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Mills legacy lives on

Interview - September 5, 2014
The PM Communications team interviewed Dr. Cadman Atta Mills, senior presidential advisor and brother of the late president John Atta Mills, and asked him about the economic and political situation of Ghana. Dr. Atta Mills spoke about Ghana’s current macroeconomic problems and long-term solutions, and revealed what really happened during negotiations for the ill-fated loan from China.
Ghana was recently experiencing a great moment in its development, with impressive growth over the past 3 years, but the economy now shows signs of temporarily slowing down and a National Economic Forum was held in May to address the situation. Given your vast experience in economic affairs, what do you think are the most important steps that can be taken to address the current slowdown?

Ghana is currently undergoing some economic challenges. I believe that we have to take certain measures in order to correct the situation. However, we have to be careful, as every measure that we take now will have an impact in the medium-term. Between 2009 and 2011 our economic situation was very good and Ghanaians and investors felt confident about the future. Back then a series of policies were implemented that increased government´s expenditure. We put together an economic advisory committee and proposed to audit the public sector´s expenditure in terms of salaries. We thought that we could reduce the number of “ghost-workers” and that would bring down government expenditure. Because of certain constraints, this was impossible to do and we are now suffering the effects of the adjustment on the public workers’ salaries.

Since then some issues regarding the structure of our economy became very evident, especially in the sources of government revenue, and in the composition of the public sector revenue base. First, it is very easy to resort to indirect taxation, because you can capture it very easily, but at the same time, it is indiscriminate. It affects those that are less able to pay. It compromises the competitiveness of the economy. Its impact on domestic prices is also large. It has become obvious that the challenge is to make sure that we shift from overreliance on indirect taxation to income taxation.

The public sector is the biggest employer. The challenge would be bringing in the professionals who, for the time being, have been able to underreport their income, but that can be done, and it is more equitable. It also lowers inflation. The pressure of inflation can be traced directly to indirect taxation as a source of government revenue. The fund has been very insistent that we don’t distort prices by giving subsidies to the energy sector. I very much applaud them. At the same time, subsidies are the other side of the coin of indirect taxes. It is surprising that they are not as quick to advise the government about overreliance on indirect taxation. They are price distorting and dampen the competitiveness of the economy.

Ghana has a very bright future, but the lesson we have to learn is that our choices made in the short term can seriously compromise the long term. We have to make a better effort at bridging the budgetary gap with the right tools. We also have to be careful about our borrowing strategy. Borrowing for current consumption is a recipe for disaster, especially at high interest rates. You need to put it in an asset that generates enough revenue to service the debt that it generated. Within that context, I applaud the economic policies that restricted borrowing only to investment in productive infrastructure. We borrow if we have to, but only in areas that generate revenue or reduce imports. One of those was the gas infrastructure, which will eventually come on stream. Another thing was railways, which are critical in terms of movement of food. Policies in general to deal with power generation deserve to be financed with borrowing. It makes sense because it adds value and creates income. It generates additional resources to finance the original investment that went into it. Over time, Ghana will experience significantly increased income from the petroleum sector, which is still in its infant stage. Therefore, we should borrow. This is a case where how you handle the short term affects the very long term.

The Chinese loan was very interesting in that sense. We used oil to demonstrate to them that if the worst case scenario happens, and investment doesn’t generate revenue, we still have oil revenue as backup. But the Chinese didn’t understand. Our intention was that the bulk of the services of the debt came from savings generated by the activity, or income generated by the investment that was taking place. They thought we were mortgaging the investment through future oil revenue.

Ghana is a new oil producing country. Can you elaborate further on how the government handled the oil discoveries so far, in terms of using revenue to develop infrastructure, raise living standards, and diversify the economy?

The year 2011 was exceptional. The contribution of oil was quite significant given that we were going from zero to a significant amount of oil production. It tended to increase growth rate. But in 2010, the growth rate without oil was quite significant. It wasn’t just oil. In 2011, a lot of foreign investments were taking place, not only in the oil sector but also related areas. There is dynamism in creating the proper environment for people to invest.

It seems to have been dampened by a number of factors or challenges. The power sector isn’t doing well. The cost of power to major businesses is very high. The quality of the power is not very reliable. Telecommunications, though they are improved, still leave a lot to be desired. Calls are dropped, and there are difficulties to communicate. Ghana is a middle-income country and aspires to be a dynamic economy. For this, you need proper energy, water supply, and communications services.

A lot of investment has to take place in those sectors for us to become competitive, even in our domestic market. Our cost of production locally is a little too high. I sometimes tend to be a little radical in saying that if you want to develop, you need to be single-minded. There are certain sectors that you simply have to focus on. The power sector must be improved, it doesn’t matter if you over do it. The same with telecommunications and water and sanitation. Sometimes, maybe at the expense of current consumption. It may not be popular for a political economist to insist on that, but there is absolutely no growth without investment. Unless you are single-minded and identify key constraints, and put emphasis there, you will always be moaning about the various obstacles to economic growth.

The government is trying to change power consumption patterns, and increase the amount of power produced. Ae they doing enough?

At least the record does show the NDC government had a very clear programme of development of the power sector since the late 1980s. Sometimes, as usual, we have taken some decisions to overcome short term challenges that turned out to be costly in the medium term. When there was a power crisis in 2007, we bought all sorts of generators, as a short term solution, rather than adding to the long term capacity of the economy. All in all, the government is successful and aware that they need to improve the situation. It is not just power, it is infrastructure. Transport is a difficult issue. Once, we all thought we were going to rely on rail as a mode of transport. Can you imagine the amount of time people spend in traffic? It has implications in terms of productivity. Telecommunications have to be improved. Within the context of a national debate, many people would subscribe to these things.

When President Obama came here in 2009, you called on him to devise a “Marshall Plan” for African infrastructure. That did not materialise. What role would you like to see historic partners such as the US and UK play in developing critical infrastructure?

I don’t want to be cynical. There is a lot of scope for public-private partnerships in infrastructural development. These partnerships can take place in the area of housing, for example, and also public transport. Housing is something important, not only socially but also for productivity. Sanitation is something where there can be useful partnerships, and also direct investment. The government provides the right environment for the private sector to invest.

My experience with public-private partnerships is that they have not been well crafted. Most times, the public sector takes all the risks and the private sector all the benefits. Unfortunately, the whole concept of public-private partnerships, which is shared risk and benefit, is forgotten in Africa. It is driven by the source of financing. The private sector brings the financing, and the government eliminates the risk altogether. Until that changes, I will remain sceptical.

The area where I am still to be convinced that there is hope for partnerships is the area of road transport. If it going to be on the basis of cost recovery and the private sector derives benefit from tolls, it is a long term investment and the tools at our disposal to pay for the initial investment are probably limited, except in the major arteries. One also has to consider that roads are a necessity for everybody and the government must be wary of prohibitive tolls.

The basis for public-private partnerships is shared risk and shared rewards. There shouldn’t be a situation where risks are shifted to the public sector.

The theme of the Global African Investment Summit in October is ‘building Africa’s future through private sector investment’. The main topics are power, agribusiness, natural resources, and critical infrastructure. How does Ghana stand out as a place conducive to private investment in these areas?

Ghana isn’t doing badly. We could do much better. In the area of agribusiness, there are a number of issues, many related to land tenure and ease of acquisition of land, that make it very difficult for potential agricultural investments to take place. We also think that the investment climate is very positive, but to a large extent on paper. There are frustrations in customs. They take a long time. Also, the human element in interpretation of the rules is such that it is tempting to emphasize human interaction as opposed to automatic decision making.

The other thing is basically reflective of what I was saying earlier. Even though most agricultural inputs are not to be taxed, the general level of indirect taxation is high, and people tend to evade them. Human element in negotiation becomes important. If indirect taxes are low, it is easier to pay. I have met a lot of people with plans for major agribusiness in Ghana. Many of them came back disappointed. It is too difficult.

In the mining sector, the problem is a little bit different. We have to have a review of our mining codes and regulations. Levels of profit taxation in the mining sector have been negotiated with mining companies. It has been a long, elaborate process. Mining companies only talk about their contribution to employment rather than income taxation. There is that. There is also the incapacity to control illegal mining, and its effects on the environment. Some of it comes from small scale miners without licence.

Increasingly, it is becoming more sophisticated, and it is not only small scale but also happens on a large scale. In the mining sector, the issues of private-public partnerships are about the share of mineral surplus and nothing else. Ghana has to assert in the same way as they assert in the petroleum sector, that what is underground belongs to Ghana. It is our natural asset. Once the gold and diamonds are finished, we are finished. Therefore, we have to claim a good share. My view is to get the Ghanaian private sector involved in mining, and add value to the sector, having refiners locally.

You were involved in discussions with the Chinese about the $3billion loan, which has since caused disagreements and recently it was announced the remaining half would not be paid. What did that teach you about the need to find trusted partners?

We went into those negotiations with our eyes wide open. First of all, we were aware that there was a political element to the loan. The president went to China in 2010, and asked for 9 billion dollars; 3 from the China Development Bank to finance infrastructure, and 6 billion from the Exxon Bank. When we entered into the negotiation, there were detractors, not least of which included the World Bank, my old institution, and the IMF, who thought it may be premature.

We need infrastructure, and we needed it yesterday. We need productive infrastructure. Infrastructure is a no-brainer. If we didn’t have it, we had to create it. One element was the gas infrastructure. The other was the railway that I talked about. It was very clear what we wanted. And we asked ourselves what the Chinese wanted. It was obvious that they had specific interests, and we tried to identify them, and have them in the back of our mind. We thought, especially in dealing with CDB, that the Chinese wanted assurances of a long-term supply of oil, not necessarily to use it as collateral, or to use the revenue as collaterals for the loans, but to be assured that they have a long term contract with Ghana where they assure that we sell oil to them at market prices. That was an assumption that we made, that may or may not have been correct.

The second thing, China wanted to move into Africa in a major way, and by making the loan available to Ghana, it would open the door to Chinese contractors and businesses in general. Maybe that was a fair price to pay. That was our analysis. The CDB happens to be a commercial bank, and maybe political considerations of long-term geopolitical interests, of long term positioning of Chinese business, may not have an effect on their list of concerns, unlike the Exxon bank, who might have had that optic. I think that was a mistake on my part. I accept the blame because I was the chairman in the negotiation.

After the master facility agreement was signed, I realized that elements of securing that loan were very important to them. They were not interested at all in arguments such as the oil was going to generate revenue. The only thing that interested them was securing it with oil and oil contracts. It came as a big shock to me. The Ghana side had argued strongly that we took the loan because of shortage of liquidity. It was very important to stagger it over time, and it was not a question of using our current oil as collateral in order to take care of the future debt service agreement. I don’t know if that was a language issue, but this was definitely lost in the practice. It became obvious that every time we exported to Congo, they insisted on a certain percentage being deposited in their account, regardless of our debt service obligations. It was incredible.

To summarize, we were clear in what we wanted but maybe, especially as far CDB was concerned, we misjudged their interest in political and economic issues, in terms of positioning China vis-à-vis the long term supply of oil. We underestimated their desire to make sure that the loan wasn’t just secure but overly secure.

Has it made you reconsider where you look for partners in the future?

It is cleaner to look for financing as a separate issue, and then go to tender. Unfortunately, given the situation of Ghana, the two are invariably mixed. The contractor comes here and tells you he is able to raise funding. The cost of financing gets lost in the actual cost of the contract and everything else. You cannot talk of fair competition when one competitor comes with financing, and the other one with the service. That is one of our major problems with respect to the CDB contract. It wasn’t just a loan agreement; it came with certain conditions about who we could contract. We had a master facility agreement. Within that context, we negotiated for loan conditions covering twelve projects. Then we had to negotiate each project by itself. Then there was a five-party agreement with GNPC, the Bank of Ghana, the Ministry of Finance… it was simply too complex. When there are issues of language, it is a recipe for confusion. The lesson is ‘keep it simple’, especially when you have difficulties understanding each other. Language is a barrier, and we had good interpreters. We didn’t make it simple, and we make it simple by divorcing finance from the contract agreement.

The Finance Minister, Honourable Seth Terkper, could be seen as a protégé of yours. Do you see yourself as a mentor for him? What lessons do you think he has learned from you as he seeks to steer Ghana on the road to prosperity?

That is really a difficult question. Honourable Seth Terkper and I had very good personal relationship. We were both located in Washington DC. I was in the World Bank, and he was in the IMF. He worked with the former president in the Internal Revenue Service when my brother was a commissioner, and he was very key in the design of the VAT system. He is an accountant by training. We used to see each other a lot. But when it came to mentoring, I think it was the economic advisory council as a whole that claimed that role. We all insisted that every economic policy has to pass through us. We had to be involved at the very beginning so the council didn’t turn out to be a policeman but it would work with the economic team. By the time any policy goes to the cabinet, the economic policy council must be satisfied at the creation stage. I think that is what happened.

Under the government of President Mills, who had a clear economic policymaking architecture involving economic policy advisors, we could and did consult ministers and at the beginning of the budget preparation process, we insisted on calling labour unions, and Seth happened to be the more available member of the Finance Ministry. Therefore, he benefited to a great extent from the views of the members of the economic advisory council.

I don’t get a sense that it is functioning in the same way today. I don’t think the council has met for the last 18 months. You can use these bodies as a public forum for people to raise doubts, questions, and issues to economic policies. People won’t do it once the policy is being printed. You become very disruptive that way, but they’d do it at the first stages.

Ghana has produced an incredible number of analysts. The best finance ministers that we ever had, had not been economists. A good finance minister always needs an economist who advises him. Our minister is a very astute political economist. That said, the economic input is important. We do need a set of very good economists in our ministry that we can rely on. That is what the economic advisory council provided. It wasn’t just economists. There were also businessmen and women, entrepreneurs, and things like that.