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Proceedings Presentation
of Country Reports Country: Ghana Public-Private Partnerships in
Ghana – the Case of the Water Sector
by Mr. Sadick Mahmud Sam,
Planning
Analyst National
Development Planning Commission, Ghana PRIVATIZATION
IN GHANA
Government
policy and approach has been to provide an enabling environment capable of
fostering improved productivity and competitiveness. The drive towards
private-sector-led growth strategy is enshrined in Article 36 of the
Constitution of the Fourth Republic of Ghana which enjoins Government to
promote the development of sound and healthy economy by “fostering and
enabling environment for a pronounced role of the private sector in the
economy” The policy of promoting private sector development involves the
development appropriate institutional and regulatory mechanisms, providing
incentives, enhancing the operational capacity of the private sector. Consistent
with the objective of promoting private sector activities, Government in
1988 undertook a major reform of the State-Owned Enterprises (SOEs) as part
of the overall economic reform program to harness the economic potential of
the country by way on engaging the private sector in development, utilizing
their capital and management capabilities in addition to promoting the use
of modern technology and accessing emerging markets resulting from increased
levels of globalization. The SOEs reform sought to dispose of the majority
of non-performing enterprises and those operating in areas where the private
sector was considered to have comparative advantage through divestiture. At
the outset of the divestiture program, most of the over three hundred SOEs
operating in all sectors of the economy such as manufacturing, agriculture
(including cocoa and coffee plantations, poultry and fishing), mining, hotel
and timber -- had proven to be inefficient and wasteful, constituting the
bulk of Ghana’s massive budget deficits. Key
objectives of the divestiture programme include: §
Reducing administrative burden
on the state and distributing ownership more widely §
Increasing
the size and dynamism of the private sector through the creation of an
enabling environment §
Encouraging
and facilitating private sector investment from both domestic and foreign
sources for modernization and rehabilitation §
Ensuring
macroeconomic stability as a result of increased revenue inflows from the
sale of SOEs and accrued savings from withdrawal of support to SOEs DIVESTITURE PROCESS AND TECHNIQUES The
SOE reform program in Ghana had two components. The first component focused
on the introduction of measures to improve the performance of enterprises
retained for strategic reasons. The second component involved divestiture or
privatization of state-owned enterprises by transferring ownership to
private investors – either Ghanaians or non-Ghanaians. Various
forms of divestiture techniques involving outright sale to liquidation have
been employed in Ghana. SOEs are divested either as whole entities or in
fragmented divisions. Fragmentation becomes a feasible option in cases where
SOEs comprises a number of distinct businesses or divisions. The
mode of divestiture is typically through the sale of assets to private
investors through competitive bidding. Other options techniques include the
sale of shares, joint venture agreement between state and the private sector
and long term leasing. Whereas sale by shares have been used for SOEs which
already have private sector shareholdings, joint ventures with private
sector investors have usually taken the form of transferring the assets of
SOEs to a newly formed business entity with the state and investor taking
equity shares. Leasing of assets of SOEs is yet another technique that has
been used and in situations where there is lack of interest in a particular
SOE by the private sector, liquidation is employed. Details of SOEs divested
by the various techniques as at the end of 1999 is given below: Divestiture
of SOEs by a Range of Techniques
The
private sector is involved in the divestiture process. Certain tasks are
outsourced to the private sector and eligible firms are engaged to provide
advice, in a lead capacity, in developing efficient, effective and
transparent mechanisms for managing the divestiture process. Private sector
firms are engaged to undertake the following specific assignments in the
divestiture of SOEs:
To
sustain the divestiture process and engender private sector interest, a
number of incentives and procedures have been designed to ensure that
investors commence operations without any administrative inhibitions. The
divestiture procedures permit investors to start with a clean slate and
select their own level of staffing. Except on special cases, investors have
the right under the divestiture agreement to terminate all existing
contracts with employees upon completion of the divestiture. Government
undertakes to indemnify investors against all costs such as severance
payments and end-of-service benefits associated with termination of
contracts. Government also absorbs fully, liabilities of SOEs except in
cases where the mode of divestiture is by sale of shares. Additionally,
investors are eligible to enjoy incentives provided under the Ghana
Investment Promotion Centre Act 478 and the Free Zone Act of 1995 which
include custom import duty exemptions, locational incentives and tax
holidays. INSTITUTIONAL
ARRANGEMENTS FOR PUBLIC-PRIVATE PARTNERSHIP
Institutional
arrangements and initiatives have evolved over the years as part of efforts
to promote private sector development in the country. Central to the
divestiture program was the Divestiture of State Interests (Implementation)
Law, 1993 (PNDC Law 326) which was followed subsequently by the
establishment of the Divestiture Implementation Committee (DIC) to implement
and execute policies in respect of the divestiture program. Membership of
the DIC comprises ministers of state and representatives from the trade
unions and private sector organizations. The
DIC is responsible for planning, monitoring, coordinating and evaluating
divestitures in the country, arranging for effective communication of
government policies and objectives for any divestiture, developing criteria
for selection of enterprises to be divested, ensuring consistency in
procedures for divestiture and making appropriate consultations for
successful processing of the divestiture program. To
promote and accelerate public-private partnership and to protect the
interest of consumers complimentary institutional arrangements and mechanism
have been developed. These include:
THE
CASE OF WATER SECTOR PRIVATIZATION IN GHANA
In
attempt to improve production and delivery in the water sector, the
Government of Ghana has taken a number of initiatives. Apart from
establishing the Public Utility Regulatory Commission (PURC) in 1997 and
subsequently the Water Resources Commission (WRC), the Ghana Water and
Sewerage Corporation (GWSC) – an SOE, was converted into a limited
liability company. The main objective for establishing GWCL was to introduce
competition, encourage the injection of new capital and improved management
skills and also provide a regulatory framework to guide operations within
the sector. The issue, however, is whether the conversion of GWSC into a
limited liability company would secure improvement in efficiency or not. The
benefits of restructuring expressed in terms of improved efficiency in
service delivery has yet to be realized by many Ghanaians. Access to water
continues to be a major problem and efficiency has not improved. The
Unaccounted for Water (UAFW) reached its peak of 57% in 1996, falling to 50%
in 1998. Meanwhile, the debt of the Ghana Water Company continues to
increase even after becoming a limited liability company. The Company would
“require US $100 million annually for the next five years to bring the
water system to the level that would meet the needs of the people in the
country”.[1]
The company’s collection ratio is low with debt owed by government
agencies constituting a large percentage of its debt. The
national drinking water supply coverage had dropped to 30% in 1998 compared
with 46% in 1992 with that of urban water supply coverage dropping from 76%
in 1992 to 70% in 1999. The
operating deficit (1994-1998) worsened steadily from ¢24,208 million in
1994 to ¢59,973 million in 1997. There was however, a slight improvement in
1998, when a deficit of ¢45,934 million was recorded due to massive
increase in tariff of 130% that became effective from March 1998. Accounts
receivable increased from ¢5,205 million in 1994 to ¢32,715 million in
1998 (MWH: 1999). The
priority issue requiring urgent consideration and resolution is the
determination of economic tariff. The Water Company contends that increases
in tariffs have been lower than economic cost and that inflation over the
years has tended to erode positive effects associated with tariff increases.
In
April 2001, GWCL made an attempt to increase tariffs by 300% to reflect
economic cost of operation but this was not approved by the PURC. The PURC
approved tariff increase of 96% arguing that inefficiencies exist whish must
be corrected. The PURC consequently ordered that the GWCL to streamline its
operations and reduce the high unaccounted for water, which stood at 51% and
also to reduce lapses in billing and, metering as well as illegal
connections from the current estimate of 20% to 16%. The PURC has made
achievement of these targets a condition for future adjustments in water
rates[2].
While acknowledging the existence of inefficiencies in its operation, the
GWCL is of the opinion that, the 96% increase is inadequate and that it does
not cover its operational cost even after controlling for the
inefficiencies. Whatever
direction one looks at the challenge confronting the water sector in Ghana,
the reality is that the sector finds itself in a vicious cycle. Whereas the
apparently lower than economic rate tariffs and huge debt owed by government
agencies have the effect of constraining any initiative at improving
efficiency due to the financial limitations posed by the low tariffs and
debt, consumers are reluctant to pay high tariffs in the absence of
demonstrated improvement in quality of services provided by the water
company. To
ensure efficiency in water provision in Ghana the challenges in the form of
key issues would need to be identified and addressed. Key issues affecting
effective provision of water and some useful lessons from the experience of
water privatisation are discussed. KEY
ISSUES AND SOME LESSONS LEARNT
Key
issues affecting efficiency in the provision of water and some lessons
learnt from the privatisation of production of water and delivery include:
TOWARD
EFFECTIVE WATER SECTOR PRIVATISATION
For a private water company (GWCL in
the case of Ghana), to become competitive, it would need to be financially
capable. A well-established pricing policy would be required if financial
autonomy of the water company is to be secured. This will reduce distortions
in the allocation of resources and promote the development of cost-saving
mechanisms. Government in collaboration with the
regulatory agencies must facilitate the process by taking a firm decision on
its debt to GWCL, institute pragmatic measures that will avoid the
generation of further debts. The regulatory body, PURC, would have to
develop and adopt a framework for adjusting tariffs to reflect the economic
cost while working with the water company to address issues of
inefficiencies, setting realistic and achievable benchmarks. Again the PURC
and GWCL would have to undertake joint advocacy programs to educate the
public on the implications of maintaining low tariffs on delivery and
quality. The PURC would have to develop regulations that
provide incentives for cost reduction in operations. Regulatory initiatives
are required to induce innovations towards improved performance, foster
efficiency through the creation of competitive conditions and regulating
tariffs to ensuring that monopoly profits are not enjoyed by the activities
of monopolists. Efficiency can be
increased by means of competition managed through contractual arrangements
ranging from simple contracts for specific services to long-term concessions
that require operation, maintenance and facility expansion. Competitive conditions either latent or real would need to be promoted as
a basis for continued productivity growth in the provision of water. A
statutory regulatory system that provides for clear and open enforcement of
the terms of contracts is required. The potential for moral hazards in
relation to contractual gaps would need to be reduced. For example, leasing
and concessions arrangements may not provide sufficient incentive for the
maintenance and expansion of facilities if there exist uncertainties on
contract renewal. Explicit
maintenance requirements would need to be written into contracts and
compliance monitored by the regulatory agency or a third party.
Additionally, private providers could be held responsible for documented
deterioration of capital stock and eligibility for contract renewal may be
made contingent on observance of state of the capital stock (World Bank:
1994). Effective
statutory regulation requires predictable and non-discriminatory rules and
creation of consumer constituencies. Transparency and accountability by
specifying in details the terms of operations, with regard to the process
and procedures for the award of contracts, is essential to guaranteeing
competition and hence efficient performance. CONCLUSION The
divestiture process has produced both success stories particularly in the
service sector. This enforces the view of the author that public/private
partnerships can and do work, depending on the circumstances and context.
In the utility sector, experience has shown that the inability to
increase tariffs to cover economic cost has hampered improvement in
productivity and hence services delivery as portrayed by the experience in
the water sector. To
ensure effective private sector development, efficient and responsive regulatory institutions and provision of
incentives such as competitive tariffs to attract private investment in the
utility sector would need to be recognized as critical success factors.
Government would need to set clear policies and goals while leaving detailed
planning and implementation of services to providers. For the Water sector, absence of political intervention on the part of governments is required in order to guarantee retention of high quality managers and stability in mid-management and professional structures in the water sector. [1] Ghana Homepage, General News of Thursday, 14 June 2001 http://www.ghanaweb.com/GhanaHomePage/ [2] Ghana Homepage, General News of Sunday, 22 June 2001 http://www.ghanaweb.com/GhanaHomePage/
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