An Assessment Of Corporate Sector Performance And Contribution To Growth

AN ASSESSMENT OF CORPORATE SECTOR PERFORMANCE AND CONTRIBUTION TO GROWTH IN THE GHANAIAN ECONOMY

1. Introduction

1.1 Background

The corporate sector is receiving increasing attention in many countries since the Asian crisis. The increasing attention stems from the importance of the sector in the links that it has with economic performance. The development of a viable private sector requires a stable macroeconomic environment. An unstable macroeconomic environment characterized by high inflation, rapid depreciation of the currency and high interest rates do not promote sound corporate growth. Macroeconomic instability, with rapidly depreciating local currency, can increase the debt-servicing costs of firms with large foreign currency obligations, destabilize the corporate sector and even threaten the financial viability of many firms. Conversely, the corporate sector can affect macroeconomic performance if the sector does not have access to adequate capital for new investment. This generally will impair growth in the economy.

Ghana has over the past two decades pursued policies aimed at restoring macroeconomic stability. The initial successes made bought about appreciable amount of progress in the activities of the private sector. Although some of the constraints and bottlenecks that confronted the sector in the past were removed during the reforms, others still remain and new problems have emerged. The major problems facing the private sector include lack of adequate working capital, which may be attributed to the rather rigid banking requirements of equity, collateral security, and financial reporting standards that most entrepreneurs are not able to comply with. Secondly, macroeconomic instability that is characterized by high rates of inflation and exchange rate depreciation has resulted in high cost of credit and rendered business planning very difficult. Also the smallness of the Ghanaian economy coupled with low-income levels results in low level of aggregate demand for industrial products. The other factors include inadequate and high cost of physical infrastructure and high cost of inputs.

On assumption of power at the beginning of the year 2001, the current government declared a “GOLDEN AGE OF BUSINESS” and began implementing corrective policies and measures to ensure the growth and development of private enterprises. The government’s fiscal measures since 2001 were aimed at achieving domestic primary surplus (above 4.0 per cent of GDP). This was to minimize the government’s domestic borrowing requirements in order to reduce interest rates as well as halt the crowding out of the private sector from the credit market.

Since the inception of the Economic Recovery Programme (ERP) Ghana’s macroeconomic policy measures have been directed at transforming the economy from a controlled to a liberalised market economy. The process of transformation has seen the private sector increasingly become the driving force of the economy. The government continued to pursue polices with the goal of creating an enabling environment for the achievement of these objectives. The policies include appropriate monetary and fiscal policies, financial sector reforms, industrial policies and policies aimed at attracting investments into the country. Also the Ghana Poverty Reduction Strategy (GPRS 2003-2005) identifies acceleration of the rate of economic growth as the key ingredient for creating jobs and meeting poverty reduction targets. As appropriately identified by the strategy accelerated growth can only be achieved with “the active involvement of the private sector as the main engine of growth and partner in nation building”.

Accordingly Ghana, in partnership with other development agencies, defined her medium-term economic growth strategic objective as to “increase competitiveness of Ghana ’s private sector in the global marketplace of goods and services, as measured by Ghana ’s share of world trade”. The purpose of this objective is to increase employment opportunities and income levels for poor Ghanaians, which requires that Ghana accelerates the rate of her economic growth. The symbiotic relationship between corporate sector growth and the development of the entire economy underscores the importance of an analysis of the performance of the corporate sector in Ghana.

1.2 Terms of reference

The objective of this study is to undertake an assessment of the corporate sector performance in Ghana and its contribution to economic growth. The rest of the document is organized as follows: Section two is an overview of the corporate sector in Ghana. Section three is devoted to analyzing the performance of the corporate sector and its contribution to the economy while section four highlights the problems confronting the corporate sector in Ghana. The conclusions and recommendations are in Section five. For the purpose of this document, the analysis of the Corporate Sector performance will be based primarily on the companies listed on the Ghana Stock Exchange (GSE). This is due to the unavailability of adequate financial information on the businesses not listed on the exchange.

2. Overview

2.1 The Corporate sector

Chart 1

Source: Registrar General’s Department

Corporate bodies in Ghana are either companies registered under the Companies Code 1963 (Act 179) or established by an Act of Parliament. They must be public limited liability entities existing as bodies separate from their owners. Of the 478,360 registered companies as at April 15, 2003, 346,442 were sole proprietorships, 105,794 were limited liability companies (private and public), 11,273 were limited by guarantee and 13,980 partnerships. There are also 871 external companies, which are offshore companies with offices in Ghana.

The data shows that sole proprietorship businesses constituted the largest of organizational form, followed by limited liability businesses. The country has only 25 publicly listed companies on the Ghana Stock Exchange.

The corporate sector has an obvious government presence but the current divestiture programme taking place will change the face and structure of the sector. The difficulty in obtaining information on firms not listed on the Ghana Stock Exchange makes it difficult to assess the entire corporate sector and this limitation implies that this assessment does not present a complete picture of corporate performance and its contribution to growth.

Nevertheless, we should note that the corporate sector in Ghana is small in terms of total employment. A USAID study (Manual for Actions in the private sector – 1989) noted that total employment in the private sector was represented as follows: Self- employed enterprises accounted for about 90 per cent; Rural/informal entities 4 per cent, while Limited liability companies accounted for only 6 per cent of total employment. Suffice it to say that though not corporate by definition, the majority of operators in the private sector are self-employed family enterprises.

2.2 Activities of Corporate Sector

Corporate institutions in Ghana operate in several sectors of the economy. The dominance of the agricultural sector in economic activity also reflects somewhat in corporate sector activity as the sector is involved in all activities in the food chain - from the point of production (farm gate) to the final consumer.

Agricultural sector activities are handled by private operators, some of whom operate as corporate entities (e.g. British–American Tobacco (BAT) Co. Ltd, UNILEVER etc.). BAT is involved in Tobacco farming whilst UNILEVER has Oil Palm plantations, thereby producing the raw materials needed in their final products.

In the mining sector, corporate activity is stronger with many foreign companies operating in the sector. However, only one mining company is listed on the Ghana Stock Exchange; Ashanti Goldfields Company (AGC). The sector accounted for 5.3 per cent of GDP in 2001 and 5.2 per cent in 2002.

In 2001, total manufacturing accounted for about 10 per cent of GDP with GSE registered/listed companies representing over 40 per cent of the total. Areas in which there is medium to large scale corporate activity include food processing, beverages, wood products and textiles.

The tertiary sector in the Ghanaian economy is large, accounting for 33 per cent of GDP. Corporate sector activity is fairly large in all the sub sectors. In the Wholesale and Retail trade sub-sector large trading houses such as Unilever, PZ and CFAO dominate in terms of market shares, although the majority of businesses in this sector are operated on a small scale. Corporate activity is also significant in the bank and non-bank financial sub-sector. Other businesses operate on a small-scale basis in the areas of transport, construction (building and roads) and provision of consultancy services. It is worthy of note that over the past decade the services sector has been a consistent growth segment of the economy.

3. PERFORMANCE OF THE CORPORATE SECTOR

3.1 Global Developments

The defining image of corporate performance between 2001 and 2002 in the industrialised economies was the bankruptcy of several ‘Blue Chip’ companies (e.g. World Com, Enron etc). Corporate performance was also exacerbated by a depressed stock market with hardly any growth in the major global bourses. The stock market in the US has experienced three consecutive years of declining return. The last time the market saw three years of down turn was during the Second World War. On the New York Stock Exchange (NYSE) alone, market value was estimated to have fallen by US$2.6 billion in 2001 (Ned Davis Research, FT 02/2003) during the same period. Standard and Poors 500 Index estimated that the market was down by 22 per cent, while the Dow Jones Industrial Average and NASDAQ Composite recorded declines of 16 per cent and 30 per cent respectively.

The consensus was that corporate performance in 2001/2002 was seen to be positively correlated among other things with governance and transparency. Since the latter half of 2001, much introspective soul searching among listed companies has directly attributed poor performance to a lack of transparency in their financial statements as well as to deficiencies in the structure and diversity of top management – with particular reference to the composition of corporate boards and the need for more non- executive board members.

Concentration of ownership of corporations and the lack of transparency in their management led to the corporate scandals mentioned in the preceding paragraph. The prevalence of conditions of bad governance and weak controls in an economy gives a clear signal to agents in corporations to abuse their ability to influence legislation thus making it easy to massively ‘book cook’ – so to speak.

In response to these corporate scandals, Governments in the industrialised countries instituted commissions of inquiry tasked with the responsibility of drawing up new corporate governance laws. The consensus of varied commissions is for a two-tier system of supervisory boards overseeing a management board as a way of restoring good corporate governance and performance.

Corporations in the industrialised economies have over the years managed to offset the agency problems created by the separation of ownership and control by:

? Putting in place the right incentives for management, particularly by tying compensation to changes in earnings and stock price;

? Enjoining/Requiring managers and directors to act in shareholders’ interest, backed up by monitoring by auditors, lenders, security analysts and large institutional investors; and

? The threat of a takeover, either by another public company or a private investment partnership.

It is however necessary for one not to assume that ownership and control are always separated.

The conclusion from the experiences of corporations in the industrialised economies in the aftermath of the corporate scandals was that improvements in financial transparency and good corporate governance practices were key to holding corporate executives in check. In this regard, the boards of companies listed on NYSE and NASDAQ will in 2004 be required to have a majority of independent directors and auditors made up of entirely non-executives in order to control Top Management greed and to protect shareholders interest. Additional evidence shows that companies with a high proportion of non-executive members on their boards are very unlikely to condone doubtful accounting practices so as to present a wrong impression of corporate performance.

3.2 Corporate sector performance in Ghana

Corporate sector performance in Ghana shows an improvement between 2001 and 2002. The GSE All Share index recorded an increase of 45.96 per cent. Unlike developments in the industrial world with a low level of shareholder/investor confidence due to governance and transparency problems, investor /shareholder confidence in Ghana improved over the period reflecting partly the improved macroeconomic conditions.

The next section discusses the performance of the corporate sector in Ghana in terms of economic contribution to the economy and financial performance.

3.2.1 Economic Criteria

The contribution of the corporate sector to the economy can be assessed in terms of the revenues they generate for government through taxes and the employment they create. Attainment of employment and tax targets are useful gauges of performance although such information is not usually readily available.

In assessing the contribution of the corporate sector to the economy in terms of their contribution to the social security an national insurance trust (SSNIT) scheme, information on the 100 largest corporate contributors to the SSNIT scheme was obtained and analysed (See Appendix 2).

Chart 2

Source: Social Security & National Insurance Trust

The data suggests that the 100 top regular corporate contributors to the SSNIT paid ￠221.34 billion cedis in 2001 and ￠276.68 billion cedis in 2002. These represent 17.5 per cent of their gross salaries implying that total salaries paid by this group in 2001 and 2002 amounted to ￠1,264.81 billion ￠1,581.023 billion respectively. The increase in salaries paid over the period was 25 per cent.

Data was also obtained from the Revenue Agencies Governing Board (RAGB) on tax revenue collection of Government by tax type. Of the total tax collection of ￠814.69 billion for first quarter of 2003, company taxes accounted for ￠382.45 billion (46.9%).

Chart 3

Source: Internal Revenue Service

The data from the RAGB also show that company taxes amounted to ￠1,161.5 billion in 2002 compared to ￠966.6 billion in 2001 and ￠696.7 billion in 2000.

Chart 4

Source: Internal Revenue Service

On employment contribution of the corporate sector, data from the RAGB suggests that majority of tax payers are on Pay As You Earn (PAYE) basis numbering about 1,159,242 at the end of March 2003. Self employed persons numbered 108,552, while companies were 44,938.

Chart 5

Source: Internal Revenue Service

3.2.2 Financial Performance

In assessing the financial performance of the corporate sector in this document, two approaches were used. The first was to assess the performance of the shares of the companies listed on the stock exchange in terms of returns on investments; e.g.- earnings growth, capital gain or losses, dividend yield, nominal returns etc. The second approach was to analyse financial statements of individual companies to assess their leverage ratio, liquidity ratios and profitability ratios. Suffice it to say that despite the convenience of using ratios as a way of summarising financial data to determine performance, it does not necessarily answer most implicit questions, even though it helps in asking the right ones.