Business News of 2014-03-19

Private sector divided over Terkper’s dev’t bank proposal

Private sector bodies are divided over calls by Finance and Economic Planning Minister, Mr Seth Terkper, for the establishment of a development bank to specifically provide medium to long-term funding to the government and businesses.

While the Association of Ghana Industries (AGI) and the Ghana Real Estate Developers Association (GREDA) have described the minister’s intention as a call in the right direction, the Private Enterprise Federation (PEF) said the suggestion is irrelevant, arguing that the setting up of a development bank will do little to address the financial challenges of the private sector.

"You don't need a development bank to be able to provide long-term finance. Even if we set up that development bank as they are saying, where are the funds going to come from to fund its operations?" the Chief Executive Officer of PEF, Nana Osei Bonsu, asked in an interview.

Nana Bonsu, as well as representatives of the AGI and GREDA, was speaking to the paper days after the Finance Minister had suggested that the private sector should initiate a process towards the establishment of a development bank to solely provide medium to long-term financing to government and industry to meet their individual credit needs.

Mr Terkper, who made the call at the maiden Graphic-Fidelity Bank Economic Dialogue on March 11, intimated that the establishment of the development would help limit government's haunt for long-dated finance in the international market.

"When you want to do 10-year financing, when you want to do beyond five-year financing, you have to go offshore. So, I'm saying that what we need as a country, like other countries do have, is a specialised bank that looks at long-term finance; one that will be deep enough to finance capital projects that have long maturity periods," the minister told the paper after the function.

The Economic Dialogue, which was the initiative of the Daily Graphic, the flagship publication of the Graphic Group, and Fidelity Bank, was meant to provide a platform for effective discourse on critical issues of national concern.

It was chaired by Mr Kwame Pianim, an economist, with participants ranging from captains of industry to heads of key public institutions.

PEF’s concerns

The CEO of PEF, who was present at the function, told the GRAPHIC BUSINESS on March 13 that instead of establishing a new bank as suggested by the minister to find solutions to industry's inability to access long-dated financial facilities, government could help develop the pension system to serve as a pool of long-dated funds to the private sector.

While bemoaning the inability of the country's pensions fund manager, SSNIT, to get more people to contribute to the social security system, Nana Bonsu said government could easily raise some GH¢6 billion from social security contributions in six years if it put its house in order.

"My analysis of the social security system showed that just a little over one million people make social security contributions. But if you are able to get about four million people to contribute, say GH¢25 per month, you will be getting some GH¢1.4 billion a year and GH¢6 billion in six years. That way, you will be able to get patient capital to lend to industry," he said.

He wondered what the source of funding for the proposed bank would be if it was set up as the minister proposed.

"Are you going to use the same deposit mobilisation system or get the funds from the private sector, which is already looking for funds to invest," he asked.

AGI and GREDA

The AGI has long sited the lack of long-term capital to business as a major blow to the growth of industry.

Its immediate past President, Nana Owusu Afari, once told the GRAPHIC BUSINESS that the government needed to encourage specific banks in the country to provide long-term finance to industry.

That concern was reiterated by the Executive Director of the association, Mr Seth Twum-Akwaboah, and also shared by a member of the Governing Council of GREDA, Mr Kwabena Nyarko.

While describing the proposal by the minister as a call in the right direction, Mr Twum-Akwaboah and Mr Nyarko said calls for the establishment of a development bank was long over-due and should, therefore, be given the attention it deserved.

"That is an idea we welcome because it will provide the stable capital that industry and businesses in this country have always needed to be able to really expand and contribute to the economic development," AGI's CEO said in an interview on March 13.

The member of GREDA's Governing Council also noted that the nature of the real estate business required that players had access to funds that would mature in about five to 15 years to be able to operate effectively.

Long-term funding

In many jurisdictions, long-term funding from development banks has been relied upon for most of the capital intensive projects.

Unfortunately, in Ghana, the situation is different because banks in the country only lend short term and those are the funds the private sector always took for their long-term projects.

This phenomenon makes their projects expensive because they are forced to pass on the full cost of the short-term facility to the customers. This is particularly obvious in the real estate sector where the cost of housing units are priced in many instances above the pockets of the middle to lower income earners.

With the introduction of the new pension scheme, therefore, it is expected that there will be more long-term funds available for the private sector.

However, three years since the new scheme took off, it is still not clear what the future of the system would be like.

The Social Security and National Insurance Trust (SSNIT), which has operated for many years and is holding billions of cedis, is not lending any of its funds to the private sector.

Instead, the government is reportedly using the pension funds to finance emergency projects and in some instances, payment is not done.

Sources hinted the paper that there are instances where government borrows money from SSNIT to pay workers’ salaries, although there is no independent confirmation of that.

Way forward

There is no doubt that long-term funding is the best for long-term projects and therefore, under the circumstance, it will be in the interest of the government to ensure that the new pension scheme is well structured to cure the canker of lack of long-term funds in the country.

Perhaps, as the President of PEF indicated, there may not be the need for a development bank if the pension scheme is working to near perfection and many more workers are roped onto the scheme.