Dr. Kwakye of IEA could be Telling a "True-Lie"

Ghana is an interesting place to be at this time of economic turmoil. I support the view that knowing the problem could be an inch to the solution. Economics as a subjective science therefore means that every man potentially has an answer to the economic crisis of our economy based on their “understanding” of the problem, which is not politics-blind. Therefore, I embrace the many proposed untested theories of academics, politicians and the ordinary Ghanaian alike in demonstration that there is no “black or white” answer to the problem – that is to say events are not independent and mutually exclusive. By this, I mean all these untested theories could be true or a lie at the same time or in varying combinations at different times. However, whether right or wrong, our choice is based on the implicit assumption that there is a standard measure against which these dual mutually exclusive outcomes are derived, which is not likely. The former president’s attribution of the economic woes of Ghana to the 2007 redenomination exercise was received less seriously until the learned Dr. Kwakye re-echoed same with some reason unlike the mere and usual roar of the former. 

In the midst of varying antithesis of Dr. Kwakye’s redenomination-economic crisis argument – referred to in this article as the “KWAKYE EFFECT” - , I present my views, stemming from my ongoing research on the “Content of Inflation and the Development Nexus”. I basically explain why I think Dr. Kwakye could be telling a “true-lie”, in other words a half truth. This is because his redenomination argument in my opinion is just one of the “symptomatic”, not a root cause component of inflation and its depreciating effect on the purchasing power of the Cedi. I therefore propose an alternative framework (model) anchored on “market failures” and “value creation” for a superior attribution of the economic performance of the Ghanaian economy. The content of inflation provides us with a robust measuring index of economic performance; that is whether caused by market failures and or as a result of value creation. The lack of such an objective index could be the reason for too many theories of Ghana’s woes – some very incredible.

I will proceed by presenting a summary of Dr. Kwakye’s argument and complete the presentation with my comments on it. Dr. Kwakye’s logic is summarized below:

"If there is an increment in pricing, say something that should be increased from 5 pesewas to 7 pesewas, it automatically jumps to 10 pesewas because of the absence of lesser denomination. A continuous repeat of this in no time certainly will have adverse effects on the economy or to limit it people's economies and the nation’s economy on a large scale".

Analysis of the Kwakye Effect

Basically, Dr. Kwakye is simply saying in other words that the HIGH INFLATION or simply inflation is the cause of the current economic quagmire, resulting from the 2007 redenomination exercise. It is difficult to agree with him on the basis because smaller currency denominations including 1pesewa coins were provided for trading purposes. Therefore, price increments from 5pesewas to 7pesewas will not automatically jump to 10pesewas because two of the 1pesewa coins could be added to the 5pesewas to make 7pesewas. However, the logic of the redenomination as the cause of high inflation “could hold true” because the 1pesewa coin is practically not in use. This doesn’t mean that high inflation is the problem, rather the causes of high inflation should be our necessary examination. I perceive that Dr. Kwakye’s has lump two arguments into one argument. I present these two arguments as H1 and H2 and H3 as his conclusion below:

H1: Redenomination is the cause of high inflation

H2: High inflation is the cause of the current economic crisis

H3: Therefore, redenomination is the cause of the current economic crisis

This kind of logic is pretty simple (for this high level of economic analysis) and assumes a linear function but creates an implicit impression that any event which could create inflation could be the cause of the economic crisis – that could also be true. Therefore, judging by Dr. Kwakye’s own logic, the profligate spending of the NDC government during the erstwhile 2012 election period could also be the cause of the problem. In fact, this logic by extension also means that  all the triggers of inflation, including the redenomination, profligate spending, import-export imbalances, high cost of production, inefficient economy, bla bla bla beside others could at the same time be the reason for this problem. Hence, the cause of the problem in my opinion is not a “black or white” answer (define above) at this stage, but of multiple continuous accumulative causation. Therefore, for Dr. Kwakye to assert that the 2007 redenomination exercise is “THE” cause of the current economic crisis in Ghana, he implicitly assumes that among all the causes of inflation (some listed above), the redenomination exercise is the most significant (Relatively important) force in causing the problem; although, he did not originally recognize that all these factors are in the vending machine. Without a robust evidence-based indicating these parameters of relative importance of the causes of inflation and their linkages to the current economic crisis (which I think is the crux of the debate), the” Kwakye Effect” which appears to be based on a careful conjecture is not a very useful model to warrant our considerable time. Moreover, the “Kwakye Effect” is a second-level argument which ignores the (root) primary causes of inflation. Inflation doesn’t cause itself, so whether prices jumps from 5pesewas to 10pesewas instead of 7pesewas, there are fundamental causes which must be dealt with. Hence, the “Kwakye Effect” will actually be a “mirage” in a well-managed or deflationary economy, although such an economy like Japan comes with its own challenges.

Market Failures and Value Creation: An Inflation Framework for Economic Performance Attribution

I will attempt to explain from a classical economics point of view of inflation and latter introduce my perception of inflation with a revelation of an element of inflation –i.e. value creation -  which is barely spoken about in the inflation debate by the many street economists in Ghana, and sometimes omitted by certified economists. I will create a model of inflation and explain the relationship between the elements of inflations as my view for better attribution of the economic crisis, not the “Kwakye Effect” above.  

In economics, inflation is accepted as a sustained increase in the general price level of goods and services in an economy over a period of time (Blanchard, 2000; Wyplosz & Burda, 1997; Barro, 1997; Abel & Bernanke 1995). When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply (Barro and Grilli, 1994). However, money supply growth does not necessarily cause inflation. Some economists maintain that under the conditions of a liquidit trap, large monetary injections are like "pushing on a string" (John Makin,  2010; Paul Krugman; Gauti Eggertsson). A liquidity trap is a situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective.  A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war (Krugman, 2008). Notwithstanding, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth (Mankiw 2002, pp. 81–107 and Abel & Bernanke 2005, pp. 266–269).

In my view as earlier deducted from the Kwakye Effect, inflation is multi-dimensional; hence, I contend that the notion of redenomination (one-dimensional) as the sole cause of the current economic mess is preposterous and an over-simplification of the problem. In my opinion, the causes of inflation (I) can be classified under two broad categories: (1) market failures (MF) and (2) value creation (VC). Any measure of inflation in any economy at any point in time is a combination of these two factors. This is represented mathematically as:

	I = Ʃ MF + VC          t =1

A market failure is a situation where the market fails to allocate resources (goods and services) efficiently or fairly – in the right quantities to the people who need it most. Market failures are often associated with “time-inconsistent preferences”, “information asymmetries”, “non-competitive markets”, “principal–agent problems”, “externalities”, or “public goods” (Stiglitz, 1989, Palacios-Huerta, 2003; Wilson, 2008; Stiglitz, 1998; Laffont, 2008). The existence of a market failure is often the reason why self-regulatory organizations, governments or supra-national institutions intervene in a particular market (Arrow, 1969; Gravelle, Hugh; Ray Rees, 2004). However, government policy interventions, such as taxes, subsidies, bailouts, wage and price controls, and regulations (including poorly implemented attempts to correct market failure), may also lead to an inefficient allocation of resources, sometimes called “GOVERNMENT FAILURE” (Weimer, David; Vining, 2004).

Value on the other hand is basically the ability to satisfy wants, which could be economic, social, political etc, achieved at a cost. Value therefore becomes a fundamental relationship between function (what the goods and services produced in an economy must do – benefits) and cost. In a business sense then, value creation is the performance of actions that increase the worth of goods, services or even a business. Many business operators now focus on value creation both in the context of creating better value for customers purchasing its products and services, as well as for shareholders in the business who want to see their stake appreciate in value. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or cost of capital).

In an economy, the interplay of market failures and value creation determines the rate of inflation in my opinion. The size of the rate of inflation is however dependent on the stage of a country in the development Life cycle, that is, Birth or Growth or Maturity or Decline. At the growth stage where Ghana seems to be, the potential for value creation is very high unlike an already developed economy like the US and the UK. Pursuing value creation at a growth stage in the development cycle could actually create inflation. In the maturity stage of development as experienced by the US and UK, value creation has limits and is more likely to fall unless supported by extreme innovation, which is also scarce and expensive. Low rates of inflation in the US and UK is therefore as a result of optimum value creation over less market failures. That is, while there is an inverse relationship between inflation and “optimum” value creation (time constrained), inflation relates positively to market failures at all times.  Thus, the high potential for value creation in the Ghanaian economy at this stage could lead to increases in price of goods and services. But, potential is not the same as actual, because value creation in Ghana is practically meagre. Further, the likelihood of market failures is as high as the prevalence of the causes of market failure including government failure as highlighted above. Value creation is positive and over a sustained period in the maturity stage of the development life cycle stagnates and subsequently falls; thus, reducing its contribution to inflation. Market failures on the other hand are continuously negative and prudent economic management is the only way for reducing its contribution to inflation.

Per this nominal reasoning, the high incidence of sustained market failures and the high potential for value creation could constitute the first level root causes of high inflation regime in Ghana and the seeming economic crisis. However, in Ghana, it is clear that the contribution of market failures to inflation is higher than value creation. For instance, increases in prices of utilities like electricity and water is as a result of inefficiencies in the production process which normally comes at a high cost compared to improvement (value created) in the services provided. Another example is the case of excess supply and excess demand of goods and service. This could lead to over-consumption or under-consumption of goods and services, which is a clear case of an inefficient market. For instance, fuel shortages lead to under-consumption of fuel and price hikes transmitted across the real economy: agriculture, industry and services. Another example is the oversupply of money during the 2012 election period and the persistent corruption in our economy. This increased the purchasing power of beneficiaries leading to over-consumption of goods and services in the economy.

It should be noted in our explanation of inflation above, that oversupply of money in an economy not accompanied by an equal measure of economic growth causes inflation. Economic growth is the sustained increase in the market value of the goods and services produced by an economy over time. This results from value creation due to a more efficient use of the nations resources according to economic growth theory. Thus, inefficient use of national resources leads to less value creation and subsequently less economic growth and vice versa. In the last two years, unproductive spending could therefore be blamed for the dwindle fortunes of Ghana’s economic growth potential. This evidence supports my opinion that  among the two causes of inflation in Ghana and the consequent economic hardship, market failures due to bad economic management is RELATIVELY IMPORTANT than value creation (from efficient use of resource) in explaining the current economic turmoil.

From this framework, Dr. Kwakye’s redenomination argument fits into the typical case of a market failure when inefficiencies in the production process results in high inflation. But the redenomination phenomenon is only a symptom of a real underlying cause of inflation, which the “Kwakye Effect” fails to explain. I must admit that the “Kwakye Effect” could be created by excessive value creation but that is far remote and not the case in the Ghanaian economy, making his argument subprime in attributing the current economic crisis. His argument is just a component of the bigger problem.

Conclusion
Summarily, I have demonstrated through economic reasoning that Dr. Kwakye’s attribution of the economic woes of Ghana to the redenomination is an over-simplification of the problem, a second-level argument which ignores the first level primary causes of inflation in the Ghanaian economy in the first place. However, the persistence of market failure and the potential for high value creation associated with Ghana’s stage in the development life cycle in my opinion presents a stronger, complete and a more robust model for attributing the problem at hand. Ghana deserves better.

Kenneth A. Donkor-Hyiaman

Department of Land Economy

University of Cambridge

United Kingdom

kwakuhyiaman@gmail.com

Pension Reforms in Ghana: Only a New Act, No Lessons Learnt

I recently wrote about what I call the “Pension Irrelevance Theorem” (PIT) which literally suggests that pension schemes in developing economies are ineffective and for that matter of no need for the low and middle-income work force, who constitute the majority of pension scheme membership. The fact that pensions are mostly annuity payments unlike lump sums to be received commencing upon retirement expands the risk that many low and middle-income people in developing economies would not receive pensions  due to low life expectancy,  averaging 54.9 in Sub-Saharan Africa whiles compulsory retirement age is about 60 years – I refer to this as the “Retirement Planning Puzzle”. The Retirement Planning Puzzle was defined in the previous article as the difficulty in realizing and actualizing pensions. The phenomenon therefore pushes the receipt of pensions further into the uncertain future beyond the reach of the contributor who is likely to demise before pension benefits accrue. Unlike developed economies with high life expectancies making pensions important, low life expectancy in developing economies render a contributor’s personal need for pensions unjustified.

In this article, I argue that the primary and most critical lessons have not been learnt from pension reforms in Ghana. This view is arrived at by analyzing the applicability of the “Pensions Irrelevance Theorem” through a review of the history of the pension industry in Ghana. The New National Pension Act of Ghana, 2008 (ACT 766) requires retrofitting or its effectiveness cannot be traced in the sands of time to come.

Defined Benefit and Defined Contributions Plans: Why it Matters

A fair understanding of pension plans is perfect for understanding the arguments raised in this article. In spite of the varying terms, three basic designs (types) of pension schemes are common globally including defined benefit (DB) plans, defined contribution (DC) plans or both. DC plans by nature specifies contributions as a predetermined fraction of salary without certainty of benefits upon retirement unlike DB plans. The latter is a promise by a sponsor bearing responsibility to pay a fixed life annuity; sometimes inflation-adjusted and benefits are a function of both years of service and wage history. Whereas member contributions are ring-fenced and individually invested in a DC model, DB enables the pooling and group management of funds. Hence, the investment risk of DC plans is emergent at two levels; investment performance uncertainty and the real value of income streams or lump sum generated at retirement. Therefore, DB plans could offer superior risk-sharing properties that are not captured by DC models.

Pension Reforms in Retrospect [1946 – 2014]

The Pension terrain in Ghana has undergone several developments from pre-independence to post-independence. The first pension program - a non-contributory pension scheme - was introduced by the Government in 1946 to cater for the retirement benefits of workers of the Colonial Administration offices. In 1950 and early 1960s, the CAP 30 Pension Scheme - created by the Pensions Ordinance Number 42 (CAP 30) - and Superannuation Schemes for public servants including certified teachers, university lecturers, and all government workers in the Gold Coast were established. Given the narrowness of coverage, the vast majority of ordinary Ghanaian workers could not benefit from these schemes. To cover all private and public sector workers who were not covered by the CAP 30 schemes, the Social Security Act (No. 279) was passed in 1965 originally as a Provident Fund to provide lump sum benefits for old age, invalidity and survivor’s benefits.

The establishment of the Social Security and National Insurance Trust (SSNIT) in 1972 under the NRCD 127 to administer the National Social Security Scheme replaced the repealed Social Security Act, 1965 (Act 279). After twenty-five years of administration, it was converted to a Social Security Pension Scheme which invested contributions in long maturity low interest rate special government bonds. Coupled with high inflation, lump sum benefits due to retiring beneficiaries were insignificant. To bring some adequacy into workers’ pension packages, the Social Security Act, 1991 (PNDC Law 2427) was enacted to transform the 1972 Scheme from Provident Fund to a DB Scheme. This came with a shift from investments in special government bonds to investments in a broad portfolio.

According to the NBD Ghana Limited, “ [t]he transition to a very broad investment portfolio required considerations that satisfied the needs of government on the one hand, the need to satisfy some social needs of the contributors and the need to generate commercial rates of return to balance the lower rates from the other portfolios”. Notwithstanding, the SSNIT schemes were less favourable compared with the CAP 30 pensions, particularly in terms of the lump sum benefit, which resulted in agitations and protests by some public sector workers on the SSNIT Scheme. The Bediako Commission set up in 2004 led to the enactment of the current National Pension Act, 2008 (Act 766) to introduce a contributory three-tier pension scheme to provide improved retirement benefits for all workers. The ACT requires employers to contribute 13% and workers 5.5% of gross income, making a total contribution of 18.5%. This distribution is presented below: 

1. First tier basic national social security scheme (13% out of total contributions); which is managed by the SSNIT is mandatory for all employees in both the private and public sectors. 2.5% out of 13% is a levy for the National Health Insurance scheme;
2. Second tier mandatory occupational (or work-based) “defined contribution” pension scheme (5% out of total contribution) is “fully funded” by employees and privately-managed by approved Trustees assisted by Pension Fund Managers and Custodians. It is designed primarily to give contributors lump sum benefits.
3. Third tier voluntary provident fund and personal pension schemes, supported by tax benefit incentives for workers in the informal (blue collar) and formal sectors (white collar).

Lessons Learnt from Pension Reforms [1946 – 2014]

The first obvious lesson is the issue of “increasing coverage of pension schemes” that replaced old schemes. For instance, prior to the coming into existence of the SSNIT in 1972, which extended its pension scheme to private sector workers, only public sector employees were covered by some form of retirement scheme. This has arisen because of concerns particularly about old age income security for all in Ghana. The second lesson is the issue of “pension inadequacy”, and a clear example was the disparity between pensions of previous CAP 30 members and the SSNIT pension schemes. One of the approaches used to achieve this ideal was to convert provident funds (usually for lump sums benefits) into DB plans as was the case in 1972 with the coming into effect of the Social Security Act, 1991 (PNDC Law 2427). The two major issues here is the investment problem: the limited availability of investment conduits and mandatory investment of contributions in low-yielding government bonds in the face of high inflation. Thus, creating diversification, risk reduction and return maximization problems for the schemes. The fact that pension contributions constitute a source of cheap funds to governments contributes to the pension inadequacy problem. The third lesson is a corporate governance issue. Prior to the enactment of the National Pension ACT, 2008 (Act 766), the DB nature of pensions in principle gave the “right to invest pension funds to a sponsor (SSNIT)”, who promised some predetermined benefits on a non-negotiable basis. Individual contributors had no business in determining their preferred investments. Their concerns were to be addressed by a Board, which ideally was believed to have comprised some sophisticated and experienced financial and investment experts. Moral hazards resulting from principal-agent problems largely because of information asymmetry are consistently persistent in all the schemes. To deal with this canker, a more diversified pension portfolio combining DB and DC plans has been introduced by ACT 766. DC plans as described earlier give the right of investment to the contributor; hence, contributors are as of right mandated to choose the pension trustees that manage their second-tier contributions as well as engage in investment asset selection. In effect, there is a sharing between contributors and trustees in the right to invest and the management of the pension scheme.

No Lessons Learnt

Despite these reforms, pensions in Ghana are still inadequate and largely unrealizable – that is the pension reality effect. In my candid opinion, these reforms are good but materially insignificant in maximizing the welfare of contributors, especially when the scheme is compulsory – the counterfactual could have been better. There appears to be a holding back in the choice to make the right decisions about the designs of pension schemes in Ghana; perhaps, deliberately from the government end or designers and managers have either lost touch with the pension reality or are not skilful enough. The very problem of pension inadequacy which has necessitated these reforms is still persistent and unlikely to be resolved by the new three-tier pension scheme. More seriously, is the existence of the Retirement Planning Puzzle and the Pension Irrelevance Theorem. Pension scheme coverage is increasing but many either do not live to enjoy their pensions or demise very shortly upon reaching retirement age because of low life expectancies and the drastic fall in their standards of living during the retirement period.

What could be wrong with the design of national pension schemes in Ghana? Although the new three-tier scheme blends the benefits and characteristics of DB and DC plans, the concentration of a chunk of contributions (11.5% out of 18.5%) in the first tier DB plan could be the avoidable risk. Traditionally, the first tier is just like the 1972 Social Security Pension Scheme which invested in low risk low-yielding long-term government bonds, which are inevitably susceptible to the depreciation effect of high inflation. In effect, higher returns on pension investments are compromised for certainty (low risk). It appears to me that the desire to satisfy government needs is to blame; yet, historically funds have been wasted mostly in unproductive and unviable investments. Therefore K.B. Asante “maintained that SSNIT money was not government money but contributions by workers and would have accrued to workers if the SSNIT law did not exist”. Reports reveal that SSNIT spends about 40% of members’ contributions on administrative expenditure. Lately in 2012, the Director-General of SSNIT admitted that some of its investments in some companies had gone bad. A typical example is the State Transport Corporation (STC) bankruptcy case, making losses in the last five year prior to the reportage. Similarly, the two central car parks constructed by the SSNIT adjoining the Ridge Towers and the Pension House have been deserted by the target clients – workers of the various corporate institutions located around Ridge and Heritage Towers in Accra according to investigations conducted by Economy Times. The car park at Ridge has a parking capacity of 818 cars, but less than 150 cars patronise it daily due to high rates charged by the Trust according to the Economy Times. The very recent distasteful deal is the Fortiz-Merchant bank sale. The SSNIT has demonstrated in no uncertain terms its capability and capacity to manage the public pension fund to maximize profits for its agents in the public interest. It is therefore, a wrong decision to allocate more funds to the SSNIT – it is likely to go waste and pensioners may continue suffering.

Further, pension reforms have barely made it possible for contributors to benefit from their contributions while alive - during their economic and active lives. The only provision is found in section 103 (2) of ACT 766, which allows members to secure a primary mortgage with their accrued second-tier DC benefits; this is however yet to be implemented and of no benefit to members currently. There is doubt about the feasibility of this provision as well because accumulated benefits could be very low due to low contribution rate (5.5% of salary). This is worsened by the fact that a chunk of contributions are invested in DB plans managed by the SSNIT. The problem is that, this scheme buys deferred annuities for contributors to be received upon retirement. The fact that these annuities are received each successive year expands the risk of members realizing and actualizing their pensions with substantial real value due to high inflation; the very essence of the Pension Irrelevance Theorem (PIT) has barely been noticed by stakeholders. Members therefore live with the hope of longevity less they would not personally have access to their pensions but their survivors. In that case, it could be concluded that pension schemes in Ghana have predominately been for the benefit of survivors in title, not contributors. The lump sum benefits promised by the second-tier DC scheme could partially mitigate the PIT intrinsically. The extrinsic benefit of the DC scheme is meagre just by the simple reason that the promised lump sums are likely to be small because the contribution rate of 5.5% is insignificant for investment purposes. This is worsened by the fact that each member’s contributions in the DC scheme is ring-fenced and invested individually; thus, it lacks the benefit of risk and fund pooling as well as investment diversification. The latter requires substantial funds to achieve; hence, members would inevitably carry substantial specific (diversifiable) risk against Modern Portfolio Theory and investor rationality. This is quite technical and would be discussed in a separate article soon.

Remedy and Conclusion

Pension contributors’ best bet in the face of the PIT and moral hazards, is to have more control over the investment of their contributions through the DC scheme. In other word, dealing with the design risk of the new scheme requires that the chunk of contributions should be in the DC scheme for maximum benefits economically. There is a high likelihood that a higher second tier DC contribution rate than the first tier DB could lead to higher accumulation rates and the insufficiency of investible funds problem addressed. To deal with PIT, two non-mutually exclusive approaches are opened to administrators. First, benefits should largely compromise of a provident fund as argued above and secondly, many ways should be devised for contributors to benefit from their pensions while alive. In effect, risk reduction, diversification and return maximization is more likely for pension contributors in Ghana in this proposed framework.

In conclusion, the Pension Irrelevance Theorem is real and still a problem against the need for pension schemes in Ghana. The life changing root lessons from triggers of pension reforms have not completely been learnt. The knowledge-base informing the design of the new pension scheme is sideliner and symptomatic in nature. Unless dealt with through robust pension scheme design, contributors would not benefit maximally, others including pension administrators, trustees, managers and custodians would.

Kenneth A. Donkor-Hyiaman

Managing Partner, MeTis Brokers

kwakuhyiaman@gmail.com

Towards Establishing the “Construction Industry Development Authority” in Ghana

Globally in the 21^st century, infrastructure is the lifeblood of prosperity and economic confidence. Successful delivery of well-planned infrastructure investments offers developing economies and for that matter Ghana, an opportunity to compete in the global marketplace. Construction is the mechanism through which infrastructure is delivered. Aside this key role, the contribution of the construction industry to the development of nations could be summed up through it forward and backward linkages with other sectors and industries of the economy. By forward linkages, the output (product) of the construction industry serves as inputs (raw materials) of other industries. For instance, construction output including all types and forms of infrastructure like buildings, roads and dams, etc. are used as inputs by the financial, transport and energy sectors and industries. Backward linkage on the other hand relates the growth in the industries that supply construction inputs –i.e. building technicians and professionals and manufacturing companies - to the growth of the construction industry.

In fact, almost every economic activity is linked up with the construction industry. Therefore, the growth and development of any economy is directly or indirectly connected with the construction industry. For example, after a rural roads rehabilitation project in Ghana, costs for transporting goods and passengers fell by about one-third on average according to a World Bank report in 2000. The strong and significant positive correlation between infrastructure and growth in Africa has also been highlighted by numerous studies.  For instance, Escribano, Guasch, and Pena (2008) found that infrastructure has a substantial effect on total factor productivity. The construction industry is therefore considered an economic backbone and major contributor to the gross domestic product (GDP) of Ghana. For instance, its contribution to GDP has shown an increasing trend from 8.5% to 11.8% from 2010 to 2013 respectively; a sign of its growing importance in the development of the nation.

This evidence notwithstanding, the construction industry in Ghana is substantially underdeveloped and plague with numerous constraints. Economic development cannot therefore be achieved on the back of a fragile developmental framework and ill-equipped construction industry. In this article, I explore some of the major constraints and discuss current initiatives towards developing the construction industry in Ghana.

The Challenges of the Construction Industry

The research landscape is replete with a number of studies that have identified the challenges of the construction industry. In a very recent study by Fugar et. (2013), seven challenges including; absence of a principal development regulatory body, inadequate financial resources, lack of investment in human resource development, inability to embrace change, low technology in the industry, lack of appreciation for workforce in the industry and high level of employee mobility were identified. Common to most of the related extant literature is the absence of a central agency to regulate and ensure the continuous development of the construction industry (Fugar, et al., 2013; Osei, 2013; Ofori, 2012; Badu and Owusu-Manu, 2009; Gyadu-Asiedu, 2009; Ofori, 2000; Ahadzie, 2009). Thus, although there exist professional bodies of architects, surveyors, engineers, builders and technicians to regulate the activities of their members, these bodies are usually weak in enforcing rules, regulations and professional standards largely due to the lack of a legal mandate – membership has been optional for most them. Externally, there is little or no coordination among these construction-related institutions and bodies -both public and private – although their activities dovetail into each other. Resulting, the construction industry is fragmented and lacks the needed cohesion to support the pace of development in Ghana. Moreover, construction output is usually substandard usually delivered with cost overruns and beyond timelines.

The construction industry in Ghana therefore faces some significant weaknesses. It is not well positioned to meet the challenges which it will face at home and in the West African sub-region in the near future. The internal weaknesses are compounded by difficulties in the operating environment of its component enterprises. The poor performance of the industry has many negative implications for short-term economic growth and longer-term national development. It is necessary for systematic effort to be made to develop the industry. An agency which will spearhead this effort is required. In these regards, the country is well behind several African nations such as Kenya, Malawi, South Africa, Tanzania and Zambia in the development process.

Evidence of International Best Practice

Similar challenges in other emerging countries resulted in the establishment of central agencies to coordinate the activities of all construction works. Interestingly, most of these countries are making very remarkable strides comparatively towards economic development. It is widely acknowledge that a strong construction industry which is properly regulated by designated bodies is a major stimulator of development in these countries. For instance, Singapore, Malaysia and South Africa have the Construction Industry Development Board (CIDB); Construction Industry Council (Hong Kong), Construction Industry Development Council (India), National Construction Services and Development Board (Indonesia) and the Institute for Construction Training and Development (Sri Lanka). Typically in Africa, countries like Zambia, Rwanda, Malawi, Kenya and Tanzania all have central bodies that are mainly responsible for the regulation and development of their construction industries.

The Way Forward

Going forward, both industry practitioners and academics are of the consensus that Ghana also needs a central body to deal with the aforementioned challenges. Thus, championed by the Chartered Institute of Building (CIOB) – Ghana, Chaired by Mr Rockson Dogbegah, and funded by the Business Sector Advocacy Challenge (BUSAC) fund, a comprehensive study was commissioned to build upon a situational report undertaken by the Association of Building and Civil Engineering Contractors of Ghana (ABCECG). A Steering Committee made up of the Presidents of the Ghana Institution of Surveyors (GhIS), Ghana Institute of Architects (GIA), Ghana Institute of Planners (GIP), Ghana Contractors Association Council (GCAC), Ghana Institute of Technicians (GIT) and the Association of Building and Civil Engineering Contractors of Ghana (ABCECG) was set up by BUSAC to led the process towards establishing a central agency for the construction industry. Further, a team of consultants led by Professor George Ofori (National University of Singapore) and supported by Dr. DeGraft Owusu-Manu, Mr. Michael Adesi and Mr. Kenneth A. Donkor-Hyiaman, all of the Kwame Nkrumah University of Science and Technology were tasked to:

1.      develop a case for the establishment of an agency to spearhead and administer the regulation and continuous development and upgrading of the construction industry in Ghana;

2.      design the architecture and operating framework of the regulatory and development agency for the construction industry in Ghana;

3.      prepare an action plan for the implementation of the proposals for improving the performance of the construction industry in Ghana.

The “Study on a Regulatory Agency for the Construction Industry in Ghana” which hinges on a baseline survey of stakeholders of the Ghanaian construction industry confirmed the aforementioned challenges revealed by previous studies. As part of the scope of works as agreed to by stakeholders at a workshop for dialogue on July 3 2014, Chaired by Surveyor Osei Asante and adopted by the Steering Committee, the report proposes for the establishment of a “Construction Industry Development Authority (CIDA)” under the parentage of the Ministry of Water Resources, Works and Housing to:

“lead the regulation, restructuring, continuous improvement and development of the construction industry in Ghana with the goal of enhancing the performance of the industry in order to derive optimum efficiency and effectiveness in its operations and outputs, to improve the quality of life of Ghanaians”.

Under its purview, the CIDA shall be responsible for the construction industry which may be defined: “as the part of the economy which plans, designs, builds, maintains, refurbishes, extends, and eventually demolishes buildings and items of infrastructure of all types”. The CIDA is therefore proposed to undertake eight (8) major activities of:

1.      championing and leading for the regulation and strategic development of the construction industry;

2.      advising the government on relevant aspects of the construction industry;

3.      formulating regulations, standards and codes to guide practice and procedure and nature of output in the construction industry;

4.      registering contractors and consultants, and enterprises linked to the construction industry, such as suppliers of materials, and monitor and control their performance;

5.      proposing guidelines and frameworks to help to streamline the work of, and promote good practice in, both public and private organisations involved in the construction industry;

6.      providing and administer incentive schemes to organisations to improve their performance;

7.      collecting, processing, maintaining and disseminating information that is crucial for activities in the construction industry;

8.      determining the needs of the construction industry, from time to time, and formulate strategies and programmes for attaining them.

To undertake the above-listed activities, it is proposed that the CIDA should set up regional offices with a headquarters in Accra and six (6) divisions as listed below to spearhead its operations:

1.      Construction Industry Regulation, Monitoring and Control;

2.      Business Development;

3.      Technology Development (including building materials);

4.      Human Resource Development;

5.      Enterprise Development and

6.      Industry Performance Programme.

Having fulfilled two (2) out of seven (7) action plans, including the drafting of a Bill for Parliament to pass into law for the establishment of the Construction Industry Development Authority, it is hoped that the subsequent processes of engaging government would be fruitful. The Steering Committee and BUSAC are very certain about the commitment of all stakeholders towards this landmark course for the development of the construction industry in Ghana. While the process is on course, all stakeholders would be engaged at all levels to address emerging concerns which could marred the hitherto success process.

Lesson Learnt and Concluding Remarks

The construction in Ghana faces numerous challenges including a weak regulatory and development framework, financial, human resource and material constraints beside others. The consensus reached between academics and industry practitioners is that of the need of a central agency to regulate, develop and coordinate the activities of all construction-related activities and bodies. The “Study on a Regulatory Agency for the Construction Industry in Ghana” has made a case for such an agency in Ghana. Experience elsewhere shows that there is merit in adopting a centralized approach to construction industry development. The lessons are, first, that construction industry development is a deliberate activity which requires a long-term approach; second, industry development programmes require the involvement of various stakeholders of the construction industries to succeed, but the government should take the lead; and third, there are likely to be dissenting voices among the practitioners who might perceive that they might lose power or influence. Another lesson is that country-specificity is key. Thus, it is important to understand the particular context which will influence change in Ghana. The action taken in Ghana must be the right kind of action for the country. Despite the many lessons which the country can learn from the experience of other nations, ultimately, only a truly Ghanaian solution will work.

The proposed CIDA will not be a panacea for all the issues facing the construction industry. For example, payment delays impact the growth of firms, and by so doing, have an adverse effect on the efforts by the nation to develop a network of construction firms able to deliver national assets, contribute to the economy of Ghana and enhance the quality of life of Ghanaians by giving value, utility and enjoyment in the buildings and infrastructure items they build. However, CIDA cannot directly influence the efficiency of the national budgeting and financial administration regime. Thus, even after the formation of CIDA, action in other areas concerning the industry which lie outside the control of CIDA will be required.

Kenneth A. Donkor-Hyiaman

Member of “CIDA” Consultancy Team

kwakuhyiaman@gmail.com

The Rent Act 1963 in Contemporary Ghana: An Anachronism?

In the aftermath of wartime bomb damage, shortage of materials and building restrictions, the increased demand for homes from those returning from World War I resulted in housing shortages. By simple economics, rents will rise genuinely; however, it is worth noting that the precursor was artificial and was expected to return to equilibrium within a short time of increasing supply by regeneration and new developments. A reality check was inevitably as unlike normal economic goods for which supply could be increased within short spans of time, the supply of housing and for that matter real estate by nature systematically almost always lags market demand.

This was the genesis of Rent Control and security of tenure; which were first introduced on 23 December 1915 by the enactment of the Increase of Rent and Mortgage Interest (War Restrictions) Act 1915 in the United Kingdom. They were intended to be temporary measures, due to expire six months after the end of the First World War to deal with excessive increases in rents which were anticipated by restricting the right of landlords to eject their tenants and preventing them from raising the rent except for limited purposes. This law was however consolidated and amended in 1920 to operate in the long term due to continuing deterioration in housing supply. At the same time, in fairness to the landlords, mortgagees of houses controlled by the Act were prevented from increasing the rate of interest and restricted in their rights to enforce the security.

The counterfactual would have been the ejectment of tenants for better rents which was the nature of contracts at the time. It is hard to support the view that an exercise of a sort was exploitation although there may have existed unscrupulous landlords; but the economics and law at play at the time justified such acts.  But as a welfare state, this socialist motivated intervention was eminent to salvage a possible market failure. Today, the very archetypes that led to the extension of the temporary rent control Acts are still with us. The fact that unscrupulous landlords are charging outrageous rents without an evidence base from the valuation fundamentals, arbitrary ejectment of tenants for higher rents and abrupt abrogation and breaching of contracts. How then has the Rent Act which seeks to protect these tenants outlived its usefulness?

Although questionable, we can assume for the purpose of this reflection that the 220^th act of the parliament of the Republic of Ghana entitled the Rent Act, 1963 was enacted in this same spirit; to:

“Consolidate and amend the law relating to the control of rents and the recovery of the possession of premises in certain cases; to amend certain provisions of existing enactments and to provide for matters connected therewith or incidental thereto”

The article is therefore only intended to diagnose the ineffectiveness of the Rent Act by conceptualizing the problem. The term “anachronism” simple means a chronological mistake; that is to say outdated or inappropriate at the time in question because it belongs to a different historical setting. For this reason, it is a popular view that this Act has outlived its usefulness; but assuming that is wholly true, what factors have contributed to this effect? Through a discussion of these factors, I wish to question this assertion on the basis that some provisions are still alive and worthy of enforcement.

Amendments to the Rent Act 1963

Age and time does not necessarily invalidate or render a law stale but the effectiveness of a law lies in its enforceability to meet changing circumstances and for that matter the need for amendments if necessary. It is in this context that Section 25(5) - “Offences” of the Rent Act, 1963 (Act 220) below was amended by Section 19(2) of the Rent Control Law, (1986), P.N.D.C.L 138; thus:

“Any person who as a condition of the grant, renewal or continuance of a tenancy demands in the case of a monthly or shorter tenancy, the payment in advance of more than a month’s rent or in case of tenancy exceeding six months, the payment in advance of more than six months rent shall be guilty of an offence and shall upon conviction by the appropriate Rent Magistrate be liable to a fine not exceeding one hundred pounds”

Section 25(5) of the Rent Act, 1963(Act 220) was amended as follows-

          a.  by the deletion  of the words “appropriate Rent  Magistrate”

          b.   by the substitution of the words “one hundred  pounds” for the words “ten thousand cedis or a           term of imprisonment not exceeding two years”

The phrase “the appropriate Rent Magistrate” in Section 25(5) only limited the adjudication of disputes to Rent Magistrates who were appointed as arbitrator for the purpose of this Act in certain areas. As such not every judge could sit on cases of rent disputes. In other words, however, the deletion of the phrase “appropriate Rent Magistrate” occasioned the granting of legal permission for any magistrate to arbitrate cases associated with rent control and the recovery of possession of premises. It was also essential to maintain the value of the fine in consonance with current economic conditions. Paragraph (b) of section 19(2) of Rent control Law (1986) substituted the phrase “one hundred pounds” for “ten thousand cedis”. An inclusion of “a term of imprisonment no exceeding two years” as an option and deterrent to defaulters who could not pay the fine but could not be left unpunished either was only in the right direction.

Yet, with all its amendments to make current its provisions to enhance enforceability, the Amended Rent Act, 1963 (Act 220) seems to have outlived its usefulness in modern times, a view which owes its thought to “regulatory arbitrage” and “regulatory lax”. These two factors in my view are but a few and the kingpins indispensable in explaining and attributing the failure of the Rent Act.

Regulatory Arbitrage and Regulatory Lax: Causes of the Ineffectiveness of the Rent Act

Regulatory arbitrage is a practice whereby legal entities (in this case a tenant or landlord) capitalize on loopholes in the regulatory system in order to circumvent unfavourable regulation. These loopholes occur as a result of differences between economic circumstance and regulatory position; thus, new circumstances, usually economic in nature have developed which are not covered by the law. This is an advantage exploited at little or no cost; or the possibility of a risk-free benefit. For instance, when the punishment for a landlord who demand or receive two years rent advance instead of the six months rent advance for monthly or shorter leases as stipulated by Section 25(5) of the Rent Act is “ten thousand cedis, which is GH¢1 today. I contend that no rational landlord will comply when the probability of a costless or risk-free benefit is inevitable. A penalty of GH¢1 today could be considered as virtually costless.  

Typically, current economic circumstances have outdated the Rent Act, rendering its compliance useless. This leverage exploited by landlords is deeply seated in the shortage of housing in Ghana, such that the highest bidder wins the auction. Regulatory lax on the other hand results from the partial and/or non-enforcement of the Rent Act; typical in instances where landlords or tenants who breach the law are not reported and even in some instances when reported. This manifests in two ways, (1) intentional and (2) unintentional. It is intentional when authorities indiscriminately hesitate to apply the law discretionarily for some unwarranted and legally unjustified benefits whiles the counterparty benefit or detriment accrues to either landlords or tenants; i.e. bribery and corruption. Thus, the law is not evoked by either landlord or tenant when a right accrues. In fact, Rent Officers are estopped by Section 24 of the Rent Act from awarding cost or receiving payment for any service except his salary and such other remuneration as may be prescribed.

Nonetheless, officers of the Rent Control Department have been vilified for conniving with landlords to fix recoverable rent over and above the recoverable rent to be paid by the tenant in exchange for kick-backs from the landlord. It is also alleged that Rent Officers charge law abiding Landlords before assessing recoverable rents for their premises. This illegal act is a disincentive to Landlords who wants to abide by the provisions in the Rent Act. Situations have been reported where Landlords bribe the Rent Control officer to evict tenants faster and the tenants on the other hand “counter bribe” the Rent Control Officer rather than pay back rent. In all these scenarios,  parties have not acted on the law. Conversely, unintentional regulatory lax emanates from regulatory arbitrage. This evokes a sense of simultaneity between regulatory lax and regulatory arbitrage. That is, regulatory lax could be caused regulatory arbitrage and vice versa. Unintentional regulatory lax is therefore a clog on the enforceability of the Rent Act. For instance, the Rent Act only covers specific buildings registered under the law; now, what happens to buildings not affected? In recent time, such buildings virtually exist. The law is therefore incapable of enforcement even when a case is reported.

More so, excessive cost and the cumbersome nature of the processes leading to enforcement usually results in extralegality; which leads to regulatory lax. It is costless or cheaper to operate without the law; as Ghana’s land courts are clogged with numerous land cases, which delay the delivery of justice. This is aside agents or brokers charging more than 5% on the whole rent-advance required by landlords instead of 5% of the recoverable rent for one year for premises as commission (transaction cost) for providing services in connection with grants, renewal, continuance or assignment of tenancies demand. In the first place, landlords are only permitted by the Rent Act to charge up to six (6) months rent in advance; yet, even the most sophisticated of tenants (someone with full knowledge of the pros and cons of the Rent Act) compromise on landlords’ demand for more than six months rent advance.

Three main reasons account for extralegality. First, this happens because Secondly, the huge housing shortage of about 1,500,000 in Ghana and the high information asymmetry makes landlords and the demand for estate agency services inelastic. This makes prospective home buyers or renters vulnerable to exploitation by agents and landlords. Secondly, it is due to what I call “cultural mediocrity”; which is a quintessence of the “medea mep3 asomdwea” slogan – as for me, I want peace as preached by the poor and even the rich. The consequence for not engaging in extralegality is almost always the forceful ejectment of tenants by landlords without an order to recover possession from the law courts; which is a contravention of paragraph (g) of Section 25(1). Excessive cost involved in enforcing the law results in unintentional regulatory lax especially when there is no certainty of the verdict going in favour of the complainant. Thirdly, another occasion for unintentional regulatory lax is due to incomplete tenancy and lease agreements; which may be invalid, not binding and unenforceable. This problem is mostly created at the initial negotiation stage due to ignorance on the part of both landlords and tenants of the substance of the Rent Act. In most cases, there are no written tenancy or lease agreements to start with.  

Weak institutional capacity evidenced by the lack or inadequate human resource like valuers and land economists also contribute to unintentional regulatory lax. A clear case is the instance of remodelled premises. Landlords determine their own recoverable rent ignoring Section 18(4) of the Rent Act, which enjoins the Landlord to apply for an assessment of the recoverable rent from a Rent Officer within one month of completion of the remodelling. However, landlords have therefore usurped the roles of valuers of the Rent Control Department which in one instance is due to unnecessary delays in assessing the appropriate rent. This problem is also linked with poor records management and the lack of or inadequate monitoring systems. This is because the Rents Cards which are meant for this exercise are no longer used. Based on this evidence, I support the popular view that the Rent Act, 1963 (Act 220) is anachronistic, but in part, because some provisions are alive and worthy of enforcement; for instance, the use of the Rent Cards for records keeping. This could be an evidence-base for enforcing the law.

Conclusion

Summarily, the Rent Act of Ghana by the persistence of regulatory arbitrage and regulatory lax is anachronistic. Regulatory arbitrage exists because of “substance over form”; that is to say, the unfavourable economic situation underscored by the shortage of housing renders compliance and enforcement of the law difficult. Thus, some critical provisions of the law are outdated. On the contrary, regulatory lax which could be intentional or unintentional also remains a clog on the enforceability of the Rent Act.  Going forward, a review of the Rent Act is eminent.

 Kenneth A. Donkor-Hyiaman

MPhil Planning Growth and Regeneration

University of Cambridge

kwakuhyiaman@gmail.com