Oil - Hope for our industriaisation drive

Ghana @51, A special Daily Graphic pull-out on 51 years of nationhood and 16 years of democracy. Page 23

Article: Charles Benoni Okine with additional files from the OECD Development Centre and BNET websites


“THE oil find in the country should in no doubt propel Ghana to realise its dream of becoming an industrialised country in the shortest possible time; The oil will not be beneficial if we do not use it to speed up our industrialisation drive.” These were the words of Mr Yaw Agyemang-Duah, Managing Director of GOIL, one of the most efficient and profitable State-Owned Enterprises (SOEs) in the country.
He was making a brief presentation at the just ended National Oil and Gas Forum in Accra, which was called at the instance of President Kufuor to find ways of managing the country’s oil when production starts next year according to Kosmos Energy.
Mr Agyemang-Duah, who is also Chairman of the Association of Oil Marketing Companies (OMCs), said many countries in the world, particularly those which had oil, had used the rich resource to achieve their dream and Ghana could not afford to stay an agrarian country when it had oil.
China, in her quest to accelerate its development to become one of the most formidable industrialised country’s in the world, is buying large volumes of the world’s crude oil to the extent that the demand has contributed to the hike in crude oil prices internationally.
Ghana’s first President, Dr Kwame Nkrumah, in realising the need for Ghana to become and industrialised country, took steps to ensure the construction of the Akosombo Hydroelectric Power Plant from which the Volta Aluminium Company (Valco), one of the biggest aluminium smelter’s in the world, was built.
His dream was to use electric energy to ensure that the dream became a reality. Soon after the inauguration of the project, small-scale industries started cropping up within areas where there is power.
Today, the story of hydro energy as a major source of fuel to drive Ghana into an industrialised state cannot be said to be a reality.

History of Ghana’s Industrialisation Drive

Between 1959 and 1966 individual Ghanaians and the state became more prominent in the setting up of industries than before. Consistent data for 1962 and 1966 show that Ghanaians with full or shared ownership accounted for 45 per cent of manufacturing value added in 1966 as compared to 32 per cent in 1962. Over the same period the share of the government in value added rose from 12 per cent to 15 per cent, and that of joint state-private enterprises went from 8 per cent to 14 per cent.
Apart from the inauguration of the petroleum refinery and the aluminium smelter at Tema, most of the expansion of production was in relatively simple consumer goods.
Thus food, beverages, tobacco, textiles and footwear together increased their share in manufacturing value added from 40 per cent in 1962 to 60 per cent in 1970.
The growth in output was thus based on what is normally seen as the easy phase of import substitution. Lack of success at this stage would consequently bode ill for the next, more difficult, stage.
Moreover, "the worst aspect of Ghana's poor showing was the failure of the big push of the Nkrumah years. High levels of capital formation failed to generate growth either in the short run or later in the decade.
“Those who took over from Nkrumah inherited a sorry mess and their successes in restoring some balance in the economy were considerable. Nevertheless, their response was the essentially negative one of cutting investment (and imports); ... and by 1972 the economy seemed as mired in stagnation as it had been during the preceding decade."
The failure of Nkrumah's industrialisation strategy was explicitly linked to the stagnation of domestic agriculture and the discouragement of primary exports.
Nkrumah's policy instruments were direct state investment (in agriculture as well as industry), protection, and measures designed to contain the growing imbalance on the external account.
It has been shown that, perhaps unintentionally, the protection afforded to Ghanaian manufacturing was random rather than purposive.
After 1961 domestic savings and gross domestic fixed capital formation tended to decline, and so — more importantly — did the efficiency with which capital was used.
This was due in substantial part to the distorting effects of the balance of payment controls.
For those favoured by relatively easy access to foreign exchange and import licences, capital was in effect subsidised. Its use was thus stimulated in industries that were not necessarily the most efficient.
Thus in the industries that were favoured the rate of capital formation exceeded that of output growth, so that the productivity of capital fell. Moreover, the use of imported materials was also over-stimulated.
Nevertheless the impact of controls on the less-favoured sectors was adverse. Starved of capital, foreign exchange and material imports, they simply failed to grow.
More effective policies in the foreign sector alone need not have meant more
growth in the economy. The controls compounded rather than caused more general errors in economic policy.
It has been noted that the complex and sometimes random character of the controls, the consequent diversion of entrepreneurial and bureaucratic energy, and the habit of waiting until a crisis was full blown before tackling it were at the root of failure.
Disappointing as Ghana's economic performance may have been in the 1960s, it
was destined to get worse before it got better.
The growth of real output was also slow compared to the rate of growth of the labour force and the capital stock. Thus in the period 1970-1982 the former grew by 63 per cent and the latter by 34 per cent. The productivity of both factor inputs obviously declined — at an average annual rate of 3.6 per cent for labour and of 2.0 per cent for capital.
Growth began to falter in the early 1960s. And although things obviously got worse later, particularly after 1974, there is no doubt that the dismal experience of the 1970s was a continuation of a pre-existing trend.
Just how dismal that trend was may be seen from a formalisation of what has just been said.
Output may grow because of brute increase in factor inputs, because of a rise in the productivity of such inputs, or because of some combination of quantitative and qualitative improvement. And it is clear that the benefits claimed for forced industrialisation are such that productivity increase should be an important part of the growth story.
When, however, economic circumstances dictated a marked slackening in the frenetic expansion of manufacturing in the 1970s, the growing inefficiency of resource use caused output itself to fall.
It is important to recognise that though Ghana's economic decline was arguably the most graphic and tragic in sub-Saharan Africa in the post-independence period, it was not entirely sui generis.
As elsewhere the problem lay largely in policy faults — in an exaggerated view of the beneficence and prescience of the state on the one hand and of the extent and importance of market failures on the other.
The colonial marketing boards, set up in the wake of the depression of the 1930s and the contingencies of war, should, for example, have been reduced rather than expanded. Unfortunately political and other pressures moved the newly-independent states in the other direction. Nowhere was this more true than in Ghana.

Industrialisation and energy

Ghana's long-held dream of becoming an industrial economy is based on a steady supply of relatively cheap power. The government, it seems, is putting its faith in gas rather than hydro for its future power needs.
It is often argued, and rightly so, that the poor condition of vital infrastructure in much of Africa has held back economic growth since independence.
Inadequate water supplies, unreliable power grids and the lack of fixed-line telecoms capacity is blamed for the scarcity of foreign investment and the inefficiency of many African companies.
Gas pipelines are relatively rarely considered, yet improved gas transmission infrastructure could be equally important if countries like Ghana are to transform from being steady but unspectacular economies into expanding industrial powers.
The Ghanaian economy has performed relatively well in recent years, as mining sector investment has increased and the key macroeconomic indicators have stabilised. Yet the country remains overly dependent on gold and agricultural exports such as cocoa. The government has made some strides towards widening mining sector participation, and there has also been some progress in utilising cocoa in domestic processing, but economic diversification is the key to moving the national economy onto the next level.
When Kwame Nkrumah led Ghana to independence in 1957, industrialisation was placed at the heart of the new nation's development plan. It was hoped that the Volta Dam scheme would generate the electricity to power the industrialisation of the country.
Although the hopes of the early independence years floundered on a combination of political upheaval and ineffective economic planning, the Volta River Authority (VRA) did go on to provide the lion's share of electricity for the country, with enough leftover to export to Côte d'Ivoire.
By the late 1990s, the situation had reversed. Ghana now imported electricity from Côte d'Ivoire and severe droughts in 1999 and 2000 resulted in lower water levels and greatly curtailed power production at the VRA hydroelectric power plants.
The government, therefore, decided to pursue the option of gas fired plants using either domestic reserves or gas imported from the proposed West African Gas Pipeline (WAGP). Despite some domestic discoveries, the lack of domestic gas reserves forced Accra to look to Nigeria and the WAGP.
Now that Ghana is as economically and politically stable as it has been in its independent history, thoughts are once again beginning to turn to industrialisation.
The Chevron-led consortium that comprises the West African Gas Pipeline Company (WAPCo) began installation of the 569km offshore section of the project in September 2005.
The Group Managing Director of Nigerian National Petroleum Corporation (NNPC) and chairman of the WAGP Company, Funso Kupolokun, commented: "As the first transnational natural gas transmission system to be developed in the sub-region, we had many complex challenges to overcome. However, the commencement of the offshore pipeline construction is a testament of the commitment that the states and the pipeline company have always maintained towards the realisation of this important project."
Apart from Chevron, the other members of the development consortium are NNPC, Shell Overseas Holdings, Takoradi Power Company, Société Togolaise de Gaz and Société Bengaz.
The inclusion of three power companies in the destination states emphasises the importance of power generation in the $600m project. The pipeline will eventually have the capacity to transport up to 475m cubic feet of gas a day from Nigeria to Cotonou in Benin, Lomé in Togo and Tema and Takoradi in Ghana.
Ghana's power sector had relied very heavily on the VRAs 1,038MW Akosombo hydro plant but the expansion of the 550MW Takoradi facility has injected an element of diversification into the sector.

Conclusion.

Apart from the oil, studies have shown clearly that Ghana has considerable volumes of natural gas.
The experts say that the deep waters of Ghana is abound with the two most powerful energy resources just as that of the many industrialised countries in the world.
However, the issue now at hand is: To what extent is Ghana ready to kick off, by taking advanatage of the oil, to propel its economy into an industriralised state?
The fact that Ghana will produce oil does not mean that the resource will be sold at a cheaper price to compel many entreprenuers to venture into the industrial sector.
The Chief Executive Officer of the National Petroleum Authority (NPA), Mr John Attafuah, has always argued that the greatest mistake Ghana would ever make when full production of oil begins in the country is to sell petroleum products at a cheaper price compared to what pertains on the international market. He said some oil producing countries such as Nigeria and Iran have failed with such attempts and Ghana cannot afford to tow that line.
According to him, these countries have problems in the form of shortages because they do not sell the products at the normal prices.
This means that although the oil will be produced here, companies may not necessarily have the luxury of buying it cheaper than what is on the international market. Should that happen, Ghana may still remain an agrarian country even in the face of oil.
A country as desperate as Ghana may want to find a way around this by ensuring that those who really want to go into the sector are given some form of tax reliefs and subsidies without necesarily selling the oil below the international market prices.
Proceeds from the oil could be used to open up every part of the country in terms of roads, telecommunications, electricity and other infrastructure and the dream may come alive.