Ghana - Trade and Investment Promotion Gateway Project

Report No. PIC5410 Project Name Ghana-Trade and Investment Promotion Gateway Project Region Africa Sector Private Sector Development Project ID GHPA41656 Borrower Government of Ghana Implementing Agency Gateway Secretariat and Free Zones Board Ministry of Trade and Industry, P.O. Box M 47 Accra, Ghana Date this PID prepared July 9, 1997 Project Appraisal Date December 1997 Project Board Date June 1998 1. Country and Sector Background. The Ghanaian economy has made significant progress in recent years in setting the parameters for an improved macroeconomic performance, such as the introduction of market-oriented pricing, liberalization of interest and exchange rates and repayment mechanisms. But it still suffers from a weak private sector supply response. Given a population growth rate of about 3 percent per annum, the average annual growth of under 5 percent during the last decade has not been sufficient to significantly reduce poverty levels and improve the quality of life of the average Ghanaian. It is estimated that an annual GDP growth rate of 8-10 percent would be required for significant poverty reduction. In order to achieve the sharply higher levels of investment necessary to achieve that level of growth, Ghana must consciously develop and consolidate its "competitive advantages" in utilizing both external and internal resources and inputs to cater to export markets. GOG's "Vision 2020" seeks to attract foreign direct investment through a comprehensive private sector development strategy that includes developing Ghana into a center for import, export, storage, assembly, distribution, processing, manufacturing, and transshipment of passengers, goods and services. The strategy envisages the use of free trade zones (FTZ), free ports, a "liberalized skies policy", teleport, etc. to attract manufacturers, entrepreneurs and traders to establish value-added job-creation facilities in Ghana. This strategy also includes the creation of value-added service industries, such as tourism and financial services, and the processing of imported materials for re-export, such as processing of data imported and re-exported by satellite. Implicit in this strategy is the need to strengthen links of the Ghanaian economy with the international economy and improve transport and communication linkages with neighboring countries. To enable the Ghanaian economy as a whole to reap benefits from  this strategy, strong backward and forward linkages within the domestic economy need to be developed. In the medium to long term, these linkages would include: (a) improved infrastructure services; (b) developed marketing and distribution network; (c) expansion of industries (e.g. agro-processing, horticulture, fish processing, apparel manufacturing, etc.) and services (e.g. teleport, financial services, tourism, regional export of power, etc.) which would increase the demand for skilled labor (e.g. technicians, keyboarding, data entry etc.) thus encouraging people to improve their skills base by enrolling in professional or vocational programs; and (d) financial and accounting services for entrepreneurs, traders, suppliers, sub-contractors, etc., thereby improving the links between the financial and the real sectors of the economy. Compared to many African countries, the level of foreign investor interest in Ghana has been high in the recent past. A large number of visits and trade missions have visited from Malaysia, Korea, Japan, South Africa and UK. However, foreign direct investment actually realized has been low. Several discussions have been held with these potential foreign investors, as well as with local entrepreneurs. These discussions have revealed that the biggest constraints faced by the private sector are: (i) unstable macroeconomic environment, particularly inflation; (ii) lack of quality infrastructure services (water, telecommunications, etc.); and (iii) the high cost of doing business due to cumbersome bureaucratic bottlenecks, poor implementation of government policies, expensive ports, cumbersome customs procedures and practices, limited aviation facilities, a relatively small skilled labor base, limited business skills, an underdeveloped capital markets for mobilizing domestic resources, particularly term financing, etc. These conclusions are also supported by the findings of two recently concluded studies by FIAS "Ghana Investor Roadmap Study" and "Investor Perception Survey". To attract the required levels of private investment, it is imperative that Ghana move swiftly to address these constraints by creating an environment that actively promotes the flow of foreign capital and resources. With Bank and IMF assistance, GOG is addressing the issue of stabilizing the macroeconomic environment. The Gateway Program seeks to address the second and third concerns: to lower the cost of doing business in Ghana and to provide international quality infrastructure services to investors. 2. Project Objectives. The Gateway Program's strategic development objective is to help create an enabling environment to facilitate increased levels of private investment in Ghana, by reducing the cost of doing business and providing the necessary infrastructure services. The Program's objective would be achieved through support for: (i) legislative, regulatory and incentives' reforms necessary to attract private investment; (ii) institutional development and capacity building for key agencies that investors deal with; (iii) new instruments to facilitate increased private sector participation such as, project finance and franchising; (iv) promotion necessary to attract foreign and domestic private -2 -  investors and efforts to build consensus among local stakeholders; and, (v) off-site infrastructure services for on-site facilities of privately developed and owned Free Trade Zone (FTZ)/ Industrial Park (IP) sites. These components of the Gateway Program can be grouped into three broad categories: (a) policy reform issues, (b) institution and capacity building technical assistance needs of various organizations that investors have to deal with, and (c) investment needed for the off-site infrastructure. Policy reforms, contained in (i) and (iii) above, will be supported through the proposed Private Sector Adjustment Credit II (PSAC-II). The Gateway project will therefore address the other issues. It will have a TA component to cover the institution-building assistance necessary to reduce the cost of doing business in Ghana as noted in objectives (i)-(iv) above; and an investment component to provide financing for the off-site infrastructure links described in (v) above. However, since the schedule for the requirement of the investment component would depend on private investors financing the on-site investment in the FTZ/IP, it may be decided to process these two components as separate projects: a TA project dealing exclusively with the institution and capacity building needs of key agencies. and a separate investment project to provide off-site infrastructure services. That would allow effective targeting of the objectives and facilitate implementation even if the schedules for the two components do not converge. This decision would be made prior to project appraisal. 3. Project Description. The strategic focus of the Gateway Program is to address the most binding sector issues identified above. The institution and capacity development component of the project will address the main sector issue of reducing the high cost of doing business by creating an enabling environment and increasing Ghana's competitiveness in the global markets through (i) the reform of the legislative, regulatory and incentive systems; (ii) institutional strengthening and capacity building including skills development in key areas; (iii) development of new instruments to increase availability of know-how and financing, such as franchising and PPI; and (iv) country promotion and consensus building. It will address the issue of quality of infrastructure in a limited manner in the immediate term by supporting the development of geographically-sited FTZ/IP The legislative, regulatory and incentives reform component will include (a) Customs sub-component: reviewing the current customs procedures and practices and implementing measures to streamline procedures to reduce the clearance time to international standards. (b) Ports sub-component: (i) reviewing laws, preparing the framework for private investment in port services after unbundling them; and (ii) assisting in the operationalization of the free port at Tema and Takoradi. (c) Aviation sector sub-component: (i) defining aviation sector policy to clarify the implication of "liberalized skies"; (ii) preparing regulations for aviation sector (both cargo and passenger traffic); and (iii) preparing ground rules for private investment in aviation sector. (d) Cross Sectoral Regulatory Agency sub-component: assisting GOG to develop an appropriate model for -3 -  a Cross Sectoral Regulatory Agency in Ghana to regulate private investment in ports, aviation, roads, water, etc. Institution and capacity building component will support (a) the design and implementation of a vocational training delivery mechanism to encourage maximum private sector participation; (b) training and institution building for Customs, Excise and Prevention Services (CEPS) to enable smooth implementation of new practices and procedures; (c) capacity building through training for agencies and regulators in the ports sector; (d) institutional development and capacity building support to the Ghana Investment Promotion Center (GIPC) to better target investment promotion efforts; and (e) institutionalizing public-private dialog. Development of new private sector instruments component will include (a) Franchising sub-component: conducting a market feasibility study for introducing franchising in Ghana and identifying key sectors for promotional efforts; and, conducting a franchising pilot. (b) Private Participation in Infrastructure sub-component: structuring new project finance transactions (BOT, BOO, ROT, ROO) for private investment in ports, aviation, railways, etc.), together with other Bank Group agencies-IFC and MIGA Country Promotion and consensus building component will support (a) GIPC's initiatives to streamline international investment promotion, investor targeting, and consensus building; (b) preparation of demand analysis for potential investors; (c) technical support for local; and (d) support for a program to build consensus amongst domestic stakeholders in favor of reforms in ports, customs, aviation, rail, etc. The Investment component of the project will address issue of poor quality of infrastructure. As an interim measure in the immediate term it will allow for the provision of privately financed physical infrastructure of international quality to make Ghanaian industry competitive, thereby facilitating higher levels of private investment in Ghana necessary to boost the supply response. To achieve this goal, GOG has allotted 1200 acres of land near Tema to be developed as the first FTZ/IP in Ghana. which will be leased out to suitable private investor(s) through international competitive bidding process for them to develop and manage the FTZ/IP. To support the development of the privately financed and owned FTZ/IP, the Investment component will finance the following: Investor Identification which will support GOG in identifying experienced developers/investors of international repute to develop and manage the onsite facilities on the Tema FTZ/IP land through international procurement, including support for preparation of request for proposal (RFP) and pre-qualification and negotiations with the prospective developers. Offsite Infrastructure which will support the development of offsite infrastructural links with the proposed FTZ/IP including (i) water connection; (ii) sewage and solid waste treatment for the FTZ/IP; (iii) electricity link; (iv) telecommunications link; (v) access roads to the site; (vi) rail link between the site and Tema port; and (vii) environmental assessments. - 4-  4. Project Financing. The Project cost, including contingencies, is US$ 30 million equivalent. IDA will finance US$ 28.5 million equivalent 5. Project Implementation. In view of the multi-sectoral implications of this program, the Cabinet of the Government of Ghana has formed an inter-ministerial Oversight Committee to coordinate the design of the Gateway Program and inter-agency policy issues. The Oversight Committee is supported by the Gateway Secretariat, both of which contain representatives from the Ministries of Trade and Industry, Finance, Roads and Transport, PEF, etc. The Gateway Secretariat will monitor and coordinate all reporting for the institutional development components while each beneficiary will be fully responsible for the implementation of its specific components within the framework of the Gateway Program. As required by the Free Zones Law, GOG has also set up a 9-member FZB, a majority of who are from the private sector. FZB will monitor and coordinate all reporting to IDA for the Off-site infrastructure component. Semi-annual progress reports, prepared on the basis of the project implementation plan and the logical framework would be provided by the beneficiaries to IDA through the Gateway Committee/Secretariat. The Bank will carry-out regular supervision missions and a mid-term review. Finally, Government will transmit a completion report to IDA within 6 months of the project closing date. 6. Lessons from Previous Bank/IDA Involvement. On the TA side, institution and capacity building operations are widely used and remain relevant to the Bank's commitment to develop local capacities. The record of implementation of institution and capacity building operations in Ghana has been improving in the recent years due to a more participatory approach to the preparation of projects derived from greater commitment and ownership of the borrower. However, issues that need continued focus and strengthening include: development of the borrower's capacity to implement and manage the TA components, including closer supervision efforts by the Government; consultants' abilities to transfer skills to local counterparts; development of local consultancy capacity and profession; counterpart staffing; and greater attention to monitoring indicators. The Gateway Program incorporates recommendations from ESW work completed on the sector (3 FIAS reports, MIGA reports), reports prepared by other donors (USAID, CIDA) and most importantly the work done by Ghana Investment Promotion Center (GIPC). The preparation of the Program has been participatory; The Government initiated a self assessment of needs conducted by all key agencies contributing to high cost of doing business in Ghana which would be reflected in an action plan being prepared by each agency in coordination with the Ministry of Finance and the Gateway Secretariat. These action plans would also identify monitorable performance indicators. To develop the borrower's implementation capacity, support would be provided to the Gateway Secretariat, FZB and other agencies. The issue of counterpart staffing has been identified as a concern and will be addressed during project preparation. The experience with Export Processing Zones (EPZs)/Free Trade Zones - 5 -  (FTZs) in Africa has been mixed. Numerous government financed EPZs/FTZs, in countries like Senegal, Liberia, Zaire, Botswana and Cameroon, failed due to problems such as, political instability and unsafe business environment, cumbersome regulatory procedures and inefficient institutional structures, high cost of doing business specially due to poor infrastructure, labor market rigidities, high minimum requirements for investment, employment or infrastructural services (electricity, etc.), or poor site selection. However, it is worth noting a few African EPZ/FTZ success stories. In the past few years, countries like Kenya and Madagascar have developed FTZs in the hopes of duplicating Mauritius' success. Madagascar program began in 1990 and by mid 1994, 90 FTZ firms were approved of which half were in operation. Employment was estimated at around 20,000 (5t of total formal sector employment) and exports in 1993 were estimated at US$50 million (15t of total exports). Madagascar primarily benefited from Mauritius overflow and due to low cost labor. Kenya's EPZ program has been in operation for four years. After three years, the program had approved 16 firms and operational firms employed 3000 workers. EPZ programs also got off to fast starts in Togo, Cameroon and Burundi, however, the status of these programs is clouded by political events. Two FTZs are being developed in Namibia with World Bank assistance with South African banks and insurance companies as primary investors. Zimbabwe is the first example in Africa of a privately financed and developed FTZ. 7. Number of lessons emerge from experience with EPZs/FTZs in Africa and elsewhere in the world. More notable ones are: (a) private sector FTZ development and management must be encouraged; (b) if industrial estates are to remain in government hands, it is essential that they be operated on a commercial basis (leases set out at commercial rates, managers paid competitive salaries, sound accounting practices, etc.); (c) encourage private sector provision of infrastructural services; (d) develop true public/private sector cooperation and streamline regulatory processes; (e) programs should have more competitive incentive packages without crippling provisions such as minimum investment requirements, etc.; and (f) in start-up phases of FTZ development, promotional focus is almost always wrong -- during this phase, active promotional efforts should be kept to minimum while efforts should be concentrated more on investment facilitation. 8. The Ghana Free Zones Act clearly recognizes the importance of most of the lessons learned. It lays out an attractive incentive package for private investors in the free zone. The proposed FTZ at Tema will also be entirely privately financed, owned and managed, one of the first in Africa. GOG is leasing the land to private investors at commercial rates for a period of 50 years. In terms of provision of infrastructural services to the FTZ site, except the telecom sector which has been fully privatized, GOG will have the responsibility of providing offsite infrastructural services due to lack of private sector providers. Where GOG currently lacks expertise is on investment promotion and facilitation activities. Gateway Program's TA Project is addressing this need by assisting GIPC in introducing a "one-stop-shop". - 6-  9. Poverty Category. The Gateway Program will indirectly contribute to poverty alleviation in Ghana through creation of job opportunities. The Program, which is an integral part of GOG's long term vision of accelerated growth, would promote higher private investment in exports through improvements in overall business environment, infrastructure services and human resources. 10. Environmental Aspects. The Project is rated a Category A Project. A detailed environmental assessment would be prepared prior to project appraisal. 11. Program Objective Category. The Project supports IDA's private sector development and economic management objectives. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending July 18, 1997. -7 -