Despite all the considerable controversy that has been generated by the design and ongoing implementation of the incumbent government’s one district one factory initiative, the programme is now well underway and only its most ardent critics are still predicting its complete failure. Already, 79 factories are at various stages of construction and another 35 have been given approvals which will soon take them into the construction stage.
The 1D 1F initiative is proving to be a very effective model for tripartite collaboration between government, the indigenous private sector and foreign direct investors; many of the factories now being built have all three types of stakeholder directly involved. Importantly though it is the private sector that is taking ownership of the enterprises being established, with government restricted in the main to providing support services, facilitating infrastructure and debt finance.
However, the Association of Ghana Industries is now proposing that government get even more involved by directly taking equity stakes in some of the enterprises being established.
We disagree with this suggestion.
To be sure, we understand why AGI has made it. Financing of industrial manufacturing enterprises requires long term capital and at relatively low cost. In Ghana, the dearth of long term deposits makes long term bank financing difficult and the relatively high interest rate regime still in place means that even where available, long term loans are prohibitively expensive.
Government is already mobilizing medium to long term lending by facilitating funding from Ghana Eximbank and several commercial banks most of which have state shareholding such as GCB Bank, Agricultural Development Bank, National Investment Bank and Universal Merchant Bank. However this is inevitably expensive, which is why AGI wants government to provide equity financing as well.
But this newspaper points to past experience as an indicator that the real cost of government equity involvement would be much higher than just the dividends that would be required as government’s returns on equity; the real cost would include the inevitable government meddling in the management of enterprises where it would take equity stakes. This would involve the appointment of ill-suited board members and managers resulting in poor corporate governance structures, procedures and conduct.
Furthermore government’s involvement in enterprises located in the rural hinterlands would be bound to get immersed in local politics and ultimately in the politics of central government as well, especially in areas that are political strong holds of the political opposition.
All this would stand to jeopardize an initiative that otherwise has the potential to harness hitherto under utilized raw materials, create direly needed jobs and wealth in the rural hinterlands, and generate export revenues while using import substitution to reduce the country’s import bills.
We suggest that a better alternative would be to explore the possibility of mobilizing private sector equity finance instead. Venture capital has not been sufficiently explored and the Ghana Alternative Stock Exchange (GAX) has not been even nearly properly utilized either.
Even if private equity secured falls well short of what government could have provided – assuming it agreed to invest equity funds in the first place – it is still a better alternative with regards to the resultant quality of corporate governance. And the recent travails of Ghana’s banking industry should be enough of an indicator of just how crucial corporate governance quality is.