the necessary technical expertise is already largely present in the PEs its duplication by GSC seems a wasteful measure. The policy issue raised by the centralized procurement agencies is one of granting to PEs the same autonomy in procurement that is enjoyed by private enterprises. The residual practice of routing PE procurement through centralized agencies is inconsistent with the reform objective of making enterprises fully capable of managing all aspects of their operations and fully accountable for their performance. Ministerial Allocation of PE Goods and Services Where Ministries intervene to allocate products to consumers or users at below market values, four consequences are of significance to policy: (a) for commodities that are material inputs to downstream enterprises (flour to bakeries, for example) the scale of production and profitability of downstream operations is constrained on the supply side by the quota allocation process, thus protecting inefficient operations and providing no incentive to improve product quality or competitiveness; (b) the price advantage accruing to quota or allocation recipients makes the allocation a tradable commodity in its own right. Allocations are traded and the commodity ANNEX-IV Page 15 of 21 eventually sold to end-users at prices considerably higher than the control price. This situation is open to significant patronage abuse, without materially reducing the price paid by Uisers (as opposed to trading intermediaries) below market determined levels; (c) the system operates to transfer the market determined margins from producers to traders who enjoy an allocation, and thus distorts local investment in a way that favours imports over domestic production. (d) the requirement that an enterprise maintain uneconomic services or provide services to individuals and Government departments below cost undermines financial viability and precludes the application of commercial principles to business planning. Treatnt of PEs whose Viability Depends on Protection Government's commitment to a liberalized trading regime has progressively lowered the protection needed to assure the profitability of some enterprises conceived as elements in a vertically integrated complex. Seriously affected by the removal of centralized price protection provided by allowing full costs in PIB price determination, together with the use of tariffs and administration measures to restrict competing imports, are a number of enterprises established under the import substitution strategy for industrialization of earlier times. These uneconomic enterprises are a major target of enterprise reform measures. Where these enterprises are not viable in the absence of the protection afforded by a centralized price control system the sooner their operations are divested the better. Prior to formal divestiture of these operations it would be desirable, to avoid unnecessary disruption, to carry out a preliminary assessment of the potential for realizing greater efficiency through staff rationalization and rehabilitation of plant or equipment. An objective assessment of this kind could be useful in separating enterprises which, if rationalized, would be competitive in domestic resource cost terms from those which would not. The conclusion in respect to changes in procurement policy is that previous sole supplier arrangements characteristic of the pre-reform strategy for industrial development are being discontinued. The policy issue raised by this conclusion is whether the enterprise could be viable in another framework and what is the best way to establish that possibility. The suggested strategy for dealing with such companies would be to offer them for privatization, as a private entrepreneur might consider alternative market potentials and scales of operation. Alternatively, an assessment might be made of the feasibility of reducing costs so as to be competitive with domestic or import alternatives. Among the consequences is the fact that some PEs are no longer viable, nor can they be made viable through restructuring, rehabilitation or recapitalization. Recommendations on Pricing and Procurement From the early 1960s, when the Government adopted the philosophy of a "planned, regulated and centralised economy, in which the state was to become the predominant economic agent" the PE sector has been subjected to a high degree of control by centralized ministries and agencies. ANNEX=I Page 16 of 21 Centralized ministries performed corporate planning functions including the specification of functions and exchange relationships of enterprises; centralized boards and authorities were established to manage the procurement function and to review production costs and establish producer margins as well as wholesale and retail market prices. In early 1991 one important effect of this interventionist policy is the lack of capacity at PE level to plan and manage basic business functions of the enterprise. This is not helped by the continuing tendency of agencies such as PIB, GSC, GNPA to interfere in key business decisions. The creation at the enterprise level of a capacity to manage procurement and inventory, and to determine pricing and marketing strategies and of the confidence to perform these formerly centralized functions themselves is essential to enterprise viability and accountability for performance. Progress towards this objective of truly autonomous and accountable PEs is constrained by the continuing mandate given to centralized procurement agencies such as GSC and GNPC and by residual controls over pricing and marketing decisions exercised by Ministries and other regulatory bodies. A general difficulty in making recommendations concerning pricing and procurement policy is a certain vagueness about the eventual policy boundary between the public and private enterprise sectors. At the date of mission the Government-directed reclassification exercise suggested 3 groups of enterprises were likely to remain in the public sector: Existing core group 17 Extended core 20 Others 2Q Total 57 All other enterprises, including virtually all manufacturing enterprises are prospective candidates for divestiture through privatisation or liquidation. Divestiture has the effect of removing an enterprise from the constraints on pricing and procurement that apply to PEs, responsibilities transferred to the new owners and to be exercised in the liberalizing framework for private sector operations. For those enterprises remaining in the public sector the pricing policy framework under the ERP is clearly stated: pricing will be based on full costs of the good or service plus a margin, and where policy directs otherwise the enterprise will be compensated by Government for the difference between actual costs and the subsidized price set by Government. Enterprise level deficiencies and the continuation of Government interventions in pricing, procurement and marketing decisions define the scope of measures that need to be taken for the stated policy objectives to be realized. For those enterprises remaining in the public sector it is essential, first, that a capacity to determine, monitor and control costs of production be established and, second, that a suitable proxy for market discipline be institutionalized to force improvements in efficiency. For continued Governmental interventions in pricing, procurement and marketing decisions of the enterprise ANNEX IV Page 17 of 21 recomendations take the form of making more transparent the relationships between Government and enterprise and putting in place a mechanism whereby Governmnnt's commitment to compensate enterprises for goods and services supplied below fully distributed cost at Government's request can be effected. Residual Price Control by PIB and Government Until recently the Prices and Incomes Board routinely reviewed cost structures and pricing proposals submitted by manufacturing and trading enterprises for approval. From a reform perspective the most serious problem resulting from this system is that it offers the enterprise no incentive to improve efficiency. Any savings in production costs automatically translate into a reduction in the PIB approved price and reduced income for the enterprise. With the liberalization of foreign exchange purchasing and the removal of most administrative controls over imports under the Economic Recovery Program the continuation of pricing intervention by Government places state-owned enterprises at a clear disadvantage to their foreign and domestic competitors. At present, private sector enterprises are free to obtain foreign exchange either by bidding at the regular auctions or through a Forex Bureau. They may then use this foreign exchange to purchase and import commodities, many of which compete in the domestic market with imports or products handled or produced by state enterprises. The PIB's present price administration role is limited to three commodities, none of which are sufficiently isolated from market forces to warrant centralized price controls. Recommendation 1. It is now appropriate to formally dissolve the Prices and Incomes Board. With the de facto discontinuation of price review and appi.- "!al by PIB a major disincentive to improved efficiency has been removed. At this point in time it would be appropriate either to formally disolve the PIB, or alternatively, amend its legal mandate to eliminate all responsibilities for price review and control. With this measure the last legal/institutional impediment to the assumption by the enterprise of full responsibility for pricing decisions would be removed. Subsidized Goods and Services Provided at Request of Government As noted in the review of pricing policy issues above it is a common practise for Ministries to direct PEs to provide goods or services below cost to Government or to designated agencies and groups. The continuing practise of some Ministries in directing the distribution of commodities, products or services by allocation is also inconsistent with a policy of encouraging enterprises to operate in a commercial manner and with the objective of transferring autonomy and accountability for performance to enterprise management. Most instruments of establishment explicitly bar Ministerial intervention in enterprise operations; present practises violate both spirit and letter of the legal division of authority between Ministry and state owned enterprise. Recommendation 2: Should Government require a public, or private enterprise, to distribute a commodity or provide a service at less than fully distributed cost the enterprise should be paid the difference between actual receipt of revenue and that fully distributed cost. ANNEXIV Page 18 of 21 To be effective Ministries will be required to estimate the magnitude of such requests in advance and make suitable budgetary provision for this purpose. This reform will improve the transparency of Government directed, below cost transactions involving PEs. Recommendation 3: Where Government, rather than PIB, intervenes to set domestic prices, as in case of petroleum products, in a manner that results in prices above or below the price based on the principle of full cost recovery the form of this intervention should be made fully transparent. For example, the premium over the cost of crude oil built into domestic prices should be converted to an explicit tax, a measure that might ensure the revenues flow to Government and not to GNPC. Where some products, eg. premix fuel for fishermen, are subsidized the cost of subsidy should be made explicit and properly budgeted as an expenditure by Government. Conc=tual Framework for Pricing Decisions The PE Reform Program is targeted on the need to improve performance, efficiency and profitability. Performance is to be measured by such commercial indicators as return on shareholder (Government) equity and return on capital employed. For most PEs the price control processes now being liberalized have operated, practically and psychologically, to minimize returns to equity or invested capital - a reality directly opposed to the reform program objective of increasing such returns. The principal thrust of policy interventions to administer prices has been one of nonstraining enterprise margins. The procedures have also contained inherent flaws of method and conception: (a) PIB emphasis in pricing decisions to allow variable costs of production materials, labour, and producer services and to minimize producer margins. The combined effect is to remove the incentive to economize on production costs and to reduce the returns to equity and invested capital far below their opportunity cost. To a considerable extent, the poor profitability and performance of state-owned manufacturing enterprises is the result of continuing Government intervention to control prices and margins; (b) The neglect of the importance of capital costs in the price determination process. Were capital consumption allowances factored into the pricing formula at their true replacement values the "approved" prices would necessarily rise even without any adjustment to "profit" margins. The problem relates both to poor acounting practise at the PE level which fails to value productive capital at replacement values and, apparently, to an attitude of mind that has difficulty accepting the depreciation of capital as a "real" production cost. The consequences of intervention in this case are a persistent squeeze on enterprise cash flow and grossly inadequate provisions for the maintenance of productive assets. Recommendation 4: Strengthen enterprise level financial management information and accounting, particularly cost accounting systems. For reform purposes it is essential that PEs properly cost their production processes or ANNEX-I Page 19 W& 21 services. The major problem with unstandardized cost accounting practises, particularly with respect to the valuation and depreciation of capital assets, has resulted in serious underestimation of the true costs of production and thus of the actual profitability. The improvement of PE accounting practise and performance is essential to progress in this area, capital, returns will continue to be uneconomic. Recommendation 5: To assist the transition to a more commercially oriented framework for pricing decisions a broad management training program with this focus should be offered to PE boards and senior management. It is important to recognize that the removal of an impediment is a necessary but not a sufficient condition for realizing the desired efficiency improvements. A number of changes must also takt place within the enterprise. Not least of these is a much strengthened capacity to determine, monitor and control unit costs of production and to assess the characteristics of market demand and competition. This is a significantly different framework for pricing and marketing decisions and one which is relatively unfamiliar to the boards and management of PEs. A program of practical training workshops would contribute to the growth of new perceptions in the minds of management that are needed to replace the old. ImDroving PE Autonomy in Pricing and Procurement Efforts to improve enterprise level autonomy have suffered not only from continuing Government intervention but also from the diffusion of concerns over more than 250 enterprises. Increased management autonomy in pricing and procurement, as in other areas of decision making, is facilitated where a well defined corporate restructuring plan is in place. Restructuring studies can be financed out of the Restructuring Fund of the PE Project. To be effective this application of resources needs to be allocated with a clear sense of priorities. Recommendation 6: It is recommended that support from the PE Project concentrate first on assistance with restructuring for the purpose of improving efficiency (workforce rationalization measures, for example) and with improving cost accounting and management information systems- capabilities esssential to the enterprise's need to control costs in a competitive pricing environment. Because the vast majority of manufacturing and trading enterprises are candidates for divestiture support from the restructuring fund of the PE Project should be concentrated on those enterprises (some 57 in all) which perform a blend of policy related and commercial functions and to which Government is committed to paying the difference between actual costs of a goods or service provided below cost at the direction of Government. Recommendation 7: Government should exempt PEs from any requirement that they utilize the services of the Ghana Supply Commission or the Ghana National Procurement Agency. The Ghana Supply Commission's role should be limited to procurement of supplies and stores for Government Ministries, Departments and subvention parastatals; they should have no legislated monopoly position with respect to the PEs. Because the Ghana National Procurement Agency competes with private sector enterprises across virtually its entire line it would be appropriate to Page 20 of 21 privatise the agency to operate as one of several major and competing importers of bulk and other commodities. Price Regulation of Monopoly Suppliers A number of PEs are "monopoly suppliers GNPC, GHAIP, GOIL, GR, GHAIR and GWSC, but the policy context for price regulatk n differs. Common to most situations is a policy objective to maintain a uniform national price; a secondary consideration is. that that price be "affordable" to users of a good or service. For petroleum products these objectives expiain use of a basing point pricing system for reconciling differential transportation charges. For utilities and transportation services these policy objectives have been sustained by an uneconomic degree of cross-subsidization. The consequences include significant erosion of financial viability and the virtual elimination of enterprise capability to generate through retained earnings and cash flow the resources required for routine maintenance of efficiency improvements. Among the results are a deteriorating quality of service, that, in the case of state-owned bus companies, has led them to charge less than private sector operators so as to attract custom for their inferior quality of service. Recommendation 8: The maintenance of a uniform national price requires the continuation of centralized price administration by Government. The basis for this price administration needs to be modified to assure that the fully distributed costs of the system are either recovered through tariffs or budgeted and paid in a fully transparent manner. The real concern of Government for realizing efficiency improvements and viable l%vels of capacity utilisation have not been satisfied by the practise of restricting enterprise margins. This, by and large, is a failed policy. In large part the policy fails because it deprives the enterprise of the capacity to generate through retained earnings the resources required to maintain a quality of service or to finance efficiency improvements. Recommendation 9: Government, through the various sector ministries should make more effective use of the performance contract system: (a) to set approved tariffs at a level that recovers the fully distributed costs of the good or service; (b) to define the goods or services that are to be provided on a less than full cost recovery basis; and (c) to define a meaningful budgetary provision for compensating the enterprise for goods and services provided below cost. Enhanging the Competitive Environment Among the complaints of Government has been that PEs have rarely paid dividends, and often failed to pay assessed taxes or social security withholdings to the appropriate agency. In most cases these failings relate to severe cashflow problems, not to any fraudulent intent at the enterprise level. It is clear from the centralized price administration procedures followed until recently that their greatest effect was to squeeze producer margins. Together with the systemic undervaluation of the capital costs of production and the use of historic actual rather than replacement costs of material inventories it is clear that the narrow allowed margin afforded little scope for the declaration of dividends, or, indeed, for the generation of taxable profits. Historic procedures for price Page 21 of 21 administration have, in relying exclusively on cost plus margin Ignored such concerns as return on equity or assets, considerations important to an investor and essential if the generation of dividends is expected. So long as enterprises lack the flexibility to include in pricing decisions such concerns as return on assets or equity or the generation of retained earnings for the rehabilitation and replacement of physical plant and equipment it has been difficult to impossible to remain financially viable. In such circumstances PEs have had to resort to a number of ingenious and often illegal measures to retain the flexibility provided by even a modicum of operating capital. The concern now must be one of assuring that enterprise management is aware of the broader framework relevant to pricing decisions, has the information necsessary to estimating the various parameters, as well as the autonomy to exercise full discretion in this area. The entrenched notion that proper pricing is cost plus narrow margin needs to be replaced with more appropriate commercial principles in situations where competitive pressures constrain excesses and by a broader framework of considerations where market situations warrant continued price regulator. Recommendation 10: That Government take appropriate steps to modernize the institutional framework and where policy requires continued intervention in pricing decisions recognize that financing their cost at the expense of the enterprise's financial viability is short-sighted in the extreme. Continued intervention by Government in the pricing and distribution of commodities is contrary to undertakings mad J in the context of the Economic Recovery Program. The policy issue of immediate concern to the PE sector is the perfermance of the PEs affected. It is clear that the existing management of several PEs has no effective control over the scale of operations, pricing or distribution. For this reason, responsibility for PE planning and performance cannot lie with management but must attach to the Pi in pricing decisions and to the intervening Ministries in respect to scale of operations and marketing. While the point of PE reform is to improve performance, it is essential that policy be reformulated in a way that clearly fixes the accountability for performance in one place. The diffusion of accountability is particularly striking in the case of GNPA and TFCC but it is an issue common to a large number of state enterprises. It would be unreasonable to expect improvements in performance before accountabilities and authorities are concentrated in the same place and in the same individuals. The large number of intervening authorities is itself a major problem to resolve. What is required is a concentration of responsibility for PE operations with PE management, or if this is not acceptable politically, with a single Ministry. The residual advisory price determination functions of PIB should be discontinued and responsibility for pricing decisions transferred to PE management or Ministry which ever is made accountable for PE performance. GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANN EX V EMPLOYMNT AND COP NTON ISSUES A. Employment Levels and Retrenchme Workforce Rationalization The rationalization of overall staffing levels in the PE sector has been of central concern to the PE reform program from its beginning. Considerable effort has been applied to the question of identifying excess staff and in managing their retrenchment. Workforce restructuring appears to have attracted less attention than it warrants considering the degree to which most enterprises have excessive ratios of management, clerical workers and administrative support staff to production workers. Distorted workforce structures have not been a very visible factor in determining the extent of overstaffing. Qccuptinal Strcture and Pattern of Overstaffing. The PE sector represented about 4.5 percent of national employment in the Census of 1984, and about 30 percent of employment in the moern formal sector. (Table E6) The occupational structure of PE employment differs significantly from that of both central Government and the private sector, and in a manner that suggests a posible approach to rationalizing staffing levels and structures. While accounting for only 4.5 percent of national employment in the Census of 1984, PEs provided 44 percent of all clerical employment, 22 percent of managerial and administrative, 19 percent of service and 10 percent of professional and technical employment. Nearly half of Ghana's architects, engineers, economists, accountants, authors and journalists, bookkeepers, cashiers, computer operators, mail clerks, telephone operators, general foremen and materials handlers are employees of a PE. In most of these occupational categories PE employment approximates the combined total of central government and private enterprise. To a considerable extent the "overstaffing" of PEs is in respect to the proliferation of junior clerical and support service grades. PEs are also distinguished from private enterprises by higher proportions in administrative, managerial and in service occupations and lower proportions in sales and production workers. These exceptionally high concentrations in specific occupational categories provide a general indication of the pattern of overstaffing in the PE sector. To a considerable extent this is a problem concentrated in clerical and support service occupations and in certain professional and technical areas - such as accountants, economists, computer operators and systems analysts. Other indicators include the 50 percent of all production supervisors and general foremen are employed in PEs in contrast to the less than 10 percent of production workers. An example illustrates the point. One PE with a total labour force of 811 in early 1991 contained an accoutits department of 35, a commercial department of 37 (although the company had only one customer) and 18 drivers for 5 vehicles. It was estimated that administrative and overhead expenses could be reduced through staff rationalization by some 75 percent. This company had already shed some 200 workers over the previous 18 months, without coming to grips with the pro lems posed by a top heavy adminstrative and support services component in its structure. Page 2 of 19 Redenloyment. Redeployment is the term used in Ghana for the retrenchment of staff redundant to the needs of an enterprise. At the inception of the PE Froject in 1987 it was assumed in project agreements that overstaffing in the order of 15 percent of total PE employment would be addressed by a staff retrenchment exercise over the 1987-90 period. These reductions were additional to the retrenchment of some 30,000 COCOBOD staff, implemented over the 1985/87 period. This initial assessment of the extent of overstaffi- - recognized that substantial staff reductions had taken place between 1982 and 1984 in private art :nt venture companies, but not in wholly state-owned mining and manufacturing enterprises. Reservations about the rationality of this somewhat arbitrary approach to workforce restructuring, together with concerns about the way it was being approached by PEs and about the lack of alternative employment opportunities in the economy, led to the commissioning in 1988 of a Manpower Redeployment Study by the SEC. This study identified a number of problems that would need to be addressed if redeployment was to contribute to the necessary workforce restructuring. These problems related zo the pattern of overstaffing, the way in which enterprises defined workforce requirements, and the procedures being used to identify staff redundancies. Redeployment Activity. 1985 -199A The most recent tabulation of redeployment activity is as of 30 April, 1990 and is summarized in Table E7. Of the 46,052 employees actually laid off through the end of 1989, some 30,000 were redeployed from COCOBOD. A total of 16,052 workers from about 43 additional PEs had actually been redeployed at the end of 1989, an additional 427 through April, 1990. Of the 7.7 billion cedis in ESBs actually paid, 5 billion cedis was paid to COCOBOD workers, just under 200,000 cedis per redeployed worker. For redeployees other than those from the COCOBOD about 2.7 billion cedis in ESB entitlements has actually been paid and an additional 15.2 billion cedis remains owing. For PEs other than COCOBOD the per worker cost of redeployment has risen from 314,000 cedis in 1986 to more than 600,000 cedis by 1988/89 and an estimated 1 million cedis in 1991. The separation of the retirement gratuity means that the financial cost of redeployment is reduced to the cost of sevrance pay, estimated to be in a range around 450,000 cedis per worker in 1991. The available evidence indicates that redeployment activity slowed markedly after 1987 with the conclusion of redeployment activity by COCOBOD. Less than 22 percent of the redeployment planned by PEs in 1989 was actually accomplished and some 22,000 employeees already identified as redundant remain on PE payrolls. Financing Redundancies The financial costs of PE redeployment have increased rapidly on a per worker basis with periodic increases in basic salary and with the increasingly generous provisons in CBAs. It would appear that the inability on the part of many enterprises to pay ESBs to laid off workers is the major factor explaining the near cessation of redeployment activity, and the continuation of redundant workers on enterprise payrolls. For the approximately 20,000 workers identified as redundant but not yet redeployed the estimated ESB cost is not less than 5.5 billion cedis, higher by reason of the ANNEX V Page 3 of 19 incremental growth in entitlement with additional years of service. In the case of a set of 32 "distressed" PEs, application has been made to the Ministry of Finance and Economic Planning for a loan of 6.5 billion cedis (US$ 18.4 million), the sum required to pay the outstanding ESBs for 15,170 redeployed workers. In addition, Government has assumed responsibility for an additional 3 billion cedis in respect of the ESB entitlements of 1,703 workers redeployed from 8 divested PEs. By and large these measures, when completed, will discharge ESB liabilities in respect to actual redeployment through 1989. For the future, it seems likely that the financial burden imposed on PEs by the Government's directive requiring the payment to its workers of their retirement gratuity entitlement outstanding as of December, 1990 will mean that the financial resources required to pay severance entitlements to retrenched workers will not be -vailable. Further retrenchment and workforce restructuring will depend on the ability to shed staff through natural attrition (estimated at some 5 percent per year) in the PE sector and thus avoid triggering an entitlement to severance pay. Management Perceptions of Autonomy in Staffing Decisions Existing policies and practices in respect to the employment and discharge of employees are regarded by about 37 percent of PE managers to be serious obstacles to improving operational efficiency. Twenty-three percent reported that ministerial approval was required for the appointment or termination of staff of middle management or lower rank. In -ddition, there is a legal requirement (NLC Decree) that the dismissal of more than 5 workers from an enterprise be referred for approval to the Chief Labour Officer. Anecdotal evidence suggests that the failure of the Ministry of Labour to respond to these referrals from PEs over the middle 1980s is a major reason why staff reductions similar to those in the private sector did not occur. A general conclusion of both the 1988 and 1990 surveys of employment experience is that the management of PEs does not have the autonomy required to freely discharge redundant workers. In the words of the 1990 report: "pressure exerted by various authorities outside, and by groups within the workplace supported from without, have, over time, eroded management's ability and freedom to carry out their functions." A survey to establish excess and redundant staff in PEs was carried out by the SEC early in 1988. Most enterprises responded with a statement that they had no excess staff and cited vacancies in their "approved establishment" as the proof. A more explicit sample survey of 64 PEs accounting for more than half of PE employment was carried out by the Manpower Redeployment Study in mid- 1988. In this second survey 27 PEs reported excess staff; 17 reported no overstaffing and 10 claimed to have completed their staff reduction program. Moreover, the MRS survey revealed that between 1983 and 1988, when significant retrenchment of staff was taking place in the private sector, PEs had continued to hire. Fully 24 percent of PE staff in post as of mid-1988 had been hired in this 5 year interval of deteriorating business conditions. When asked the basis for identifying redundant staff in the first phase of the PE redeployment ANNEX V Page 4 of 19 exercise PE responses emphasized personal characteristics of the empi,yee rather than the functional needs of the enterprise. Poor work attitudes, age and il-health were the most important considerations in declaring an employee redundant. In consequence, the effect of retrenchment over the 1985-1987 period was to further distort the occupational structure of the enterprise workforce by concentrating redundancies in occupational categories generally under-represented in the structure. (Tables E8(a) and E8(b)) Nearly two-thirds of those retrenched were production, sales and service workers. Production workers alone represented 40 percent of those retrenched. Clerical workers constituted 23 percent of the workforce, but only 11 percent of those retrenched; only 9 administrative and managerial personnel were declared redundant in the sample of 64 PEs. The 1989 survey indicated that more than half the enterprises surveyed considered themselves to be overstaffed. The indicated overstaffing averaged some 25 percent of the staff in post at the time of the survey. A significant qualification to recent estimates of the degree of overstaffing actually present in PEs is the low level of capacity utilisation at present. Enterprise managers emphasize that at higher levels of capacity utilisati3n overstaffing would be much reduced. Whatever might be the complex of factors underlying low levels of capacity utilisation at present, the central point for employment policy is that enterprise management lacks the ability to adjust its workforce to varying levels of capacity utilization. Defining Workforce Requirements A number of existing practices with respect to workforce classification and in the determination of staffing requirements have complicated the problem of workforce restructuring, blurring the perceptions of both workers and management. The staffing structure of most PEs is defined in terms of da "approved establishment list". This terminology appears, historically, as a relict of civil service practice in which a Ministry of Finance and central personnel agency jointly approve a Staff list by position (the establishment list) of a Government Department or Ministry. The terminology has been carried over to the PE sector, probably in the 1960s when a number of civil service departments were reconstituted as PEs. Not transferred with the terminology were the disciplining mechanisms of approval by the Ministry of Finance and the central civil service personnel agency. It is not clear who has the authority to "approve" the establishment of an PE although that authority rests in theory with PE management and Boards. In practice, and in the absence of effective restraint exercised by Boards, management or sector Ministry, the establishment lists of many PEs have grown over the years. By the late 1980s many were characterized by a proliferation of grade and occupational classifications that bore little resemblance to the functional requirements of the enterprise. This overly elaborated structure has coexisted for many years with a generally higher staffing level than enterprise operations would appear to warrant. Policy Issues Relating to Emloyment and Retrenchment Policy issues relating to employment arise out of a number of specific problem situations which have slowed the rationalization of staffing levels and workforce stLactures and contributed to an unsatisfactory environment for workforce management. These problems include: ANNEXM Page 5 of 19 1. the lack of management autonomy in decisions to hire, discharge or lay off temporarily PE employees; 2. inappropriate employment and occupational workforce classifications and structures; 3. the failure of a costly effort to redeploy redundant staff to contribute materially to the workforce restructuring required in most enterprises; 4. the absence of a temporary layoffIrecall option in employment contracts; and 5. the near cessation of redeployment activity in the PE sector. Redeployment related issues are closely meshed with compensation issues and must be addressed in both dimensions. A. Wa&es. salaries and benefits in the PE Sector Ihe Compensation Structure for PE Employees Within the PE sector, collective agreements are the normal instrument for defining the employment relationship. Virtually all collective agreements define basic salary and annual increments, various allowances payable in addition to basic salary, and the benefits or subsidies provided by the employer. They also define the entitlements of workers who retire, become sick or die, or are declared redundant. Basic Sgaly. On average the basic salary represented about one-half of the total remuneration of an PE's employee in 1987/8. While it is generally the case that basic salary levels in the PE sector are higher than those payable by private enterprises, it is important to note that emoluments levels tend to lag behind increases in the cost of living. Surveys of income and family expenditure have suggested that family expenditures tend to be 2 to 3 times the take-home pay of middle and senior level management and professional staff in both the Government and PE sector. Allowances and Other Benefits. A broad range of benefits and allowances are incorporated in most collective agreements. The considerable variation among PE employment contracts in the monetary value of allowances and benefits is illustrated in Table El for a sample of 12 PEs. The values assume an annual base salary of 100,000 cedis and an employee with between 5 and 10 years of service. Allowances payable to all or most employees on a regular basis are incorporated in Table El; other allowances and benefits payable under special circumstances are difficult to quantify but represent, in the aggregate, a significant cost to the employer. These other allowances vary significantly among subvented parastatal bodies, PEs and private enterprises. A summary comparison of benefits payable by PE and private sector employers is provided in Table E2. In the case of several benefits, medical expenses for example, the employer's liability is virtually open-ended; only a few private sector firms put a limit on the annual cost payable for an employee and his eligible dependents. ANNEX V Page 6 of 19 Other benefits that cannot be readily quantified, but which represent a significant cost for enterprises, are the loan facilities offered to employees for the purchase of transport, housing and durable goods, and for car repair and insurance. Many contracts refer to these as available on the same terms as corresponding Government loan schemes available to the civil service. That these are not a serious problem at present is due to the wide difference between the maximum loan available and the market cost of housing and vehicles. Government loan scheme limits are adjusted periodically but have consistently lagged market costs and have been little used for that reason. Most loans outstanding are for purchase of motorcycles and bicycles and for repair. It is evident in the overall pattern of other allowances and benefits that the employer in both the public and private sectors carries a significant social responsibility and cost in providing housing, medical, transportation, funeral and other allowances. In each case the rationalization for the incorporation of such allowances in a collective agreement is the deficiencies in the social service infrastructure. Thus, the employer carries the cost on his payroll of inadequate housing stocks, inadequate public transport, inadequate medical insurance and so on. Salary Comparisons with Other Sectors. A rough comparison of basic salaries payable to senior management and professional staff in different parts of the public sector in early 1990 is presented in Table E3. The most obvious feature of this summary is the wide variation, more than 100 percent, in the salaries payable to most senior management and the much smaller variation at the junior, entry-level professional grade. This pattern reflects the severe wage compression that characterizes some institutions but not others. Most PEs and the civil service complain of difficulties in recruiting qualified professionals and in retaining experienced professional staff under present salary regimes. Provisions for End-of-Service Benefits The entitlements of workers who retire, resign or are declared redundant (end-of-service benefits) are incorporated in collective agreements. Generally, collective agreements contain provisions for one or more of the following: * redundancy payments; * severance pay; and * retirement or ex gratia benefit. Up to the end of 1990, retiring workers were entitled also to a lump sum payment from the Social Security Scheme, a national scheme supported by the contributions of workers and employers since 1965. This scheme was converted to a national pension trust with effect from January, 1991. See below. Redundancy/Severance Pay. Most agreements refer to a redundancy entitlement rather than severance pay, but, whatever it may be called in a collective agreement, the circumstances under which it is payable are those set out in the Labour Decree (1967, NLCD 157) as amended by the Labour (Amendment) Decree (1969, NLCD 342). In brief, entitlement to "severance pay" arises from an employee being declared redundant. While the legislation defines the circumstances in which an entitlement arises, the amount is defined in collective bargaining. ANNEX V Page 7 of 19 References to either "severance pay" or to a "redundancy entitlement" are references to the same thing, although some agreements provide for both to be paid (eg. Ghana Airways). In several PEs the senior staff agreements contain no provision for redundancy oi. severance pay. This omission doesn't mean that such individuals have no entitlement, only that it has not been defined. In some agreements reference is made to "severance pay" as authorized by the Labour Decree. In all cases where the amount of severance pay is not defined in collective bargaining it has been necessary to negotiate the amount as a prelude to redeployment, a situation that has led to some delay in the implementation of this aspect of the reform program. Historically, severance pay entitlements varied with length of service and were expressed as lump sum payments equivalent to 1, 2 or 3 months of basic salary. While related to length of service, severance pay was not computed as a multiple of "years of service". This feature of present agreements appeared first in 1967 as a fraction of one month's pay multiplied by total years of service. This model has been incorporated in subsequent and other agreements and the base pay factor to be multiplied by years of service increased in negotiation from some fraction of one month's pay to several month's pay for most PEs. There are, however, a number of agreements in which severance pay is not calculated as some multiple of years of service, the Electricity Corporation of Ghana, for example. Much of the escalation in severance pay entitlements has occurred over the 1980s. By 1987 the severance or redundancy provision of collective agreements appeared to be excessively generous for many PEs. The Bast Fibre Board Agreement, for example, provides a severance entitlement equal to 60 percent of annual pay (7.2 months) for each year of service. A 10 year employee declared redundant is entitled to severance pay equivalent to 6 years basic salary. The entitlement is additional to an ex gratia or retirement benefit equivalent to 5 years of basic salary. In Table 4 contractual provisions for redundancy or severance payments are summarized for an illustrative sample of private sector firms and PEs. Retirement Gratuity. The terminology used in collective agreements refers to "retirement", "end-of-service" and "ex gratia" entitlements. Conceptually, this class of entitlements represents lump sum retirement or termination benefits payable to retiring workers in lieu of pension. Retiring workers were also entitled to a lump sum payment from the Social Security and National Insurance Trust (SSNIT) which operated as a Provident Fund from 1965 through 1990. There was no true pension scheme in any collective agreement before 1990, although several included an employer's Provident Fund. Negotiated retirement benefits for a sample of private sector firms and PEs are summarized in Table ES. The provisions of PE agreements are consistently more generous than those of the private sector, although wide variations are evident in both categories. It should be noted that several commercial enterprises are joint-venture companies. It has been the practise in Ghana to pay retrenched workers both a redundancy and a retirement award or gratuity. In a few PEs retrenched workers are entitled to both redundancy and severance awards as well as a retirement benefit. On average, redundancy or severance entitlements approximate 77 percent of the retirement benefit although there are contracts where the retirement benefit is less than the redundancy payment. PE contract provisions for redundancy are some 65 ANNEX V Page 8 of 19 percent higher than those in private sector contracts; for retirement some 70 percent. The Social Security Scheme 1965-1990. The Social Security Scheme established in 1965 was intended to operate over a period of five years as a Provident Fund and thereafter to be converted into a pension scheme making periodic monthly payments to retired workers. Management of the scheme is the responsibility of the Social Security and National Insurance Trust (SSNIT). The scheme has operated, however, from 1965 through 1990 as a Provident Fund, and has proved quite ineffective in providing income security in retirement. Through 1990 the scheme has been funded by employer and employee contributions, 12.5 percent and 2.5 percent of basic salary respectively. The Social Security Pension, 1991 -. With the conversion of SSNIT from Provident Fund to Pension Trust, a pension payable from the Trust replaces the payment of a retirement gratuity as negotiated in a collective agreement. From January 1991, the national pension scheme is in effect and retirement gratuity provisions will no longer be incorporated in CBAs. Under the new pension scheme the employer's contribution remains at 12.5 percent, the worker's contribution is increased to 5 percent. Benefits payable under the new pension scheme are: Old Age Benefit: a member qualifies for monthly old age/ retirement benefit when he/she is aged between 55 and 60 and has made the minimum Social Security contributions of 240 months in aggregate; Invalidity Benefit: a member qualifies for monthly invalidity benefit when he/she is certified to be permanently incapacitated; and Survivors Benefit: the survivors of a deceased member will be entitled to a lump sum Death/Survivors cash benefit if a member dies while in employment or a pensioner dies before age 72. Under the transition rules for the first 5 years of the new scheme where a member fails to contribute for the minimum period of 180 months (15 years) but has reached the compulsory retirement age of 60, he shall be paid the amount standing to his credit with interest. Wage and Salary Determination in the PE Sector There are a number of institutions more or less involved in wage determination and incomes policy affecting Ghana's PE sector. In wage determination there have been, until 1991, two major elements: the determination of a minimum wage and compulsory collective bargaining. Changes in Government policy with respect to the determination of a minimum wage have been applied for 1991, together with other measures intended to undo the traditional linkage between civil service wage settlements and collective bargaining in the PE sector. Minimum Wage. The minimum wage has a long history in Ghana, dating from the ANNEXV Page 9 of 19 pre-Independence period. The minimum wage legislation introduced in 1960 provided two methods for its determination: (a) determination of sectoral minimum wages by sectoral wages boards representing different industry groups, a framework that could lead to different minimum wages for different occupational and industrial groups; and (b) determination of a national minimum wage by Government after consultation "with an equal number of persons representative of workers and employers of such workers," - the Tripartite Committee. From 1968 Government has determined a national minimum wage and sectorally differentiated minimum wages have lost their significance, effectively displaced by collective bargaining. From 1976 determination of the minimum wage has been by a national level tripartite committee comprising representatives of workers, employers and Government. Following a period of inactivity, during which the minimum wage was determined by Government alone, this national level tripartite committee was reactivated for the determination of the 1984 minimum wage and continued to perform this function through 1990. The minimum wage currently stands at 218 cedis per day. The .apact of minimum wage determinations on enterprise wage bills is related to the way it is factored into basic salary by the Prices and Incomes Board. Generally, PIB has computed the difference between the new minimum wage and the prevailing minimum wage in the enterprise and applied the resulting percentage increase across the board. This practise has meant that the severe wage compression noted in civil service and subvention parastatal salary structures, where the minimum wage was factored into the existing salary structure differently, is less evident in the PE sector. Because most allowances are expressed as percentages of basic salary the method used by PIB translates into an increase in the total wage bill approximating the percentage increase in the minimum wage. Until this year the announcement of the new minimum wage and of the salary increase payable to the Civil Service triggered reopener clauses in most PE collective agreements. Government has not convened the Tripartite Committee to set a minimum wage for 1991, a conscious attempt to step back from a process that automatically triggered the reopening of wage negotiations in other sectors of the economy. Moreover, the most recent civil service wage settlement has not been made the subject of an official circular, an action that also triggered reopener clauses in PE labour agreements. These departures from historic practise are part of Government's continuing efforts to "delink" civil service pay awards from wage bargaining in the PE sector. Such "delinking" measures constitute an important step towards a policy environment more conducive to responsible collective bargaining in the PE sector. Collective Bargaining. The Industrial Relations Act (1958) first introduced the idea of compulsory collective bargaining by a joint standing negotiating committee consisting of members of a certified union and representatives of the employer in equal numbers. The Trades Union Congress (TUC) is made up of 17 industrial unions, most of which are certified under The Industrial Relations Act for collective bargaining purposes. The Industrial Relations Act of 1965 assigns to the ANNEX V Page 10 of 19 joint standing negotiating committee jurisdiction to negotiate all matters concerning employment, terms of employment and the conditions of labour of any of the employees of the employer. This framework for collective bargaining does not apply to the civil service, nor to local government employees and most public service workers. Collective bargaining is well established as a means for determining conditions of employment in public and private enterprises. Employees of PEs and public corporations have, and exercise, the right to bargain collectively. For most PEs two agreements are negotiated: Terms and Conditions of Service for Senior Staff (TCS) and a Collective Bargaining Agreement (CBA) for all other employees of the enterprise. While broadly similar in form collective agreements differ substantially in detail from one enterprise to another. All collective agreements are subject to review and approval by The Prices and Incomes Board (PIB). Over most of the 1980s, CBAs for junior staff were negotiated with senior enterprise management. Senior management, in effect, negotiated the terms and conditions for senior staff with itself and were inclined to be generous in agreeing to benefits and allowances payable to junior staff in a CBA. The generous provisions agreed with junior staff were then incorporated in the provisions for senior staff. For this reason it can be said that the discipline required to negotiate responsible contracts, assumed in the Industrial Relations Act to be provided by the equal representation of owners and workers in compulsory negotiation, was only technically present in PE negotiations. While each enterprise will differ in its capacity to afford specific contractual obligations, it is also the case that many have been unable to meet current payroll obligations from enterprise cash flow in recent years. Generally, joint negotiating committees appear to have had little concern for the ability of the enterprise to pay negotiated salary and benefits entitlements. Clearly the "owners' interest", as represented by senior management in labour negotiations, has not reflected much concern for the financial viability of the enterprise. Notwithstanding the responsibility assigned to the Prices and Incomes Board to review collective agreements, there is no substantive evidence to suggest that Government used this authority to control the excesses evident in the collective bargaining process. It has been suggested that during this period PIB experienced severe staff shortages, including long delays in the appointment and confirmation of a permanent head, and was more concerned with price administration and control than with collective agreements being negotiated. - A more important circumstance contributing to the negotiation of unaffordable agreements would appear to be the absence of an effective representation of an "owners' interest" in PE collective bargaining over the 1980s. A major reason for this has been. the fact that, generally speaking, PE Boards have not been involved. For a variety of reasons, including the periodic removal of entire Boards and long delays in the appointment of Board members, these have not exercised any discipline over collective bargaining. It would appear to be more than a coincidence that the 1982 decision by the PNDC to replace the Boards of more than 61 of the largest PEs with Interim Management Committees coincided with a period over which the generosity and unaffordability of collective agreements increased dramatically. ANNEXLV Page 11 of 19 Collective Bargaining and the TUC The Trades Union Congress (TUC) is strongly committed to the principle of collective bargaining along the lines of ILO conventions reflected in Ghanaian legislation. In respect to the problems posed for the PE sector by the excessive provisions of many collective agreements and the financial difficulties of numerous individual enterprises, the offical position of the TUC is that the negotiated provisions of contracts are legitimate claims enforceable on the enterprise and, in the event of an enterprises inability to pay, upon the Government. This official position has meant that TUC has strongly opposed Government's suggestions that end-of-service benefit entitlements that exceed an enterprise's ability to pay should be renegotiated downwards to an "affordable" level. The official position of the Ministry of Finance and Planning is that entitlements negotiated in a collective agreement are enforceable on the PE, but not on the Government. While the position of the Ministry is consistent with existing law, it is more realistic to recognize that the issue is not entirely a question of law. Moreover, Government has established something of a precedent in the case of a number of divested and liquidated companies by assuming responsibility for paying negotiated end-of-service benefits to retrenched and laid off workers. Policy concerns may well encourage a degree of flexibility in the application of the official position stated by the Ministry of Finance and Economic Planning to the current situation. The TUC also recognizes that the provisions of some collective agreements are unreasonable and appears to be prepared in such cases to facilitate some renegotiation of the terms on an informal basis . The TUC is, moreover, fully aware of institutional deficiencies that have contributed to the loss of effective discipline over the collective bargaining process in the PE sector. Their suggestions for restoring discipline to the process are: (a) that current and reliable information on the financial situation of the enterprise be available to both management and union(s); (b) that a thorough analysis of the costs of union proposals presented in the course of negotiation be done by management; (c) that the Board of Directors set the parameters acceptable to the enterprise for the provisions and costs of a collective agreement; and (d) that the responsible sector Ministry be involved in setting the acceptable parameters for an agreement, through its representation on the Board of the enterprise. Of all the factors contributing to the problem situation the lack of current and reliable financial information is regarded by the TUC as the most significant. When management is unaware ofthe enterprise's true financial position responsible bargaining is impossible. Over the past year official TUC policy has shifted from total opposition to the idea of performance related productivity criteria in the negotiation of collective agreements to one of qualified support. Moreover, they have also officially endorsed a number of instances of contracting out for the supply of goods and services to an enterprise. ANNEX V Page 12 of 19 In respect to the proliferation of special allowances and separate provisions for housing, medical, transportation and other allowances that characterize most collective agreements it would appear that the TUC is agreeable in principle to their consolidation in basic salary, provided the tax consequences of such a consolidation are taken fully into account. Finally, the TUC would also point to the considerable gap between after-tax remuneration and the cost of living that even the apparent relative generosity of some collective agreements fails to close. In this area their view is that Government could, at little cost to its revenues or to the financial viability of the enterprise, raise the threshold of exemption from income tax and so ease the circumstances for a large number of workers. TUC concern for the welfare of workers is reflected in strong support for the regular determination of a minimum wage by a tripartite committee. It has been the consistent position of the TUC since it was directly linked to a political party that PEs are both the creatures and responsibility of Government. In practical terms that continues to mean that TUC insists on the liability of Government to meet the terms of labour contracts in the event that an enterprise is unable to do so, and, on the linking of pay awards in the Civil Service to the reopening of wage negotiations in PEs. At the present time they are attempting to re-open PE wage negotiations to incorporate the recent pay awards in the Civil Service in CBAs. As noted elsewhere Government is resisting this pressure to link the two sectors in wage negotiations. B. Policy Issues Related to Compensation Transition to National Pension Scheme The retirement gratuity entitlements incorporated in CBAs have been frozen as of 31 December, 1990, as part of the transition to a national Social Security Pension Scheme. This transition has created a number of problem situations which are not yet resolved. In October, 1990 Government issued a directive requiring the managements and Boards of all PEs: "to initiate action immediately to renegotiate the ESBs with Workers by invoking the wage opener clause within the respective Collective Bargaining Agreements.... In this regard, account is to be taken of the sustainable viability of the enterprises and their responsibilities to the State, other agencies and their own workers and guided also by the modalities that informed the financial compensation package that applies under the Labour Redeployment Programme." The issue raised by the transition from retirement gratuity provisions in collective agreements to a national pension trust centers on the financial and labour relations implications of the implementing directive of Ocother, 1990. The TUC has expressed strong opposition to the directive's implication that ESBs were to be negotiated downwards to a level affordable by the enterprise. To date the position adopted by its member unions in approaching these negotiations is that the amount is not negotiable although the terms and modalities of payment are. Any agreement between enterprises and their workers respecting the payment of outstanding retirement gratuity entitlements will have to be paid out of cash flow over a period of time. At the ANNEX V Page 13 of 19 present time no comprehensive estimate of the magnitude of this liability has been made although the TUC have indicated that their planning figure is 200 billion cedis (US$ 563 million). The available information indicates that as of December, 1990 PE employment was not less than 150,000 and could be as much as 175/180,000. Assuming the lower figure, and an average gratuity entitlement of 500,000 cedis (approximating the liability assumed by Government for 1,703 workers in 8 divested PEs), the minimum financial requirement can be estimated at 75 billion cedis (US$ 211 million). There is little doubt that the discharge of retirement gratuity liabilities will severely strain the financial position of most PEs. Their already limited capacity to generate through retained earnings the resources needed for the rehabilitation of plant and equipment as well as operations apears likely to disappear entirely for an extended period of time. Moreover, the IMF have expressed concerns at the impact of an addition to the money supply of this magnitude and would urge a form of discharge of this liability in some other form. The nature and magnitude of retirement gratuity liabilities outstanding in the PE sector, and largely unfunded as of December 1990, should be a matter of considerable concern for the PE reform program. With the transition to a national pension scheme and the requirement that all enterprises discharge their liability for retirement gratuities through negotiation with their unions an enormous financial problem must somehow be resolved. While the change has the effect of making future redeployment less costly to the enterprise it has done so at the price of creating a large financial problem for enterprises and their workers to resolve in the near term future. Restoring Discipline in Collective Bar*aining The numerous problems rooted in the substantive content of collective agreements are suggestive of defects in the process by which agreements are reached in the case of state-owned enterprises. Substantive provisions for retirement gratuities and severance pay in public sector collective agreements have already contributed to the near cessation of workforce rationalization measures and, as well, seriously impeded the divestiture process. There remain three characteristics of these agreements which promise to compromise efforts to improve performance and competitiveness: (a) the proliferation of special allowances and benefits characteristic of most contracts in the PE sector complicates the collective bargaining process and makes productivity related bargaining difficult to achieve; (b) basic salary and allowances appear overall and on average to be significantly more generous in the PE sector than for private enterprises; and (c) the excessively generous entitlements in a great many collective agreements for severance pay. These characteristics of public sector labour agreements indicate a lack of discipline over the collective bargaining process in past years. The concern for policy is the introduction of measures that will restore discipline to collective bargaining and assure the negotiation of responsible collective agreements. The issue relating -to severance pay should be addressed outside of the collective A-NNEXY Page 14 of 19 bargaining process. Provisions for "Severince" Pay The excessively generous provisions in many CBAs for redundancy or severance pay remain a serious impediment to workforce restructuring and for the divestment or privatisation of PEs - central objectives of the PE reform program. The twin policy objectives suggested for severance pay are to assure that all workers are treated equally and that the amount of severance pay is reasonable for the purpose, as defined in legislation, of compensating workers who become unemployed involuntarily. Neither objective can be said to be well served by the existing situation. The most straightforward remedy would appear to be an amendment of the Labour Decree, which already defines the circumstances in which an entitlement to severance pay arises, but leaves determination of the amount to the outcomes of enterprise by enterprise collective bargaining. This amendment would remove responsibility for negotiating the amount of the entitlement from the collective bargaining process and replace it with a schedule of entitlements related to years of service and payable by the employer to all workers equally. In the longer term it might be desirable to consider replacing the concept of severance pay with a contributory national unemployment insurance scheme. Pelinkine Civil Service from PE Wage Determination There is a long history in Ghana of linkage between wage awards in one part of the public sector and those in another. This has been reinforced by the annual ritual of setting a national minimum wage and the basic policy position taken by the TUC in reopening wage negotiations when the Civil Service pay award is announced. The impact of periodic and arbitrary adjustments to the minimum wage is not so much the amount of the minimum wage itself but rather in the way it has been factored into the determination by the PIB of across the board percentage increases in basic salary. While there is a growing awareness on the part of both Government and the TUC of a need to restore discipline to the collective bargaining process and of the relationship between increased productivity and the capacity to pay higher wages, the TUC continues its efforts to maintain a linkage between the Civil Service pay award and the increase in basic salaries paid by PEs. The policy problem here is one of eliminating the annual determination of a minimum wage and the periodic pay awards of the Civil Service as factors conditioning wage agreements for a PE. Until this is accomplished it will be difficult to focus enterprise level collective bargaining on the issues of enterprise productivity and performance. Incentive and Bonus Pay Most collective agreements provide for annual bonuses to be paid to management and workers. Technically, the payment of annual bonuses continues to be subject to the guidelines of a 1976 Government circular (SCR.-14/38), as amended subsequently. By the late 1970s the bonus system was virtually identical with the performance contract system now being introduced in requiring ANNEIXV Page 15 of 19 that SEC fix operational targets for each Board or Corporation and that the meeting or exceeding of such targets was the essential condition for payment of bonuses. The present practice is to reference a bonus to basic salary, either as one month salary or as a percent of annual salary; 8.33 to 18% is the present range. Both PIB and SEC are involved in approving enterprise requests for authority to pay the annual bonus. The maximum approved by PIB for 1989 appears to have been 15%; SEC practise is to approve a maximum bonus of 8.33% of annual basic salary. At present the annual bonus is considered as a tax free increment to basic salary and, because it is not based on any system of performance appraisal, does not provide a meaningful system of incentives for enterprise management or workers. There is no program of management incentives in most enterprises. E. Recommendations on Employment and Compensation Employment Policy The termination of excess or redundant staff is a critical part of the reform program. To date this has been compromised by its high financial costs and by management's perceptions of workforce structure and requirements. Recommendatiois for improving work force management involve a number of actions: Autonomy of Boards The appointment of Boards to those enterprises still lacking them and the grant of real autonomy in hiring, firing and wage determination is essential to avoid a recurrence/continuation of excess in collective bargaining and staffing behavior of PEs. Job Classification and Functional Review The practise of referencing enterprise staffing requirements to an approved establishment list introduced a degree of rigidity into personnel management that has made it difficult if not impossible to adjust staffing levels and occupational structures to enterprise operations. A necessary prelude to further restructuring and redeployment efforts is the review of job classifications and functional requirements. The objective of this exercise would be to relate the functional and operational needs of the enterprise to the determination of its labour requirements. An incidental benefit of such an effort would be to break the link with civil service practise and terminology that is inappropriate to the needs of a commercially oriented enterprise. A feature of this reform should be the elimination of references to junior and senior staff, replacing these with some definition of bargaining units for collective bargaining purposes. The approach recommended for non-core enterprises, which are identified in the current reclassification exercise as enterprises that will remain in the public sector, is to use the resources of the Restructuring Fund incorporated in the PE Project to finance the technical support of a job classification and functional requirements assessment. ANNEXM Page 16 of 19 Workforce Restructuring and Redeployment To date redeployment has been understood by management as an exercise to shed undesirable employees. It has not, generally, been related to the need to restructure workforce complements. The result has been too often that, after a costly effort at redeployment, the enterprise workforce remains grossly overstaffed in some categories. To avoid this situation it is recommended that future redeployment efforts be concentrated on those enterprises that will continue in the public sector and be preceded by an assessment of work force requirements and a job classification exercise. In realizing the transition from the existing to the desired structure maximum use should be made of natural attrition, currently estimated t be about 5 percent per year. Natural attrition will need to be complemented by a redeployment program but that program should certainly be derived from an objective assessment of the skills and numbers required for enterprise operations. Considerable overstaffing continues to characterize the PE sector. An estimated 22,000 redundant staff continue to be employed because of the inability of the enterprise to pay their termination benefits. Now that definitive action has been taken to resolve the retirement gratuity costs of redeployment, it is important that the necessary action be taken to rationalize worker entitlements to severance or redundancy pay consequewnt upon their becoming involuntarily unemployed. Temporary LayofflRecall Option A further complication in the existing situation is that the perceptions of both workers and management, as reflected in collective agreements, do not appear to recognize the need in a commercial operation for the flexibility provided by a temporary lay-off/recall option. The consequence is an inability on the part of the enterprise to temporarily layoff workers without triggering worker entitlements to all end-of-service benefits. The provision of such an option should become a feature of all in collective agreements and the support of the TUC sought in implementing this change. Bonuses and Incentives The universal eligibility of all workers and management of an enterprise for payment of an annual bonus makes the present system quite unsuitable as an incentive scheme. It is recommended that this existing system be discontinued and existing provisions for payment of an annual bonus be consolidated in basic salary. For purposes of this consolidation it might be suggested that the entitlement, regardless of the content of a collective agreement, be set within the range of bonus payments authorized by SEC and PIB, i.e. between 8.33 and 15% of basic salary. For enterprises covered by a Performance Contract it is recommended that a management incentive scheme be defined by each enterprise's Board of Directors. Eligibility for payment of the annual management incentive bonus would involve two basic conditions: (1) that the enterprise meet or exceed the targets set in the Performance Contract Agreement, and (2) that the distribution of the bonus be guided by a regular system of performance appraisal established for management personnel. The historic condition that an enterprise make a profit as confirmed in the audited accounts should ANNEX V Page 17 of 19 be replaced with a condition that performance targets established in annual performance contracts be met or exceeded for purposes of the management incentive bonus scheme. SEC would be responsible for monitoring and confirming that an enterprise met the agreed performance targets. For the non-management staff of an enterprise it is recommended that the provision of a bonus incentive scheme for non-management staff be left to the discretion of the Board. Should they introduce such a scheme it should be based on regular, systematic performance appraisal of participating staff. Transition to National Pension Scheme The overhang of largely unfunded liabilities for retirement gratuities will likely constrain PE capacity to generate, through retained earnings, resources for rehabilitation of plant and equipment, as well as operations. Financing the required payments to workers out of PE cash flow will severely cripple PE capacity to improve operational performance. The unpredictable element in this situation is the domestic rate of inflation, currently estimated at more than 30 percent. Should the payment to workers, frozen at December 1990 prices, be scheduled over, say, a 5 year period, the real cost to the enterprise would become insignificant if domestic inflation continues at this level. The social concern must be that, should this scenario materialize, the workers are effectively deprived of the real value of their entitlements as of December 1990. That these entitlements are, in a great many instances, unreasonably generous makes it difficult to see a solution that is both socially and economically responsible. The best solution would be for workers and enterprise management to accept the unreasonable nature of provisions in current contracts and mutually agree to a renegotiation downwards of the entitlements. This possibility has been explicitly rejected by the TUC and in the approach taken by its member unions towards the implementation of Government's directive. In these circumstances the strategy suggested for enterprise negotiations is to arrange for payment of the Decembr 1990 entitlements in nominal terms over a period of not less than 3 years. This would have the effect of letting domestic inflation reduce the nominal values to an affordable level for the enterprise. Restoring Discipline to Collective Bargaining The negotiation of generous and unaffordable labour contracts may be attributed to the absence of an effective representation of an "owner's interest" in the collective bargaining process. The key to restoring the necessary discipline is the assignment to Boards of the responsibility for negotiating a reasonable and affordable settlement and the grant to Boards of the autonomy to do so. Critical to the success of this measure is the delinking of Civil Service and Minimum Wage determination from wage negotiations in the PE sector. The measures suggested by the TUC relating to the development of current financial information and the setting by enterprise Boards of the parameters acceptable to the Board in a negotiated agreement are an important contribution to the restoration of effective discipline. The desire of TUC to involve the sector Ministries in establishing the parameters for collective bargaining is not appropriate because it effectively denies to enterprise Boards the autonomy and responsibility ANNEX V Page 18 of 19 necessary to the objective and sustains a direct linkage to Government that is part of the problem. Redundancy/Severance Pay Entitlements in Collective Agreements A fundamental problem for both redeployment and enterprise viability is the unreasonable provision in many collective agreements for severance pay. Redundancy entitlements are negotiated in course of collective bargaining. Provisions are remarkably generous in a large number of PEs and, together with lump sum retirement gratuity entitlements, their cost has been a major impediment to divestiture as well as workforce rationalization. The issue here is to remove the costs of redundancy as an impediment to workforce restructuring, retrenchment and divestiture, and to replace the existing scheme with one that treats workers fairly, but not excessively. The most straightforward remedy would appear to be an amendment of the Labour Decree, which already defines the circumstances in which an entitlement to severance pay arises, but leaves determination of the amount to the outcomes of enterprise by enterprise collective bargaining. This amendment would remove responsibility for negotiating the amount of the entitlement from the collective bargaining process and replace it with a legislated schedule of entitlements related to years of service and payable by the employer to all workers equally. In the longer term it might be desirable to consider replacing the concept of severance pay with a contributory national unemployment insurance scheme. Delinking PEs from Wage Determination in the Civil Service The institutional framework for wage determination in PEs has operated in a way that has produced a range of agreements that are unaffordable by the enterprise and which bear little relationship to its productivity or performance. This is to suggest that the parameters deternining wage settlements in the PE sector tend to be set in an institutional framework that is somehow separate from the enterprise. The principal elements of this framework appear to be: the determination of a national minimum wage by tripartite committee, the periodic announcement of pay awards for the Civil Service, and the traditional linkage between those determinations and wage bargaining in the PE sector that continues at the center of TUC policy. The recent actions by Government in not convening the Tripartite committee to set a minimum wage for 1991 and in omitting the issue of a Treasury Circular announcing the pay awards to the Civil Service have denied to unions the formalities required to invoke reopener clauses for wage renegotiation. It is too early to know whether these measures will be effective. The TUC is actively seeking the reopening of wage negotiations in the PE sector and is not likely to give up their policy insistence on maintaining this linkage. The linkage is also reflected in Government's directive of October, 1990 requiring PEs and their unions to renegotiate the end of service benefits of collective agreements keeping in mind the way this was handled in the Civil Service. A further measure towards the complete delinking of the two sectors might take the form of a policy statement or decree granting autonomy and responsibility to enterprise Boards for the negotiation of collective agreements. To go further, to indicate, for example, principles and guidelines for wage negotiation, would erode the autonomy that Boards need if they are to be fully accountable. The linkage remains plausible so long as Government continues to intervene in the ANNEX V Page 19 of 19 operations of PEs, and so long as the effects of Government intervention are reflected in the profitability (or the lack of it) of the enterprise. For delinking to be plausible, Government must adopt a less direct form of involvement in enterprise operations. GHANA PUBLIC ENTERPRISE SECTOR REVIEW Attachment Table 1 Illustrative Annual Payroll Costs, selected SOEs (for employee with 5 to 10 years service) Ghana Railways Water & Teme State Transport Corporation Graphic 1.0 Basic Salary 100,000 100,000 100,000 100,000. 100,000 100,000 100,000 ALLOWANCES 2.1 Leave Allowance 12,500 12,500 10,000 12,500 10,000 10,000 15,000 2.2 Rent 20,000 20,000 20,000 20,000 20,000 2.3 Vehicle 33,600 13,800 7,200 13,800 60600 1,200 9,000 2.4 Canteen 6,900 6,900. 6,900 13,800 16,100 Yes 8,050 2.5 Tools 3,450 . 720 1,800 2.6 Professional/Responsibility 15,000 15,000 . Yes 25,000 2.7 Other/Risk 4,800 20,000 Yes 7,500 BENEFITS 3.1 Social Security (Note 1) 12,500 12,500 12,500 12,500 12,500 . 12,500 12,500 3.2 Redundancy (Note 2) 534 . 534 534 491 1,068 1,068 534 3.3 Retirement/Cr tuity (Note 3) 5,666 5,666 19,994 21,046 14,031 7,015 10,523 3.4 LonglService Yes 2,500 200 Yes Yes 1,000 3.5 Workmens Compensation Yes Yes Yes Yes 3.6 Medical (Note 4) 1,800 1,800 1,800 1,800 1,800 1,800 1,800 3.7 Other Yes Yes Yes Yes Yes TOTAL PAYROLL COSTS 208,500 196,950 201,428 196,857 240,498 133,583 187,707 Multiple of Base Salary . 2.09 1.97 2.01 1.97 2.40 1.34 1.88 Note 1. Employer*s contribution Note 2. Sinking fund provision, assuming 10% probability of receiving within S years > either 24 months basic pay (See Table 4.2) or contract provision Note 3. Sinking fund provision, assumes discount rate = 4%, and that current salary is final salary at age 60, Note 4. Estimated 0 1.8% of basic salary (= the weight of medical and health care in consumer price index) 0 Table 1 (cont'd) Illustrative Annual Payroll Costs, selected SOEs for employee with 5 to 10 years service Electricity Food Prod State Cocoa Marketing Board Arch & Eng Bst ITEM . Corp. Ghana Corporation Forms Jr. Staff Sr. Staff Serv Corp Fibre 1.0 Basic Salary 100,000 100,000 100,000 100,000 100,000 100,000 100,000 ALLOWANCES 2.1 Leave Allowance 10,000 300 350 10,000 8,333 8,333 2.2 Rent 20,000 20,000 20,000 25,000 25,000 20,000 20,000 2.3 Vehicle Yes 2,520 1,200 1,800 3,600 7,200 4,320 2.4 Canteen 17,250 Yes 4,600 Yes Yes 4,600 11,500 2.5 Tools 2,400 120 300 2.6 Professional/Responsibility Yes 2.7 Other/Risk Yes Yes 3,600 BENEFITS 3.1 Social Security 12,500 12,500 12,500 12,500 12,500 12,500 12,500 .3.2 Redundency/Severance 3,080 2,957 534 2,957 2,957 1,971 15,377 3.3 Retirement/Gratuity 11,575 5,262 10,523 12,628 12,628 10,523 14,031 3.4 Long Service 1,667 833 3.5 Workmens Compensation Yes Yes Yes . Yes 3.6 Medical 1,800 1,800 , - 1,800 1,800 1,800 1,800 1,800 3.7 Other Yes TOTAL PAYROLL COSTS 177,872 145,339 153,557 157,155 168,785 167,761 191,461 Multiple of BaseSaljry 1.78. 1.45 , 1.4 1.57 1.69 1f .8 1.9 0) rtZ * rt '0 (D ANNEX V Attachment Page 3 of 9 Table 2. Comi arative other benefits and allowances Subvention Self-financing Private 0. PeIestatels 30Es Sector Benefit Mia Max Min F -Max Min Max yalues in cedi, %of basic salary Funeral * in kind'. coffin, shroud,.schnapps 0 0 0 * donation 5,000 40,000 35,000 60,000 35,000 50,00 Overtime multipleof boti salary 1.5 2 1.5 2 1.5 2.000/mont Acting Allovanct % basic salary 20% - 20% 20% 20% 20% 20% Out-of-Stationi hoy. 3,000 4,000 600 6,000 2,000 8,000 Day-trip-Allow 100 500 150 700 100 150 Responsibility ilow. 1,500 20% 7,000 20% 2,000 3,000 Loans to employ, es * transport Gov*t Rates 450,000 2,500,000 * housing Gov't Scheme Gov't Scbeme 450,000 700,000 *durable goods 5,000 100,000 40,000 1 yr. salary * repair/insur; nce 0 250,000 3,000 250,000 * rent advance 150,000 30% 60,000 50% 20% 35% Study leave ' : . Yes Yes Yes In-service Trai ang Yes Yes Yes ANNEX V Attachment 8 . Page 4 of 9 Table 3. Coaparat -e Salary Levels:,iManageaent and Professional Grades. 1990 Public. F. terprise Sector Department/ *' Division Senior Interiediate Intry*Level Head Professional Professional Professional Professional GIROC Phartaceutc Is Co. '260,746 222,158 203,738 186,600 167,078 G1 Portsiliarbours Nth. 305.724 290.689 290.612 274,615 251.857 State Interprises oga. 323,429 293,306 278,245 262,281 247,220 Auto. Tech. Serve 348.901 328.044 289.418 259.692 242.141 Tema Food Co. Ltd. 190.376 363,180 328,104 307,512 286,920 GPIC 447.568 308.983 . 292.164 275.365 259.164 GNPA 463,830 415.322 319,368 299,484 251,100 State Shipping Cori. 485.600 450.182 404'511 358.841 312.086 Irrigation Dev. A4 h. $12,524 364,995 316,069 294,095 269,369 GH Oil Co. Ltd. 544.667 489.238 446.340 403.475 359.030 Achinota Brewery L d. 670,000 466,400 437,805 402.993 368,165 GB Cocoa Board 708,840 548.448 477,943 410.956 339.400 Sample Average 455.200 378.412 340.360 311.326 279.461 Source: Data supp] ed by State Enterprises Commission ANNEX V Attachment Page 5 of 9 Table 4. edundency Entitlement, Selected SOEs and private sector enterprises in month's of basic pay A. PRIVATE SECTOR - Etitlement with 5 years 10 9ers 15 years 20 !ears 25 years Conimercia Employers 8.75 17.50 30.00 40.00 50.00 Lever Bros (Ohana) - .. 9.25 18.46 27.69 36.92 46.15 FoodSpeciaities .10..8 23.08 34.62 46.15 57.69 Brevery Gi oup 12.50 25.00 37.50 50.00 62.50 GlACEM 15.00 30.00 45.00 60.00 75.00 Insurance (ompanies 15.00 30.00 45.00 60.00 75.00 State Insur nce Corp 9.23 27.69 41.54 55.58 69.23 Mobil (Gha 11) 7.00 8.00 10.00 10.00 10.00 Texaco (Ght na) 6.00 8.00 8.00 8.00 8.00 GhanaAluminium 12.50 30.00 45.00 60.00 75.00 Tema Food Cemplex 10.00 20.00 30.00 40.00 50.00 AVERAGE 10.51 21.61 32.21 42.41 5 2 .60 8. STATE 0 4NED ENTERPRISES Et titlement with 5 !ears 10 years 15 years 20 years 25 years Ghana Airv ys (Junior) 26.62 100.80 186.00 216.00 246.00 Ghana Airwys (Senior) 49.00 135.00 220.50 294.00 367.50 Best Fibre Woard 36.00 72.00 108.00 144.00 180.00 Ghana Rail% ays (Junior) 1.00 1.00 1.00 1.00 1.00 Ghana Railu ays (Senior) no provision no provision no provision no provision no provision Electricity .orporation 8.08 14.31 15.23 15.23 15.23 Cocoa Markting (Junior) .. 4.62 13.85 20.77 27.69 34.62 Cocoa Markuting (Senior) 4.62 13.85 20.77 27.69 34.62 State Formt Corporation 10.00 40.00 60.00 80.00 100.00 Food Produc tion Corp. . 6.92 13.85 20.77 27.69 34.62 Graphic Cot poration . no provision no provision no provision no provision no provision State Transport (Junior) 4.00 6.00 6.00 6.00 6.00 State Transport (Senior) no provision no provision no provision no provision no provision Water & Sverage Corp. negotiable negotiable negotiable negotiable negotiable Architectur A & ESC 4.62 9.23 13.85 18.46 23.08 TemaShipiprd 1.15 2.50 3.75 5.00 6.25 AVERAGES 13.05 35.20 56.39 71.90 8 7 .4 1 Source: Pri- ate sector companies - SEC/SCR 34/2/77 (30 Sept., 1987) SOE -- review of recent collective agreements ANNEX V Attachment Page 6 of 9 Table 5. itirement Entitlement, Selected SOE3.and private sector enterprioes in month's of basic pay A. PRIVATE *ECTOR. En itlement with S years 10 years 15 years 20 9ears 25 !ears Commercial Employers 12.50 25.00 37.50 50.00 62.50 Lever Bros Ghana) 14.54 23.08 54.62 46.15 57.69 Food.Speciaties . 11.54 23.08 34.62 46.15 57.69 Brewery Gr iup . 15.00 50.00 45.00 60.00 75.00 GHACEM . 20.00 40.00 60.00 80.00 100.00 Insurance Companies 15.00 30.00 45.00 60.00 75.00 State Insura ice Corp 12.00 24.00 72.00 96.00 120.00 Mobil (Ghar ) 5.00 15.00 30.00 40.00 50.00 Texaco (Who is) 4.62 13.85 20.77 32.31 40.38 GhanaAluminium 15.00 30.00 45.00 60.00 75.00 Tema Food Cmplex 10.00 20.00 35.00 50.00 62.00 AVERAGE 1202 24.91 41.77 56.42 70.48 B. STATE O!NED ENTERPRISES En itlement with 5 years 10 Wears 15 ers 20 years 25 ers GhansAirva4s (Junior) 18.00 60.00 96.00 96.00 96.00 Ghana Airwaqs (Senior) 24.00 60.00 108.00 14400 180.00 Best Fibre E ard 20.00 60.00 90.00 120.00 150.00 Ghana Rajly ts (Junior) 8.08 16.15 55.38 73.85 92.31 Ghana Railv jus (Senior) 8.08 16.15 55.38 73.85 92.31 I' Electricity (orporation 16.50 45.00 76.50 102.00 127.50 Cocoa Marketing (Junior) 18.00 42.00 63.00 96.00 120.00 Cocoa-Mrke ing (Senior) 18.00 42.00 63.00 96.00 120.00 State Forms Corporation 10.00 30.00 60.00 80.00 100.00 Food Produci ion Corp. 7.50 15.00 30.00 40.00 50.00 Graphic Cori oration 15.00 30.00 85.50 114.00 142.50 State Transr )rt (Junior) 10.00 30.00 60.00 80.00 100.00 State Transp >rt (Senior) - 20.00 60.00 90.00 160.00 200.00 Water & Se% erage Corp. 28.50 57.00 85.50 114.00 142.50 Architectur I & ESC 6.00 18.00 54.00 72.00 90.00 Teme Ship rd 27.00 65.00 92.50 120.00 147.50 AVERAGE 15.92 40.39 72.80 9886 121.91 Source: Priv ite sector companies - SEC/SCR 34/2/77 (30 Sept., 1987) SOE, - - review of recent collective agreements 9 Table 6. Occupational Structures in the Public Sector distribution of total 1984 employment by type of employer and sector Total lational Central Government Public Interprise Private Enterprise I Formal Sector ISIC Vate Total lumber Percent Ksher Percent Numher Percent I Number Percent- I Agriculture. etc. 3.154,167 18.925 0.6% 61.440 1.9% 95.018 3.0% I 175.383 5.61 2 Nining 25,800 | 129 0.5% 23.359 90.5% 2.060 8.0% I 25.548 99.0t 3 Nanufacturing 685.000 1.370 0.2% 25.705 3.8% 65,516 9.61 I 92.591 13.5t 4 Utilities 14.667 88 0.6% 14,531 99.1% 595 4.1% 15.214 103.7% 5 Construction 64.764 I 9.067 14.0% 16.467 25.4% 16.174 25.01 41.708 64.0% 6 Wholesale. Retail 1,088.000 1,088 0.1% 22,264 2.0% 36.641 3.4% j 59.993 5.5% 7 Transoort. Comm. 121.792 2.923 2.4% 32817 7.0% 39.533 32.5% I 75.333 61.9% 8 Business Services 27,410 1.069 3.9% 19.042 69.5% 4.824 17.6% 1 24,935 91.0% 9 Community Services 413.412 ) 275.999 50.3% 26.005 5.5% 59,179 12.5% 1 361.183 76.3% umber! % of Total 5,655,011 310,658 5.5% 241,640 4.3% 319.590 5.1% 1 816.902 15.51 % of Formal Esployment 876,902 1 35.4% 27.6% 36.4% I 100.0 ' formal sector excludes self-employed, unpaid family workers and others: Grand totals include cooperatives and international organisations O>> M to ANNEX V Attachment R/015 Page 8 of 9 Table 7. Redeployment Activity 1985 - 1990 (a) Numbers and Costs of Redeployment Redeployment End-of-service Benefits Planned Actual Estimated Paid Outstanding Year np no cedi millions 1985 16,638 16,638 3,038.1 3,038.1 0.0 1986 728 728 228.7 228.7 0.0 1987 16,149 14,630 3,149.8 2,982.9 166.9 1988 13,869 11,112 8,341.0 484.8 7,856.2 1989 14,364 2,935 3,514.2 871.9 2,642.3 1990 5,628 427 3,833.8 268.0 3,565.8 1991 1,342 0 851.3 0.0 851.3 Totals 68,718 46,470 22,956.9 7,874.4 15,082.5 (b) End-of-service benefits position as of end 1990 cedi 1. ESBs owed in respect to workers million already redeployed: * in 32 "distressed enterprises" 6,541.4 * in 8 divested enterprises 3,000.0 2. ESB for redundant staff not yet redeployed 5,541.1 Total outstanding 15,082.5 (c) End-of-service benefits per worker by year cedi/ Year worker -------------------------- 1985 182,600 1986 314,148 1987 195,046 1988 601,413 1989 244,653 1990 681,201 1991 634,352 Source: data supplied by State Enterprises Commission ANNEX V Attachment R/0 15 Page 9 of 9 Table 8(a) Occupational Classification of SOE Workers Retrenched in 1987/88 Percent in Percent Total in occupational Classification Number Workforce Retrenched Professional, Technical 144 9.5% 6.1 Administrative, Managerial 9 1.5% 0.4% Clerical 257 23.3% 11.0 Sales Workers 130 1.4% 5.5% Service Workers 351 10.5% 15.0 Agricultural, Forestry, Fishing 415 17.8% 17.7% Production Workers 945 29.1%. 40.3% Material Handling, Transport 95 6.9% 4.0% Total sample 2,346 100.0% 100.0% Data from sample survey of 64 SOEs, 1988 Table 8(b) Criteria used to identify redundant staff in 1988/89 Percent of 34 SOEs Criteria Frequency Reporting - ---m ---m ------mm -m --------m --------m -----------e ------- Lary, late, poor attitude 24 70.6% Old age, near retirement 21 61.8% Frequent sickness, weak 12 35.3% No specific work 11 32.4% Seniority (last in, first out) 6 17.6% Criminal record, misconduct 5 14.7% Obsolete skill, untrainable 5 14.7% Department closed down 5 14.7% Temporary worker 5 14.7% Voluntary early retirement 2 5.9% Total mentions 96 * * exceeds 100% because of multiple responses Data from sample survey of 64 SOEs, 1988: 30 did not respond to this question GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX VI LEGAL AND INSIT(JTIQNAL FRAMEWORK This chapter examines the legal and institutional framework of the PE sector in Ghana and ighlights the key issues and potential options for dealing with them. I. Legal Authority The legal authority and obligations of the Government with respect to PEs arise from two principal contexts: * explicit powers to direct the affairs of PEs conferred in the enacting legislation on the Head of State or a Minister (Secretary). This applies mainly to corporations established under the Statutory Corporations Act (1964, N. 232) or by a special act or decree. * Government's position as direct or indirect owner of some or all of the shares of an enterprise. This applies mainly to corporations established as limited liability companies under the companies code (1963, Act 179) and includes most confiscated and joint-venture enterprises. Each original instrument of incorporation provided, in addition to the objects and authorities of the PE, for the appointment of a board of directors as the body to direct enterprise policy. Ghana's laws governing statutory corporations define various forms of state control over enterprises to ensure public accountability. Of these judicial, parliamentary or ministerial control mechanisms, the one that has posed the greatest difficulties for enterprise management according to sound business pr;nciples has been that of ministerial control. In law governmental authority over statutory and special decree corporations is, in most instances, delegated by the Head of State to a Minister (Secretary). The legislated authorities relate to three areas: a. the appointment and dismissal of board members and other staff of corporations; b. the making of rules and general directions for the running of corporations; and c. the power to grant or withhold consent in respect of specified acts of the corporations. Generally, the instruments of establishment assign responsibility for certain decisions and operations of the enterprise to boards of directors and senior management. Functioning af the Board of Directors. There is wide variation in the provisions for the appointment of board members. In some cases, absolute discretion is granted to the Head of State; in others appointees must have prescribed qualifications. In still others, appointments must have the approval of a third body. Reports of Committees and Commissions of Inquiry have documented over the years numerous instances of the abuse of this authority, most typically in the appointment to board and management positions of individuals lackirtg the appropriate technical, financial or managerial skills. ANNEX VI Page 2 of 10 The authority to appoint members of PE boards is one that can and has been abused in practice; equally damaging have been the periodic wholesale sackings of boards or senior management by decree and their replacement with ad hoc interim management structures. This occurred most recently in 1982 with promulgation of the Interim Management Committees (Public Boards and Corporations) Decree. This decree replaced existing management structures in 61 of the largest public enterprise with committees made up of the Chief Executive, the Financial Controller, Head of Op"rations, a representative of middle management, a representative of the workers' union and two representatives of the People's Defense Committee. As of 1991, only about 50 percent of the boards have been reconstituted. Contributing to a further blurring of accountabilities and responsibilities have been periodic amendments to the instruments of incorporation in respect to the position of Chief Executive. The original instruments generally made this position accountable to the board of directors. Amendments have had the effect of making the chief executive a member of the board thus replacing accountability to the board with accountability to the Ministry. At the present time, the authority and responsibility of boards of directors has been greatly undermined; in 1991, a significant number of vacancies still exist. Authority to Issue General Directives. Many, but not all, instruments of incorporation distinguish between a ministerial authority to issue directives in respect to general policy of the corporation and Board responsibility for day-to-day operations management. The reports of a number of commission or Committees of Inquiry document numerous instances where this distinction has been ignored and where ministerial intervention in day-to-day management decisions has occurred. As damaging as these interventions have been in each or any specific environment that discourages responsible operational management and blurs the accountability for enterprise performance. On a broader scale since 1960, a succession of Governments have enacted minimum wage legislation for general application. Both state-owned and private enterprises are subject to its provisions. From an institutional framework perspective the central point is that Government, in setting annually a minimum wage, has pre-empted one of the functions of the collective bargaining process. Collective bargaining and Government's annual minimum wage determination together determine wage settlements with the enterprise. For enterprises established under the Companies Code as limited liability companies, governmental control is derived from its ownership of shares or equity, particularly in the case of joint venture companies. All state enterprises, whether statutory corporations or limited liability companies, are accountable to a Ministry and the legal distinctions between the two types of companies has tended to be blurred in the exercise of ministerial authority. In addition, the instruments of incorporation have been amended over the years to redefine the roles and accountabilities of enterprise boards and senior management and to include or delete references to the State Enterprises Commission, responsibilities of the Auditor General and the State Enterprises Audit Commission, and with respect to financial accounting details. II. The State Enterprise Commission (SEC) and the PE Sector The present State Enterprises Commission (SEC) was established in 1987 (PNDC Law 170) ANNEXVI Page 3 of 10 and is the second of that name. Its predecessor, established in 1981, (Act 433), was restructured in conjunction with other institutional reforms under the Economic Recovery Programme (ERP) and to satisfy SAC conditionalities. Both versions of the Commission are essentially monitoring, review and advisory bodies with limited direct authority over PE operations. The State Enterprises Commission (SEC) was created in 1981 as an instrument for coordinating and supervising the management of the sector. The 1981 instrument gave SEC authority to review staff strength and personnel policies in some but not all PEs and to advise Government on the remuneration and conditions of service of PE employees. In the amended decree of 1987, these responsibilities were limited to a total of 112. The instrument of establishment assigns to SEC a number of responsibilities: a. to promote within the framework of government policy, the efficient and profitable operation of the prescribed body; b. to review the objectives, programmes and plans of the prescribed body and to monitor as well as evaiuate their performance in relation to agreed targets; c. to undertake operational and management audit where necessary with a view to improving the performance of the prescribed body; d. to review the organizational structure and personnel policies and practices of the prescribed bodies and advise the Goverment on the remuneration and other conditions of service of the staff of the prescribed bodies; e. to advise Government on the criteria for the establishment of new state enterprises and where necessary advise the sector ministries on state enterprise rationalization and rehabilitation programmes; f. to advise Government on the appointment and removal of chief executives or members of Boards or other governing bodies of the prescribed bodies; g. to examine financial structures and major investment proposals of the prescribed bodies and make appropriate recommendations to Government; h. to ensure that appropriate dividends are paid to Government by the prescribed bodies; i. to ensure that the prescribed bodies establish internal audit units, corporate planning and management information systems and also to ensure the institution and implementation of managerial and professional training programmes for their staff; J. to make recommendations on application to the Ministry of Finance and Economic Planning for additional credit, government guarantees, financing of capital expenditure and investment plans, for the prescribed bodies; k. to provide consultancy services to a prescribed body for an agreed fee which shall be paid into the Consolidated Fund; and ANNEX VI Page 4 of 10 1. to perform any other functions which are incidental to the objects of the Commission. The terms of reference of SEC, defined in law, are of three kinds: 1. Advisory responsibilities to Government (e,f,g,h,k). 2. Reviewing, monitoring and reporting functions with respect to PE operations and performance (b,c,e). 3. Intervention authority over PEs (ij). Under this law, SEC has very limited statutory authority to intervene directly in the operations of individual PEs. This authority is limited to ensuring the presence of audit and planning capacity and of appropriate staff training programs. Second, SEC's review and advisory functions are interconnected but there is no clear allocation of responsibility for the implementation of decisions taken on the advice of SEC. This is to say that a major part of SEC's mission is the preparation of reports and recommendations that will be decided and implemented by others, and, the Commission's accountability is limited in law to the preparation of recommendations. Accountability for PE performance rests, under the instruments of establishment and under the State Enterprises Commission Law, with Government acting through its sector ministries and the Auditor General. The SEC Law does not draw a clear boundary between the responsibilities of SEC and the sector ministry with respect to individual PEs. Most instruments for the establishment of an PE grant authorities and responsibilities over PE policy and operations to a sector ministry. The law does empower SEC to request any information it might require from a PE and requires the latter to comply with such requests. These arrangements are not a problem insofar as SEC's advisory responsibilities to Government are concerned but there is a potential for confusion in respect to the implementation of the PE Reform Program. A case in point is the inclusion of rehabilitation projects for several GIHOC companies in the investment program of *he Ministry of Industry, Science and Technology. While these projects are known to the Commission, they were not subjected to SEC review as required under the SEC Law, paragraph 2(h). In practice, the reform management role performed by SEC is mainly diagnostic, analytical and advisory. The implementation of recommendations for enterprise reform-redeployment, restructuring or rehabilitation-is generally a responsibility of the enterprise and its sector ministry; once agreement has been reached on reform measures, the Commission performs a facilitating, monitoring and reporting role. This role is particularly evident in the negotiation of performance contracts between a sector ministry and a public enterprise. Organizational Structure-of SEC The present organizational structure of SEC is derived from recommendations of the PE Task Force Report on State Enterprises Reform (1986). This same report was a major element in the drafting of the State Enterprises Commission Law (PNDCL 170, 1987), in which the composition and responsibilities of the Commission and the scope of its authority over PEs are defined. Page 5 of 10 The present organizational structure of SEC consists of four operational divisions or departments: * Finance and Accounts; * Human Resource Management: * Operations; and * Planning Monitoring, Evaluation and Marketing. These operational divisions are supported by an administrative unit. Their terms of reference are those defined in the Task Force Report of 1986, although severe professional staffing shortages have meant that a number of tasks assigned are not, in fact, performed. The present allocation of operational responsibilities by department is summarized in the following sections. Departmental Responsibility Allocation From a management perspective the present allocation of functional and operational responsibilities leaves much to be desired. 1. Each department has too long a list of responsibilities for effective management. Even if the full establishment of professional staff were in post, there are more responsibilities than people, a case of overspecification of tasks. 2. The allocation of responsibilities does not reflect the additional responsibilities of the Commission under the State Enterprise Reform Program. Serious difficulties in the management of the divestiture program before the establishment of a separate Divestiture Implementation Committee are an example. 3. The lists of responsibilities give no clear indication of priorities, or, more importantly, of their focus and purpose in reference to the responsibilities of the Commission under the SEC Law and the Public Enterprise Project. 4. Th t .o allocation of responsibility for the establishment of information data systems upon which much of the Commission's responsibility depends. 5. There is no provision or allocation of responsibility for the performance of SEC's statutory and project reporting responsibilities. This is not to say that SEC does not perform its statutory and other responsibilities, although its annual reports have not been produced on a regular basis for some time. What is indicated by the review above of statutory and reform responsibilities is that the present organizational structure and allocation of functions needs to be adjusted so that the Commission's reform responsibilities can be performed both efficiently and effectively. ANNEX VI Page 6 of 10 Staffing Situation The overall professional staffing situation is stark: of 36 approved professional positions only 14 are currently filled. Professional vacancy levels range from 50 percent in the Human Resources Department to 37 percent in the Finance and Accounts Department. Given the severe shortages of skilled human resources in Ghana and the much better terms and conditions of service offered by competing employers in the PE and private sectors, it has proved extremely difficult to attract and retain the necessary skills and experience in the service of the Commission. High vacancy levels are also characteristic of the administrative and support categories. Here too the much superior terms and conditions of service elsewhere in both the private and public sectors has made it extremely difficult to recruit or retrain qualified support staff. Pay and Grading Issues: A major factor operating to weaken SEC's capacity to manage the workload of PE reform management is an inability and retain suitably qualified individuals in professional positions. In significant part, this is a problem of remuneration and incentives. The salary levels paid by the Commission lag those not only of the state and private sector enterprises, but also those of the main civil service. In the past year, pay increases in the civil service averaged some 34 percent, for more senior levels somewhat higher. For the staff of the Commission the approved pay increase was less than 20 percent, just over half the approved increase in the minimum wage. The overall salary structure of the Commission is highly compressed. Between the Executive Director position and that of laborer/cleaner the wage ratio stands at 4.77, as compared to a more appropriate ratio of 10 to 15. The failure of annual pay awards to keep pace with either the rate of inflation or with the increases awarded elsewhere in the public service is a major contributor to poor staff morale. The Accra CPI rose more than 28 percent from 1989 to 1990. Despite these problems, SEC is moving in the right direction in terms of the PE reform program. On the positive side, it has influenced the substance of reforms in important ways. Instead of treating retrenchment as a mechanical exercise, SEC has brought in the concept of functional analysis so as to facilitate a useful restructuring of the PE work force. It has promoted performance agreements in most of the core PEs in spite of sector ministry indifference. It has provided support services in terms of training, and accounting systems. It has taken papers to the Cabinet (PNDC) on common PE issues such as the role of sector ministries, managerial incentives, boards of directors, and the public agreements board issue. It has not been able, however, to get the Cabinet to resolve most of these problems. The effort seems to have been made, but with little impact. Nevertheless, there are some welcome developments in the PE sector. First, of the 17 core PEs, 13 have boards of directors with a majority of non-officials. Increasingly, chairmen of boards are being appointed from the private sector. The endeavor seems to be to initiate this process in the non-core PEs too. Second, performance agreements now exist in almost all core PEs. Though initially put in place by SEC without much involvement of the sector ministries or even the PEs themselves, there is evidence that the chief executives now welcome the idea. The agreements seem rather one sided, but the process may have some value. Third, some of the assistance being given to selected PEs, the participation of PEs in SEC's training programs and their receptivity to SEC's advisory work seems Page 7 of 10 to be growing. One risk here is that SEC is losing its staff to the PEs or the private sector. Ill. Segtor Ministries and SEC In order to assess the pattern of influence of the institutional framework on PE functioning, major PEs (17 in all) were asked to indicate the agencies of Government that approve or control 15 key decisions/functions that affect their performance. An analysis of their responses (16 responded) revealed the following findings: 1. Of all public agencies, sector ministries intervene in and control more decision areas than any other. There is, however, no clear pattern across PEs with regard to the functions being performed by the ministries. Available evidence shows that the appointment of chief executives, investment plans and corporate plans in a majority of PEs are vetted by their respectiv; sector ministries. In most other decisions/functions, a few sector ministries intervene; others do not. Table 1 below shows that some ministries get involved in the appointment and dismissal of senior managers, and in consultancy and procurement contracts. In nearly half the cases, ministries intervene in the matter of bank/government loans to PEs. While some variations in the role of ministries vis a vis PEs is to be expected, what this analysis shows is a high degree of ad hoc controls with no overall rationale underlying it. Table Fl SECTOR MINISTRY APPROVAL OF PE DECISIONS Number of PEs Decision/Approval Renorting Ministry Role Appointment of Chief Executives 13 Investment Program 12 Corporate Plan 10 Bank/Government Loans 8 Pricing of Goods 8 Consultancy Contracts 7 Annual Budget 7 Procurement Contracts 5 Dismissal of Managers 4 Appointment of Senior Managers 3 Bonus to Workers 2 ANNEX VI Page 8 of 10 2. Table I also confirms that some of the functions being performed by sector ministries really belong to PE boards. Approval of procurement or consultancy contracts, appointment and dismissal of managers and the approval of annual budgets (except for ANNEX-V Page 8 of 10 public subsidies) are functions that belong to PE boards. The latter are made redundant when ministries intervene in these decisions. A systematic review of why ministries behave differently in different sectors with respect to key PE decisions is clearly in order. 3. A similar analysis of the role of SEC in key PE decisions shows that corporate plans are the main activity in which it interacts with PEs. Two thirds of the core PEs refer their corporate plans to SEC whereas only in a fourth to a third of the PEs does SEC get involved with the appointment of chief executives and the setting of annual sales and profit targets. All these are functions of SEC according to PNDC Law 170. Again, this shows how uneven the compliance with the law is in the PE sector. IV. MFEP and the PE Sector Like SEC, MFEP interfaces with PEs across sectors. Budgetary allocations to individual PEs are made by MFEP. Strictly speaking, therefore, MFEP should be the repository of all information on the financial transactions between PEs and Government. The reality is, however, that MFEP has no such institutional memory. As a result, a comprehensive picture of the transactions between PEs and Government does not exist. Part of the problem is that the relevant information is scattered in different parts of MFEP and hence, it has no focal point to monitor these financial transactions. MFEP is also supposed to play an active role along with SEC, in planning the performance agreements between PEs and Government. But its limited staff and numerous other duties have caused it to play a rather passive role in this exercise. It is believed that performance agreements were rushed through on a pro forma basis in order to meet SAC conditionality. V. Public Agreements Board (PAB) and PEs Both foreign exchange constraints and the concern about corruption seem to have triggered PAB's stronger role in the approval of legal agreements by PEs. Whenever a public body enters into future commitments and liabilities, it is only proper that the government demands a "legal clearance" of the issues involved. The PAB, however, goes far beyond this consideration. First of all, it examines all agreements thereby overloading its capacity and delaying approvals. Second, it has no guidelines to help clients to prepare agreements in an acceptable form. Nor does it have any system whereby clients can get advice or comments in advance of the preparation of a formal agreement. Third, PAB not only examines agreements from a legal angle but also from the substantive angle. It may question the need for certain consultancies or ask why a local consultant could not be used instead of an expatriate. PAB has panels of advisers drawn from different professions and disciplines to assist it in assessing the substance of agreements. PAB considers its task as a watchdog function on behalf of Government. SEC and PEs feel that much time and money are wasted because of the excessive delays in getting PAB approvals and the need to renegotiate contracts with foreign consultants/firms as a result of delays. ANNXI Page 9 of 10 VI. Emerging Institutional Issues and Qtions Overlaps of Sector Ministry Functions with Roles of Other Agencies. The foregoing analysis clearly demonstrates that functional and role overlaps are a serious problem in the PE sector institutional framework in Ghana. The most glaring overlap Is between the functions of the sector ministry and PE boards. It is possible that this pattern was exacerbated by the non-existence of boards since 1982, when ministry officials got used to intervening in PE operations frequently. The overlaps between ministries and SEC seem less serious though the tendency of PEs to ignore SEC stems partly from the strong interventionist feature of sector ministries on which PEs depend for getting things done within Government. The emerging challenge for Government Is to redefine the role and functions of sector ministries given that boards of directors are being appointed for PEs and that the performance agreements being introduced require managerial autonomy if PEs are to be accountable. If in some sectors, ministries have to play a more active role because PEs are monopolies, a careful review of the regulatory function of government will be in order. This should not be confused with a ministry's role in managing the PEs under its supervision. A Government task force or expert group may examine this set of issues and propose a more rational approach for the future. Streamlinine the Mission. Functions. and Structure of SEC. In light of the rationalization of sector ministry roles, and the introduction of PE boards and performance agreements, it will be necessary to redefine SEC's mission, functions and organizational and incentive structures. PNDC Law 170 seems to have assigned to SEC multiple functions, some of which are probably redundant or inappropriate. Review of the organizational structures and personnel policies of PEs, advice on the criteria for the establishment of new public enterprises, examination of the financial structures and investment proposals of PEs, ensuring that appropriate dividends are paid by PEs to government, and recommendations for additional credit to PEs are a complex and highly diverse set of functions that will require an elaborate and highly skilled staff that SEC will never be able to atteact. Some of these are functions that PE boards should perform. Others belong to banks, consulting firms, etc. Obviously Government could ask SEC to advise on some of these issues if they concern the PE sector as a whole (e. g., personnel policies, incentives). Once SEC's functions are rationalized along with those of sector ministries, it will be in order to redraft its mission statement and realign its organizational structure consist with the mission. The operational departments of SEC and their interrelationships should be examined to minimize overlaps and to strengthen their capacity and incentives (including salary structures) to perform their primary tasks. Given the ad hoc nature of some of the tasks or studies Government might ask SEC to undertake, the latter should be given the needed flexibility to use consultants. This will be more productive and manageable in the long run than building up in house capability in diverse subjects especially in view of the civil service constraints facing SEC. PAB's Role in Legal Agreements: Need for Simpler Options. The delays and bureaucratic wrangles caused by the current PAB procedures has been highlighted above. This is a classic example of striking the wrong balance between autonomy and accountability. The remedy lies in seeking simpler and more efficient options to respond to Government's legitimate concerns about legal safeguards and transparency of transactions. Several options can be considered to solve the ANNEX VI Page 10 of 10 present impasse. First, PAB guidelines on contracts and legal conditions and safeguards to all public agencies will help them to prepare better agreements and to reduce delays at PAB. Second, PAB can ask clients to seek prior advice on the formulation of contracts. Third, PAB may permit lawyers in ministries/public agencies to clear agreements when they entail sums below specified limits. Lawyers could be trained and updated by PAB in order to ensure that their skills are adequate. Monitoring the Transactions Between PEs and Government. As noted above, there is no institutional mechanism at present for monitoring the financial transactions between PEs and the Government. One of the problems here is that the required data here are scattered between different sections of MFEP, Department of Revenue and the Auditor General. Ideally, MFEP should be the focal point for monitoring these transactions. But given its current pressures and priorities, it is doubtful that at this stage this function can be left to MFEP. An alternative is for SEC to play this role for a specified period. When the PE sector shrinks and Government-PE transactions decline, Government could review the matter to see if MFEP should take over the function. Statutory Corporations vs. Limited Liability Companies. Most large PEs are statutory corporations, a more restrictive legal form compared to the limited liability company form. The distinction between the two may not be material under the current political regime. Looking ahead, in a more open regime, the company form may better fit the needs of most PEs, especially if there is a need to turn them into joint ventures or to encourage workers or the public to own their shares. On the other hand, if a limited PE sector is envisaged, a statutory form may be more amenable to supervision and is less likely to be abused by the bureaucracy. Strengthening PE Boards of Directors. A high priority task for Government is to complete the appointment of boards in all PEs that are not to be privatized. But there is a more subtle underlying issue here. Though boards have been appointed in many PEs, sector ministries are acting as though they don't exist, and boards seem to go along. PNDC sometimes hires and fires chief executives with scant attention to the accepted policies and institutional responsibilities. Forms and functions clearly do not match. This problem reflects a lack of regard for the due process of law and hence is more than a problem of autonomy. There is no doubt that controls on procurement and legal clearances for all contracts will erode autonomy. But the more important issue here is that there is no predictability in key decision making areas. If those appointed have no certainty as to their future or the fairness of a due process, their motivation and conduct are unlikely to be conducive to good enterprise performance. The necessary legal and institutional forms may exist; but if they are ignored at the highest levels of decision making, performance cannot but remain suboptimal. This is a sensitive subject, but one that needs to be addressed, especially in light of the current concern about African governance. GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX VII THE USE OF PERFORMANCE CONTRACTS Performance contracts are negotiated agreements between a sector Ministry and the managers of a public enterprise accountable to that Ministry. Such contracts are intended to define the respective intentions, obligations and responsibilities of Government and the enterprise. All agreements are signed by the Sector Ministry Secretary, the Secretary for Finance and Planning, the chief executive of the PE and witnessed by the State Enterprises Commission. The setting of specific performance targets for the enterprise and its sector ministry, in a format that could be monitored, is intended to provide a basis for evaluating performance and improving accountability in the public enterprise sector. In Ghana, the agreements are also related to an inceptive bonus scheme for enterprise management. The State Enterprises Commission functions as a facilitator in the negotiation of agreements and has responsibility for monitoring and evaluating performance against agreed objectives and targets, and for making recommendations to Government for the payment of incentive bonuses. Sco2e and Status of the System The performance contract system is intended to apply to core or priority PEs which are, by agreement between Government and the World Bank/IDA, to remain in the public sector. In 1989, the first year for which performance agreements were negotiated, 12 core PEs participated; an additional 4 were included for 1990. As of March 1991, the negotiation of 1991 peirformance agreements for a total of 16 core PEs was in progress. (Table Gl) Conditionalities attached to a series of Structural Adjustment and other Credits have been used to assure implementation of a performance contract system. This use of conditionality has been continued in the third structural adjustment credit. The draft agreement makes the signing of 1991 agreements with 13 priority PEs a condition of Board Presentation; the signing of 1992 agreements a condition of Second Tranche Release of SAC III. The performance agreements for 1989 have been evaluated by the State Enterprises Commission and recommendations for the payment of related incentive bonus were forwarded by the Commission to Government in December, 1990. Table 1. Particiotin Core PEs 1989 Ghana Water and Sewerage Corporation Electricity Corporation of Ghana Ghana Oil Company Ltd. Ghana Ports and Harbours Authority Ghana Railways Omnibus Services Authority City Express ANNEX VII Page 2 of 9 State Transport Corporation State Shipping Corporation (Black Star Line) Ghana Supply Commission Posts and Telecommunications Corporation Postal Service Ghana Cocoa Board Ghana National Procurement Agency State Gold Mining Corporation 1990 all of 1989 participating PEs Volta River Authority Ghana National Petroleum Corporation Posts and Telecommunications Corporation Telecommunications Service Ghana Italian Petroleum Company Ltd. Ghana Airways 1991 all of 1990 participating PEs Implementation Experience 1989-1991 1989 Performance Agreements Nezotiation. As conceived, the first performance contract agreements were to be related to comprehensive corporate development plans and to represent annual targets towards the implementation of those plans. Prior to the preparation of the first generation agreements (1989) many corporate plans had been prepared, most by consultants as many PEs lacked any significant corporate planning capability. At a series of information workshops organized by the State Enterprises Commission in 1988 it became apparent that PE management had generally not been involved in these corporate planning exercises. Managing Directors expressed both confusion and alienation regarding corporate plans prepared on their behalf by consultants. A further difficulty for the planning exercise was the general absence of current financial information for PEs and uncertainties about the direction of Government's policy affecting their operating environment. This atmosphere of uncertainty was compounded by the failure to involve sector ministries in the negotiation of the 1989 agreements. The 1989 performance contract agreements were negotiated in relative haste, under the pressure of conditionalities attached to the Structural Adjustment Credit, by the State Enterprises Commission and PE management. Neither the Sector Ministries nor the Ministry of Finance and Planning participated in the negotiations. There was a significant exception to this general experience. In the case of the Ghana Cocoa Board, the Office of the PNDC, to which the Board is accountable, participated actively in both the corporate planning exercise and the negotiation of a multi-year performance contract. ANNEX VII Page 3 of 9 Conteng. By and large the performance indicators included in the first generation agreements emphasized financial criteria (profitability and return on assets indicators), the updating of accounting arrears, and one or tw6 indicators of efficiency improvements. In most contracts the section referring to the obligations of Government was blank. Qutntm. Of the 14 core PEs subject to a performance contract for 1989, 11 submitted the information required for a performance evaluation to the State Enterprises Commission. While the performance of all 11 PEs evaluated improved in the course of 1989, only four were judged to have reached or exceeded negotiated performance targets: Ghana Supply Commission, Ghana Ports and Harbours Authority, Electricity Corporation of Ghana, and Ghana National Procurement Agency. The lowest performance indices (100 = achieved targets) were associated with the transportation sector: Ghana Railways, State Shipping Corporation, City Express and State Transport Corporation. 1990 Performance Agreements Negotiation. In the preparation of the 1990 performance contracts only one sector ministry was directly and fully involved. The Ministry of Transport and Communication was a participant in the formulation of agreements for Ghana Airways, Ghana Railways, State Shipping Corporation, Ghana Ports and Harbours Authority, Ghana Posts and Telecommunications Corporation, Omnibus Services Authority, City Express and State Transport Corporation. For each of these PEs (except Ghana Airways) a corporate plan had been prepared and served as the basis for the content of contract agreements and the selection of performance indicators. This represents 8 of 16 designated core PEs. In the case of Ghana Airways a thorough analysis of the enterprise had been completed by consultants and a draft corporate plan submitted to management. However, this plan was not acceptable to management which had prepared an alternative. This alternative, in turn, was not acceptable to the State Enterprises Commission. This conflict remained unresolved throughout 1990. All other performance contracts for 1990 were negotiated between the enterprise and the State Enterprises Commission without the participation of the various sector ministries. All were signed by both the sector ministry and the Ministry of Finance and Planning. Content. The performance indicators included in the 1990 agreements were, with the exception of Ghana Airways, related to existing corporate plans. In the case of contracts negotiated with the participation of MOTC a section summarizing Government's commitments was included. This ranged from a minimal commitment to pay promptly all charges related to services provided to or on behalf of Government, to a detailed Government commitment to grant PE management autonomy in specified areas. It was generally the case that the more detailed and specific Government commitments to increase the autonomy of PE management were for those enterprises, such as Ghana Railways, for which major project support was being provided by the World Bank/IDA or other donor agencies. For other PEs explicit commitments by Government were largely missing or limited to an agreement to pay promptly the costs of services provided to or on behalf of Government. ANNEXYII Page 4 of 9 Qng. As of the date of mission the evaluation of 1990 enterprise performance had not begun. Enterprise returns for the fourth quarter are not'due at the State Enterprises Commission until the end of March and the evaluation is scheduled for -completion in May. For most enterprises covered by agreements three quarterly return reports were in hand at the State Enterprises Commission. Those reports suggested that enterprise performance had continued to improve through 1990. 1991 Performance Aereements Negotiation. Performance Contracts were in the process of negotiation for 18 core PEs in March, 1991. In terms of employment these enterprises comprise more than one-third of public enterprise employment. The status of corporate plans and performance contract negotiations is indicated in Table 2. All negotiations are reported by the State Enterprises Commission to include the full participation of the sector ministry. The Ministry of Finance and Planning is not involved in negotiations. The signing of 1991 performance contract agreements with 13 priority state-owned enterprises is a condition of Board Presentation of the proposed third IDA Credit. In mid-April all 1991 performance contracts were signed in a ceremony at the Ministry of Finance and Economic Planning in the presence of the PNDC Secrataries for Finance and the State Enterprises Commission. The political prominence given to the signing of 1991 Performance Contracts has stimulated demands from a number of Ministries and enterprises for inclusion in the system. By mid-April, the drafting of 1991 performance contracts and the review of corporate plans for an additional 30 public enterprises was begun by SEC staff. 1992 Performance Agreements The updating of corporate plans for 13 priority PEs and the signing of 1992 performance contracts has been made a condition of second tranche release in SAC III. Content of Performance Contracts For 1991, the structure of the performance contracts has been standardized about five main heads: 1. objectives of the PE (a statement of mission); 2. Indicators of performance and annual targets; 3. obligations of Government; 4. incentives for achievement of targets; and 5. reporting requirements. Monitoring and Evaluation of Performance Contracts Each PE subject to a performance contract is required to submit to the State Enterprises Commission, within four weeks after the end of each quarter, a financial and operational report. The contents of these quarterly reports include: ANNEX VII Page 5 of 9 a. an operating statement, showing actual performance against budget for the quarter and year to date; b. an approximate earnings and expenditure account as at the end of the quarter; c. cash flow for the quarter showing actual against forecast; d. a report of capital projects compared to budget; e. a report on the achievement of agreed performance targets; f. a report by the Managing Director on progress achieved, explaining deviations and indicating the most important trends of the quarter. The annual performance evaluation report prepared by the State Enterprises Commission based on quarterly reports from the PE is also structured in five parts: 1. a basic information sheet that explains the main activities, outputs, inputs, pricing and other aspects of PE operations and mission; 2. a comparison of performance targets and actual results; 3. a performance index sheet which is a weighted overall performance score based on actual vs target performance. In this index a profitability measure is weighted at 50%; 4. a profit and loss statement, initially for 4 years to be extended to five for 1990 and later years, as a summary of progress by the enterprise; and 5. a performance review assessment of factors underlying actual performance and departure from targeted levels and of importance to future planning and programming. The annual evaluation reports are submitted to the PNDC Member and Chairman of the Committee of Secretaries with copies to the sector Ministry, Ministry of Finance and Planning and the Member Secretary of the Committee of Secretaries. Responsibilities for the monitoring and evaluation of all 1989 and 1990 performance contracts were performed by the State Enterprises Commission. For the 1991 contracts i' the energy sector, responsibility for monitoring and evaluation and reporting to the PNDC Member and chairman of the Committee of Secretaries is assigned to the National Energy Board; their quarterly and annual reports are to be copied to the State Enterprises Commission and included in the Commission's annual report to Government. The dissolution of the National Energy Board in March 1991 has had the effect of removing this reporting controversy as an issue. Case Example: Ghana Railways Corporation The Ghana Railway Corporation is a Statutory Corporation accountable to the Ministry of Transport and Communications. Its principal functions are the provision of freight and passenger rail Page 6 of 9 transportation services. In both areas recent volumes are substantially below peak levels of earlier years. The corporation receives a subsidy from Government to support operations; at constant prices the 1989 subsidy was less than 10 percent of that paid in 1986. Government also sets allowable fares and tariffs for both freight and passenger movements. Passenger tariffs are subsidized and represent about 60 percent of the filly distributed cost of service. In addition to subsidies from Government, Ghana Railways have had access to external financial assistance for a major rehabilitation of physical plant and equipme it. Corporate Plan. The rehabilitation of Ghana Railways Corporation has been supported through two Transport Rehabilitation Projects (Credit 1858, 1988; Credit 2192, 1991). Financing of the 1991 credit for the railways component approximates US$ 74.3 million and is to be provided by several agencies including CCEE, ODA and IDA. This donor agency involvement with Ghana Railways has meant that the Corporate Plan reflects, in all important respects, the details of successive railways rehabilitation projects as agreed with lending agencies. The draft corporate plan for the Gtana Railway Corporation was prepared as of February 1989 and has provided the basis for the two performance contracts negotiated to date and for the 1991 contract in preparation. Performance Contracts. 1989/91. The content of performance contracts for Ghana Railways is based on implementation schedules for the Rehabilitation Project. The indicators generally provide a much greater detail than would be required for central monitoring. However, the inclusion of such detail is important to the sector ministry for their purposes. Monitoring and Evaluation of Performance Contracts. The close integration among GRC's corporate plan, the rehabilitation projects and the performance agreements has meant that the quarterly reporting required by the project has been extended to serve as the reporting on the performance contracts. The capacity had been developed utder the project and the format of project reports has been carried over; the major consequence is that SEC receives much more, and more detailed information than is required solely for purposes of monitoring the performance agreements. Conclusions and Policy Issues The history of Performance Contract experience in Ghana suggests a progressive evolution from the partial coverage and pro forma compliance with SAC Conditionalities in the 1989 agreements to the situation of 1991 in which the sector ministries have taken a serious interest in negotiating the terms and monitoring of these agreements. In this respect, Ghana's experience suggests that the forced introduction of performance contracts has been instrumental in changing ministerial perceptions of an appropriate and effective relationship between ministry and PE. This has meant that in the evolution of Performance contracts there has been a greater concern for defining efficiency and other performance targets for the enterprise than in quantifying and specifying the obligations of Government. Although it should be noted that most draft 1991 contracts reviewed include a commitment by the Ministry to grant to the enterprise the autonomy necessary for the achievement of performance targets. ANNEXII Page 7 of 9 In the negotiation of the 1991 agreements, the Ministries of Fuel and Power and of Transport and Communications both appear to find them a useful format for defining respective authorities and discretion. In the case of Ghana Railways and the Posts and Telecommunications Corporation the content of Corporate Plans and Performance Contracts is well integrated on the basis of Sector Rehabilitation and Investment projects funded by the World Bank/IDA or other donor agencies. In these cases the performance contract, reflecting already agreed upon allocations of responsibility and authority, is a useful mechanism for monitoring compliance as well as uf tracking progress towards planned improvements in capacity and performance. It would appear that the current serious interest in the form and content of performance agreements on the part of most sector ministries is related to a growing perception that these are a useful instrument for managing PE/Ministry relationships. In the case of Ghana Airways there has been no agreement on the specifies of a Corporate Plan and there is a risk that any Performance Contract negotiated would tend to be used in support of one corporate development strategy rather than another. This circumstance suggests that the existence of a Corporate Development Plan that has the formal endorsement of the Sector Ministry and of the Ministry of Finance and Planning should be a pre-condition for the negotiation of a Performance Contract. In the absence of such a pre-condition the Performance Contract process risks becoming party to ongoing arguments about policy and investment priorities that should be resolved at the Ministerial level. The exclusion of the Ministry of Finance from participation in the negotiation and quantification of Government's commitments is a serious omission. For the core enterprises a feature of several contracts is a commitment by Government to clear cross-debts. While there is a plan for this in MFEP, only GHC 3.5 billion has been budgeted for 1991, a sum that falls far short of the funds required to fully discharge this commitment. Where a performance agreement commits Government to pay the cost of subsidized services directed by Government the participation of MFEP is essential. While this is primarily a budget issue between MFEP and sector ministry, the effect on PE operations is important. There is cause for concern in the assumption of negotiation, monitoring and evaluation of 1991 Performance Contracts in the energy sector by the National Energy Board. A major purpose in assigning to the State Enterprises commission responsibilities for evaluating PE performance was the desire to encourage an ains length, objective assessment that would be more or less independent of Ministry influence, a condition particularly important for the assessment of Ministry as well as PE compliance with the provisions of Performance Contracts. This tendency is likely to spread as Ministries discover the value of a performance contract system for their own purposes, although the dissolution of NEB in March 1991 has removed this specific problem for the time being. Any arrangement that divides responsibility for reporting on PE performance to the Committee of Secretaries creates a. precedent for the transfer of monitoring and evaluation responsibility to sector Ministries. This would tend to erode the authority and role of the State Enterprises Commission in overseeing the public enterprise reform program. n support of such a transfer of responsibility it has been suggested that the point of the Performance contract exercise is to improve PE performance, an objective well served by a Ministry's assumption of an active and dominant role in the process. While this is indeed the case, it is also the case that Performance Contracts are intended to structure the Ministry/PE relationship, an objective better served by assigning monitoring and evaluation responsibility to a relatively disinterested third party, in this case ANNX VII Page 8 of 9 the State Enterprises Commission. A final issue -raised by a review of the content of 1989, 1990 and available draft 1991 Performance Contracts is the considerable variation in generic indicators of performance and the heavy weight (50 percent) attached to a profitability criteria. While suitable indicators of performance will vary from one industrial sector or enterprise to another, concerns for productivity of labour and returns on assets, together with obvious idiosyncrasies in the measurement of "profits" from one PE to another, suggest that a more rigorous set of generic indicators might be appropriate for all Performance Contracts. Recomndaions The broadening acceptance of and interest in performance agreements on the part of sector ministries is both a plus and a minus. Their active interest assures the serious interest of enterprise management in the process; their reporting requirements invoke an order of detailed micro-management from The Ministry that is greater than required for centralized performance monitoring purposes. In reconciling these two interests, while preserving the need to have a single performance contract and reporting system for the enterprise, a number of recommendations can be made. I. That the State Enterprises Commission be designated the responsible agency for the preparation of annual evaluation reports prepared for consideration by the Committee of Secretaries; 2. That a standard set of generic indicators reflecting the salient dimensions of financial and productivity trends be incorporated in all performance contracts to be complemented as appropriate by indicators suited to the specific PE or industry sector. These generic indicators would relate to financial performance, trends in employment, the revaluation of assets, the updating of accounts, and to progress with corporate planning and restructuring and might include as a minimum: - net operating profit/loss - ratio of salaries to sales or revenues - ratio of administrative expenses to sales or revenues - rate of return on assets - revaluation to current basis of assets (target month) - completion of audited accounts (target month) - employment/redeployment (year-end targets) * status of corporate planning and/or restructuring 3. that the weighting formula applied by SEC for assessing overall PE performance be adjusted to distribute the SO percent currently attached to a profitability criteria over a broader range of financial and productivity indicators; 4. That the principle agreed by Government in respect to the full recovery of costs plus an appropriate margin be reflected in the prices charged for goods and services be ANNgX II Page 9 of 9 incorporated in all Performance Contracts by requiring enterprise Boards to base prices on this principle, reserving only a right of intervention by the Ministry for those cases where Boards depart from this principle in priping decisions; 5. that the general commitment by Government, contained in several Performance Contracts, to compensate the enterprise for goods or services provided, on the request of Government, at less than full cost plus margin, be strengthened by an indication of the anticipated nature and estimated volume of such transactions over the contract period; and 6. that the Ministry of Finance and Planning participate in the negotiation of those provisions in a performance agreement that commit Government to assume financial obligations of the enterprise, whether directly through the budget of the sector Ministry as may be the case in item (5) above, or indirectly, as relating, for example, to the waiver of taxes or dividends or to the assumption of debt service obligations. GHANA PUBLIC ENTERPRISE SECTOR REVIEW ANNEX VIII PRIVATIZATION The Government's divestment program was begun in 1987. After a slow start, it has made some useful progress. The program for 1991 is better than that for 1990. However, there is a need for some re-orientation and revitalization if it is to realize its proper potential as part of the structural adjustment process and avoid running out of steam. The difficulties experienced so far are a combination of the philosophical and the practical. Section I of the report analyzes progress and problems and constraints. . Section II makes eight specific recommendations for re-orientation and revitalization of the program. It also makes some minor recommendations. I. PROGRESS SO FAR AND PROBLEMS EXPERIENCED Divestments Achieved Thirty-nine enterprises have been divested so far. But the word divestment covers a number of different things. Government Shareholdings have been sold in eight enterprises: (Cedis million) Buyer No. Gross Proportion of Employees Proceeds State Holdings Sold (%) Two Worlds Manuf. Co. Ltd Local 60 60.0 100 Overseas Knitwear Fabrics Local 60 37.5 100 Famekwa Trading Local 6 5.0 100 Metalics Trading Local 32 23.9 100 D.L. Steel Ltd Local ? 44.0 100 Lever Brothers Ghana Ltd Foreign n.k 1,966.5 45* Reiss & Co (Ghana) Ltd Local n.k 22.2 ? Leyland/DAF Ghana Ltd Local n.k 12.0 ? *Ministry holding of 30% retained by Government ANNEX VMI Page 2 of 16 Five wholly-owned enterprises have been sold outright: (Cedis million) Employees Gross Proceeds Buyer Continental Hotel 230 1,234.4 Foreign Winneba Club House ? 3.0 Local Apremdo Poultry Unit 9 25.0 Local Nkwakubew Animal Husbandry ? 50.0 Local NIC Farms 1 24.9 Local One wholly-owned enterprises has been converted into a Joint Venture with a Swedish company, the Government retaining 47.6 per cent: Employees Gross Proceeds GIHOC Paper Company 313 ? Three enterprises have been leased: (Cedis million) Employees Rental (p.a.) Lessee Ambassador Hotel 234 23.0 Foreign GIHOC Glass 339 20.7 Foreign GHASEL Sugar (part) 577 3.0 Local Five enterprises have been liquidated and a further 17 are in process of liquidation with proceeds so far of C 56.5 million. The total proceeds, capitalizing the leases at three years rental value, are: 3,705 million cedis ($10.7 million) excluding an undisclosed consideration for the GIHOC Paper joint venture. However substantial liabilities have been assumed by the Government in the process of salelliquidation, as follows: End of Service Benefits C 1,568.7 million Other Liabilities C 2,223.0 million Total C 3,791.7 million ANNEX Y Page 3 of 16 The other liabilities assumed are mainly outstanding debts and taxes. It can be seen that without the sale of shares to. Unilever, which brought in nearly 2 billion cedis, there would be a substantial overall deficit on the transactions so far. It should be noted that by no means have all of the assumed liabilities been met as yet. Of the total, some C 3,146.5 million is still outstanding, i.e., 83 per cent. However, not all the proceeds have yet been paid, either. An outstanding amount of C 2,095 million, 57 per cent, is still due. For completeness, it should also be noted that transactions have begun on some 12 plantation/farm units of the Ghana Cocoa Board. Right of entry has been conveyed on payment of a deposit pending valuation. Some Cedis 4 million worth of deposits has been received. No further reference is made to this aspect of the divestment program in this report. Divestments Scheduled The current program provides for continuation with what is underway, and to achieve an IDA/IMF target of 25 divestures in 1991. Forty-two companies have been selected for possible divestiture in 1991. Several of these also figured in earlier selection lists. Thirty-nine of the 42 companies are mentioned in an advertisement recently issued by the Divestiture Implementation Committee (DIC), "inviting private participation (corporate or individual) in the ownership and management of the under-listed companies." The other three companies of the 42, so far, not publicly advertised are: Nestle Ghana (55% holding) State Gold Mining Corporation (Prestea, Dunka, Tarka Mines) National Manganese Corporation Although the published list of forty-two includes a significant proportion of minor enterprises and (no doubt) a number which will eventually have to be liquidated, it does also for the first time include some of the better candidates with reasonable size and track records. These include the three already mentioned above as not in the publicly advertised list, and also: Tema Food Complex Corporation, Achimota Brewery, GIHOC Distilleries, GIHOC Bottling, Gliksten Ghana. (There may be others not yet identified because of lack of information.) The Overall Picture in Relation to the PE Sector There is a very large number of lists of companies prepared for various purposes, none of which is wholly consistent with any other. The most comprehensive list is the PE Classification prepared by the State Enterprises Commission (SEC). It lists 329 enterprises. Unfortunately, lists prepared by the DIC of companies divested/liquidated or of the future program are not wholly compatible with the PE Classification (a) because they include companies simply not mentioned in the PE Classification and (b) because they tend to itemize subsidiaries whereas this is not always done in the PE Classification (though sometimes it is). Thus, for example, of the 39 companies claimed as divested or liquidated by the DIC, seven are not mentioned in the PE Classification and seven are ANNEX VIII Page 4 of 16 subsidiaries while only the principal company appears in the PE Classification. The situation is better with the 42 companies in the DIC list for 1991; only two are not mentioned in the PE Classification and only six are un-itemized subsidiaries (probably of the State Hotels Corporation). Taking only those companies mentioned both in the PE and DIC lists, the overall situation might be depicted as follows. Tht PE Classification lists 254 companies as falling outside the core sector of companies to be retained under state management. Of this total 25 companies have been divested or put in the hands of liquidators, 14 being worked on, and 27 have been included in the list for 1991. In terms of pure "headcount," therefore, and using the PE Classification as the base against which progress can be measured, it looks as though, in the two years or so that the program has been running: - about 10 per cent of eligible enterprises have been dealt with (predominantly by liquidation); - about 5 1/2 per cent are in process of one kind or another; - about 11 per cent have been newly injected for 1991. This, it must be emphasized, is a very crude way of looking at progress. It takes no view of the large qualitative differences between enterprises such that some are really worth nothing whereas others are worth up to $10 million and perhaps more. The difficulty is that there is no information base on which to make any systematic general assessment, other than in headcount terms. However, the headcount method probably gives a somewhat exaggerated impression of progress. Institutional Arrangements The lead in the divestment process now rests firmly with the Divestiture Implementation Committee (DIC) reporting directly to the Provisional National Defense Council (PNDC). The PNDC is strongly represented on the DIC itself, so the latter is now capable of taking most of the decisions necessary and providing a more sustained momentum for the program than was possible under earlier arrangements. Formal PNDC ratification of transactions is still necessary. The DIC Secretariat provides the operational input. It has a current professional staff of five people: two senior officials, a lawyer, and two financial analysts. The calibre and dedication of these people is generally good. But the Secretariat is understaffed for the number of deals it is trying to manage and for forward preparation of future deals and the program. Selection of candidates for divestment is formally the task of the State Enterprises Commission (SEC) operating in conjunction with the Sponsoring Ministries. However, the allocation of formal responsibility appears to be a poor guide to the reality of the situation. It was repeatedly emphasized that in practice, it is open to anyone to bid for any of the 250 or so PE's which are not listed as core enterprises to remain under state control. (Both the DIC Secretariat and the Deputy Finance Minister made this statement clearly.) ANNEX-VIII Page 5 of 16 This situation has both merits and demerits. On the merit side, it means that one unnecessary loop in the decision-making process (the PE) appears to have been effectively by-passed. Secondly, it enables the DIC to iise its discretion to a rather greater extent to push forward those enterprises where there is manifest investor interest. At the outset, in 1988, this was not so. It was then tied to a list of some 32 enterprises most of which were small and uninteresting; many of which were fit only for liquidation. On the demerit side, however, it is patently not the case that the DIC (and particularly the Secretariat) has a completely free hand to adopt a "market-driven" approach. There remains a substantial, if not wholly tangible, element of restriction on what is on offer in terms of enterprises and types of deal. There is, thus, a large element of "inexplicitness" in the present arrangements which is confusing and also off-putting to investors. Problems and Constraints An earlier World Bank report (reference 9/30/90, "Divestiture in Ghana, Analysis and Recommendations") contains a thorough analysis of many of the difficulties which have slowed the pace of divestiture, and there is no reason to believe that these do not still largely apply. The detailed practical recommendations in this report are also of continued applicability. For the purposes of this report, the following factors are worth particular emphasis: - Bottlenecks and delays in the Land Valuation Office (LVO); - Problems stemming from the valuations themselves, done by the LVO; - Political inhibitions injected at various stages and levels; - Obstructiveness on the part of sponsoring ministries; - Lack of up-to-date accounting information, or, indeed, knowledge of the enterprises themselves; - Practical inexperience and lack of professional resources in the DIC Secretariat; - Concern about the liabilities, particularly for End of Service Benefits (E.S.B.'s). It is not easy to assign relative weighing to this mixture of political and practical constraints. In discussion the DIC Secretariat emphasized the practical side of the limitations. This view was supported by an influential member of the DIC (the Chairman of the Ghana Petroleum Corporation). He argued that although there were still political inhibitions affecting the progress of divestment, these were decreasing and their importance should be over-estimated. The main difficulty in his view (as in the DIC Secretariat's) was lack of technical expertise. On the other hand it is also clear that the execution of a number of deals has been affected by political constraints whether real or presumed on the part of those responsible for the conduct of the deals. For example, Unilever wished to buy the whole of the Government's holding in Lever ANNEX VIII Page 6 of 16 Brothers Ghana and negotiated for two years in good faith to achieve this. The deal was postponed at literally the last minute because of unstated Government objections. Discussions were re-started after an interval, (and some forceful representations from Unilever), but only on the basis of a partial sale with the Government retaining a significant interest. Similarly, it is understood that the divestment of GIHOC Glass Factory to a consortium led by a major U.K. glass company was only concluded on the basis of a leasing arrangement in spite of the fact that the consortium had a strong preference for buying outright. It was suggested from the vendor's side that this was partly due to difficulties in agreeing on valuation. However, it was also accepted that there was a political preference for a leasing arrangement over disposing of complete control. It has also to be observed that apparently practical obstructions can easily be converted from surmountability to insurmountability through lack of political will and driving force. This can particularly arise if the institutional arrangements are such as to facilitate the raising of objections or difficulties. There is anecdotal evidence to suggest that the DIC may not be ideally constituted from this point of view. Turning to the demand side, a number of interviews with private sector businessmen and merchant bankers, highlighted a continuing lack of confidence in the Government's intentions. It is clear that this remains a serious problem. Among concerns expressed were the following: - Worries that anyone who came forward with capital would expose themselves to investigation by the tax or other authorities (this was repeated far too often to be dismissed); - Unwillingness to commit saving or capital to the formal banking system; - Lack of confidence in the management of any of the enterprises being divested, exacerbated by (a) doubts about whether ownership would confer freedom to recruit and employ new management, particularly from expatriate sources and (b) similar doubts about the quality of information available on the companies being divested; - Lack of clarity about what exactly was being offered under the general heading of divestment, in particular what conditions, restrictions, etc., the Government wished to attach to any disposal and what form of disposal it was interested in undertaking. - More generally, doubts about whether there had been .ny real change of heart on the part of the Government at the highest levels (a point which was overtly expressed remarkably often). Again the business community appeared to be expressing a mixture of the political and practical as far as their worries were concerned. But the overall message was clear:- i. Many were still adopting a "wait-and-see" position on divestment; ANNEX VIII Page 7 of 16 ii. The conditions of capital flight (from the banking sector and from the country) have not yet been reversed - one Ghanaian businessman, for example, said: "It is too early to bring any inoney back from Liechtenstein or Switzerland." On the other hand, the relative willingness of people to talk openly about these matters - both in Government and in the private sector - is encouraging. It suggests there is potential for private sector confidence to be rebuilt, even if the potential is still some way from being reaized. Equally, there is a growing awareness in Government of the importance of upgrading the privatization effort, and a corresponding willingness to discuss possibilities which perhaps did not exist a year or two ago. II. RECOMMENDATIONS FOR IMPROVING THE PROGRAM The Rationale The basic problem with the existing divestment program is that its conception is narrow. Its origins lie in the idea of reducing the burden of poorly run enterprises on the State. Its implementation has very much reflected this and has more resembled a rationalization exercise than a privatization program. The emphasis has been on the achievement of a headcount of "companies" divested or liquidated. Divestiture has been construed to mean primarily anything which would achieve the close-ending of the public enterprise sector's ability to generate new State liabilities. By the same token, there has been a strong view in Government decision centers that divestment of profitable PE's is both unnecessary and undesirable. At the least, it is low priority. While this approach and philosophy has its logic, it is an approach intrinsically more suited to a large diversified company than a Government. It makes sense for a General Motors, say, to engage in a bout of rationalization from time to time, in which it reviews its activities and decides to dispose of or close down those which are less than adequately profitable or do not related to its core strategy. But G.M.'s purpose is simply to improve the average performance of the company. It has nothing to do with promoting structural changes in the economy. If the present Ghanaian divestment exercise is to move from being essentially a piece of public sector rationalization to making a significant contribution to structural reform, it needs to become more selective, more market-driven, more prominently presented and explained and more cogently relate to other aspects of the reform program, in particular, the program for building up the private sector. Though this is essentially a strategic shift, it can be approached tactically, i.e., through a progressive escalation of activity. But raising the level of activity by itself will not suffice to bring about the change. As the U.K. and other countries' experience has shown, the crucial breakthrough occurs with a change in the type of activity, in particular, with the move from undertaking divestments through sales to individual or corporate buyers to engaging in substantial public offerings or shares. It is above all this step, together with a whole range of associated actions which it entails, which has generally brought about the strategic shift from divestment to privatization. Without such a change not only does it seem likely that there will be very little real contribution to structural reform, but the divestment program itself is bound to remain very much an ANNEX VIII Page 8 of 16 uphill struggle requiring a great deal of continuing stimulus from outside to be maintained. This is because its benefits will be controversial and low on the perception threshold, while its costs, aggravation anZ painfulness will be much less so. Moreover, the present policy line on divestment provides no guidance on how to handle a number of the issues which are inherently likely to arise - and have already arisen - in the course of implementation. As a result, these issues are not being resolved entirely satisfactorily and this is obstructing progress. Examples are: i. A variety of issues relating essentially to the rule of law. Because the historic answer to many problems arising from misbehavior or perceived misbehavior on the part of the private sector has been to nationalize, there is no framework for dealing satisfactorily with the renewed potential for these problems now that the process is being put into reverse. An otherwise desirable deal for transferring Ghana's only electric are furnace to private operation by a steel company is being held up because there is no anti- monopoly or competition law. There is, thus, no framework for handling the fear (whether real or simply being used as a negotiating tactic) expressed by the underbidding company that will be cut off from an important source of input for its processes. ii. Issues relating to the "acceptability" of particular bidders for PE's. These are, of course, politically sensitive matters unlikely to be disclosed to outsiders. But at least one case came to attention where a bidder seemed to be being rejected because he had a poor record of treatment of his workers. However, the answer here is not to keep the company under State control, which has already more than demonstrated its inability to run it successfully, but to review the operation and perhaps structure of employment laws. Again the weaknesses of the existing legal framework (either its enforcement or its structure) are disclosed as inhibiting progress. iii. Issues relating to imports, use of foreign exchange, employment of expatriate manager, etc. It is clear that these types of issues still lead to confused responses. Here the problem is less lack of clarity about the legal than the economic framework for decision- taking. But the old reflexes of using direct control to enforce import substitution, employment of Ghanaians in management and so on, are causing particular bids to be turned down or modified in unsatisfactory ways and divestment to be impeded. iv. Issues relating to availability of finance. Here the implicit assumption seems to be that desirable investment and trade credit is more easily obtainable if the enterprise is retained in the public sector. If true; then something needs to be done to change the situation. If only a matter of perception, something still needs to be done to alter perceptions particularly amongst those in the public sector (both inside and outside PE management) who are constraining the progress of privatization on this account. Privatization works better where it is generally perceived to free State enterprises from the non-commercial allocation of credit for investment by bureaucratic processes. v. Issues relating to whether the State is getting good value. The correct perspective here is: What is the alternative? But in Ghana thus far, this perspective seems t' be almost ANNEX VIII Page 9 of 16 wholly lacking. Undue reliance is being placed on notional valuations for businesses, based primarily on net replacement cost of assets, without adequate regard to the more fundamental question of whether there is any realistic prospect of such values being realized under the continuing State direction. Thus, the strategic issue: to divest or not to divest, is becoming fairly systematically confused with the tactical issue of obtaining good specific bids from potential buyers. Again, it would help to promote 4he whole pro.ess of divestment if the Government were clearer about their view of the wider economic interest and the way it would be served by the State getting out of the business of managing most enterprises. iv. Lastly, issues relating to exposing the liabilities which have been generated. There is general recognition that the scale of unmet liabilities particularly for end of service benefits (ESBs) is inhibiting the divestment of some enterprises. These are presumably the larger employing ones, though specific cases were not cited. There are also large unmet tax and loan repayment liabilities. From the standpoint of improving the divestment process, the important thing is for the Government to be clear in its own mind, and clear therefore to potential buyers, how it going to handle such liabilities. This is obviously not yet the case. The mission was told by the Ministry of Finance that the liabilities were obligations of the companies and the State did not stand behind them. On the other hand, this is belied by the willingness of the State to assume then comprehensively in the divestments undertaken so far. The DIC view indeed seems to be that there is no question of the State trying to offload historic liabilities as part of the divestment process. The temptation to duck these issues by simply deferring divestment is clearly considerable. Specific recommendations are made on some of these issues in later paragraphs. The general point, however, is that the narrowness of the present concept of divestment is an insufficient base for tackling all the problems which are arising. A more thorough-going concept of privatization is needed if the aims of structural adjustment are going to be achieved. If privatization is to take off it must be set in a broader context with a better understood relationship to the other aspects of economic reform. In particular, it should be seen as an intrinsic part of the program to promote the private sector and to build its confidence - not just as one method of ridding the state sector of some awkward problems. Such a change of perspective should bring about much needed change in the selection of candidates for privatization as well as in the methods employed to privatize. It should also help to direct interest towards getting the framework for the general operation of the private sector right, thereby helping to get some action on the many matters addressed in the private sector program. Finally, it will contribute to inducing a much more market-driven approach to privatization, getting away from the present somewhat introverted direction of policy. For privatization to succeed the Government needs to understand much better what the market is like for the companies it is trying to sell; what measures it can take to stimulate and educate that market; and how privatization can be used to progressively redefine the State's relationship to the private sector so that the former can fulfill its responsibilities in new ways which do not prejudice the operation of the latter. ANNEX VIHT Page 10 of 16 Soecific Recommendations Recommendation 1 The general goals described in the preceding section would be best served by making a full- scale offer for sale to the public of one c the larger, better-known and more profitable of the PE's. Experience in other countries (U.K., France, Spain, Poland, Turkey, for example) has shown that such an approach can reap enormous dividends in terms of building public confidence and understanding of what the Government is trying to do, which in turn facilitates most other aspects of a privatization program. Experience also shows that it pays to adopt a bold approach, choosing a company of real significance and employing a substantial and well-planned and organized campaign leading up to the sale itself. Discussion with a wide range of people in Ghana, both in Government and in the business and financial community, indicated a high level of receptiveness for the idea. The choice of company is important. One of the largest and most successful companies in Ghana is Ashanti Goldfields in which the Government owns 55 per cent (with LONRHO holding the balance). At first sight, this is a very attractive candidate, although there are a number of issues which would need to be cleared first. Other smaller possibilities include: GIHOC Bottling (Pepsi- Cola), GIHOC Distilleries and GIHOC Pharmaceuticals. There may well be further suitable candidates such as some of those companies already mentioned in earlier sections of this report. Recommendation 2 Priority should now be given to setting in hand the selection of companies suitable for a public offer and the organization of a team in the DIC Secretariat, including the appointment of outside advisers to prepare and, eventually, undertake the project. The work involved includes: readying the company (including negotiations with the minority owner if there is one); accounting and legal review and prospectus drafting; review of Government relationship to new privatized company; preparation of a public education and marketing campaign; setting up distribution arrangements for a widespread share issue; if desired, construction of special arrangements for employee and/or small shareholder participation; also if desired, arrangements for inviting international participation. DIC officials were given a more detailed description of all the necessary actions underlying the elements of work involved in a significant public offer. There is an already existent financial services sector in Ghana, although it is small and has limited experience. Discussions were held with some of the merchant banks and brokers and with the team which has been setting up the Stock Exchange. Some of the major world accountancy firms have Ghana offices. The other important capabilities for a public offer are experts in company law and in public relations. It was not possible to assess these in the time available, but local legal expertise certainly exists (and, in any case, cannot be imported). The potential for construction of an indigenous advisory team is therefore reasonably ANNEX VII Page 11 of 16 satisfactory. However, it is also recommended that this should be supplemented by experienced expatriate privatization advise from a merchant or investment bank, coupled with arrangements to draw in some top-level accounting advice and possibly also legal and public relations advice from abroad. None of this need be on a full-time basis. Its purpose would be to provide project supervision and coordination and to draw on the consideration pool of international experience in such projects. Time required should be 5-6 months. Cost is dependent on size of company. But for the first public offer, where much has to be created for the first time, cost will be relatively high: perhaps as much as 20 per cent of an offer worth $10 million. Though it might be possible to improve on this estimate in the event, cost savings should be not be sought at the expense of quality. The DIC expressed a certain reluctance about leaning too heavily on professional advice from the Ghanaian commercial sector. The reason appears to be doubts about conflicts of interest. Understandable though this is in such a country, it should on balance be discouraged. The development of the financial services infrastructure with adequate professional standards, should be regarded as an objective in its own right. Moreover, it is one which the privatization process can itself contribute to substantially, quite apart from the real practical difficulties of the Government developing its own sources of specialist expertise in all the relevant areas. The use of expatriate advisers should also help in supervising the overall conduct of locally-based advisers. Recommendation 3 The *headcount" approach to divestiture should be de-emphasized. In future greater selectivity should be encouraged with an eye particularly to what can be achieved most successfully in the light of the current state of business and investor interest. As confidence and momentum grown with the undertaking of successful and high-profile public offers, other more difficult/less interesting divestitures will be easier to get away than they are at present. Liquidations of non-viable PE's or parts of PE's can continue. But it should be recognized that they contribute relatively little to the kind of broader concept privatization advocated here. Indeed, liquidating inviable operations is best regarded as something which should be done anyway rather than as a major contributor to the structural adjustment process. This line of thinking suggests the following broad prioritization of different types of privatization work:- 1. Public offers for sale of significant and viable companies (primary offers); 2. Public offers of Government shares held in companies already quoted on the Ghana Stock Exchange (secondary offers); 3. Placements with large investors of Government shares (placements); 4. Trade sales of smaller viable companies or of companies otherwise unsuitable for public offer (trade sales); ANNEX YIII Page 12 of 16 5. Sales of whole companies to employee/managerlinvestor buyers potentially bidding either separately or in consortium (buy-outs); 6. More specialist types of sale such as real estate, farmland, hotels, sales of individual rights or concessions (very broadly, property sales); 7. Leases (which should be viewed primarily as an alternative to outright disposal of property); 8. Liquidations. Applicable to all these levels of privatization priority is the need to prioritize preparation work accordingly. Priority should be given to work on those measures of privatization which are likely to have the biggest impact in terms of stimulating the development of the "market" for privatizations. Consequently, the effort on other lower priority disposal should be scaled down to fit inevitably very limited resources, or re-scheduled to take place over a longer time scale. Recommendation 4 The previous recommendation implies a broad categorization of the PE's in terms of their estimated eligibility for different types of treatment. This is not an exercise which should be undertaken mechanistically. It is better suited to a steady process of continuous review and expansion. For a start it would nake sense for tht DIC to endorse a prioritization of the existing candidates for 1991. It is then also desirable to Identify the pool of candidates likely to be suitable in the future for the highest priority types of disposal (i.e., it is suggested, by public offer). The next most important category to define is the list of companies likely to be disposed of by trade sale/buy- out. Secondary offers/placements define themselves, as essentially do property sales. By this process, it should be possible to bring fairly rapidly into existence a program looking ahead two or three years which provides for a judicious mix each year of public offers, trade sales and other disposal, but always with an eye to what can be accomplished most successfully and what will push the momentum of privatization forward most significantly. Rgenopendatian S The DIC Secretariat should be given the necessary powers to ensure that companies scheduled for the higher priority types of privaization are suitable prepared. in particular, management changes may be necessary, accounts may need to be brought into good order, there may be a need for limited restructuring measures, there may be critical legal steps to be taken which require time to get through. The operative requirement here is to ensure that essential measures to enable disposal to take place are undertaken in good time. There is a risk that disposal will be deferred while non-essential preparations are completed. This needs to be guarJed against. It is better to leave the future private sector management to decide ANNEX VIII Page 13 of 16 how to maximize the value of the business. What needs to be done inside Government before disposal is only what is essential to enable disposal to take place at all, i.e., to ensure that the company is sellable. By definition this is likely to be a larger task for those companies destined to be publicly offered for sale than those destined to be sold to other companies in the same line of business. It is for this reason that sponsoring ministries may not always be the best people to entrust with the preparatory responsibility. They are less likely to be aware of the requirements of the market than the DIC Secretariat - possibly more likely to be diverted into undertaking preparatory work not essential to the task in hand. It Is not the task of this report to make machinery of government recommendations. But the foregoing suggest that DIC powers to organize companies in the forward privatization program (once this has been prepared) may need to be strengthened. Recommendation 6 The resources in terms of numbers and technical experience of the DIC Secretariat are very limited and probably need to be increased somewhat. However, the DIC Secretariat should also make greater use of private sector professional resources than it has done up to now. This point has already been discussed in general terms at the start of this sector. Suffice it to say here that the present lack of confidence in private sector professional expertise is a very serious weakness which needs to be overcome, because it is not appropriate for the public sector to try to set up its own centers of professional expertise in order to compensate for perceived deficiencies in the private sector. (There are some signs that this may already be happening. It is understood that the Land Valuation Office is causing something of a bottleneck in the preparatory process through insistence that it undertake all valuation work and that any private sector assistance imported to boost the effort should be recruited and employed by it. Why?) In practice Ghana seems to be relatively well-endowed with professional expertise in accountancy, merchant banking, etc. Moreover, the Government has already supplied useful steps such as the setting up of new investment banking investment institutions and the Stock Exchange, which will help to strengthen the existing structure further. The main task for the DIC is therefore to learn the techniques of using outside professionals. Rtcommendaion,7. The DIC and the DIC Secretariat should re-assess their attitude to the related issues of transparency of transactions and valuation. At present a number of rather confusing positions seem to be being taken and this is causing difficulties in processing transactions. Transparency Is clearly extremely important and appreciated as sich by all concerned. However, somewhat paradoxically, it is not really being achieved. The Government's reason for undertaking (or failing to undertake in some cases) transactions, and for preferring one type of disposal over another, or one type of buyer over another, are often obscure. This gives rise to two types of danger, both of which may tend to damage the reputation of the privatization effort over time. ANNEX VII Page 14 of 16 The first is that investors and the public at large do not understand what is going on because they cannot read the signals being emitted. This is bad because it both impairs public confidence in the process and inhibits buying interest on the part of potential investors. The second danger is that no clear standard of behavior is being established against which the administration itself can assess its actions. There are certain routine practices to meet these kinds of problems, which have been well tested in other countries. The first is to engage in a conscious effort to conduct the implementation of privatization as openly as possible. This means paying close attention to ensuring that the outside world is informed as extensively as possible about the transactions being undertaken, how they are being done and the results. An active program of public relations is required to achieve this with regular briefing of the press and other media to build up their understanding, speeches by Government ministers and so on. The second important safeguard is to seek to achieve competition at all stages. This means arranging competitions for jobs advising the Government on particular transaction, e.g., for all accounting, legal or merchant banking appointmerm. Even more important, it means encouraging the maximum possible competitive bidding by investors/buyers at every stage. And this in turn requires that the Government, as far as possible, operates clear and simple rules for the bidding process in each case, which are well set out in advance and adhered to subsequently. The aim should always be to encourage the widest possible field to enter the competition to acquire State assets. And this can only be achieved if the vendor's (i.e., the State's) own decision-making is seen to be sufficiently impartial and coherent with pre-stated objectives to allow the best bid ultimately to win, wherever it comes from. Lastly, more could be done by the Ghanaian Government to tell potential Investorsibuyers about what Is being sought from them. For example, the latest advertisement from the Government for 1991 simply invites "proposals for private participation" in a miscellaneous (and lengthy) list of companies, with deadlines for receipt of these proposals. There is no indication of what form these proposals should take; whether one type of proposal (e.g., for leasing, for acquiring or whatever) would be preferred; what timescale the proposals will be handled on; or what information, if any, will be forthcoming about the companies. There is no indication of whether the Government is looking to dispose of the whole or part of its interest. While, admittedly, this advertisement Is only a request for preliminary expression of interest, with the promise of "formal requirements" to be specified upon registration, it Is indicative of a general lack of specificity in the conduct of Government privatization policy which is conducive neither to bringing forward investor Interest nor to inspiring public confidence in transparency. recoMmendation.. he question of transparency discussed under Recommendation 7 Is more closely related to the difficult Issues posed by valuation than may at first sight appear. The less transparent and open is the handling of the disposal process, the greater is the weight that has to be placed on so-valled "independent valuation" of companies as the only safeguard that can be appealed to as demonstration of the fairness and satistactoriness of outcomes. The truth is that "independent valuation" cannot ANMYIII Page 15 of 16 carry such a weight without being erected into a wholly misleading standard which will Unduly obstruct progress in achieving results. Unfortunately, precisely this phenomenon may be occurring in the implementation'of the present program. It is clear that those responsible for implementation are finding themselves restricted on numerous occasions by the difficulty of achieving valuations set by the Land Valuation Office (LVO). Privatization programs shculd not be inhibited by this kind of deadlock. The actual value of any asset or business depends in the last resort on what its owners and managers do with it. The State has in general been a poor owner/manager so the realized value has been low, hence the objective of divesting. In these circumstances potential value, in different hands, may well be higher - indeed it should be. But there is no reason to suppose that the State can realize all, or even the greater part of this in disposing of the asset or business concerned. The extent to which it does so will depend on a large number of factors including the degree of competition which can be invoked in the bidding process and the vendor's willingness to sell to the highest bidder. In any case, the State has a strategic reason for making the disposal which is, to quite an extent, independent of the precise value achieved. The strategic reason is that placing the assets or business in different hands will be the wider benefit of the economy and the alternative of carrying on as before under State control is not acceptable. In these circumstances it does not make sense to treat any abstract attempt to assess a proxy for market value, by people, however "expert", as an absolute standard below which no offer should be entertained. On the contrary the right "floor price" to have in mind is likely to be well below this, i.e., the realistic net value which could continue to be obtained if the State went on running the business itself (often negative in fact). The other types of valuation, whether based on net rplacement cost or prospective earnings, are then best regarded as signposts indicating (though still only in a very approximate way) what is the room for negotiation between the minimum floor price and the maximum, which with luck and good handling might be obtained. Recommendation 8 therefore is that the DIC should downgrade the significance attached at present to the valuations being undertaken by the LVO It should focus instead in each case on what are the realistic minimum levels of consideration acceptable in the light of the know alteinative of continuing State management. At the same time greater effort should be turned into creating the right conditions for achieving maximum competition In the biddipg process. This Is in the last resort, by far, the best security for both the Government and the public that best value is being obtained. Minor.RecMomndations The Government should not accept late payment of consideration or long schedules of payment. It should not be In the business of banking its own transactions to the present extent. If companies cannot be sold on reasonable payment terms, then they should not be sold at all and perhaps ought to be liquidated Instead. Part of the present problem is arising because (a) the private ANNEX VIII Page 16 of 16 sector is not yet coming forward enthusiastically enough and (b) the Government is trying to achieve excessively high valuations. The Government should move towards being clearer, both privately and publicly, that its objective is to hand businesses over to private ownership and management, and to relieve the State of these roles which it does not fulfill very satisfactorily. This will boost private sector confidence, will give the program an underlying momentum, which at present it lacks, and will help to clarify the issue of what "divesting" really means. If the private sector is weak in its response to particular divestments and/or the Government is unhappy with proposals coming forward, then it should not instinctively respond by ruling out particular bidders or trying to attach special strings to the transaction. It should look to see whether there are "framework" changes to make to provide a better regulatory environment; it should re- examine its objectives for the disposal (were they too specific, were they too many?); and it should ask itself whether perhaps the disposal was attempted before the market was sufficiently developed to take it (i.e., a failure of prioritization). In short, it should try always to generalize and avoid particularized decisions which of their nature have the appearance of arbitrariness and, hence, are damaging to confidence and enthusiastic investor participation. Lastly, the Government should consider whether there are public utilities, like telecomms for instance, which would benefit from private sector management in a few regulatory environment.