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Conversion of Old Land Reference Numbers to New Parcel Numbers

On 31st December 2020, the Cabinet Secretary for Lands and Physical Planning, Ms. Farida Karoney published Gazette Notice No. 11348 of 2020 (“the Notice”) notifying the general public of the conversion of specific old land registration numbers to new parcel numbers. The Notice outlines the old registration numbers and the new parcel numbers. It also categorises the listed parcels of land under newly established land registration units, bearing various block numbers.

  1. LEGALITY OF THE NOTICE

The Notice is premised on the provisions of the Land Registration (Registration Units) Order of 2017 (“the Regulations”) promulgated under Section 6 of the Land Registration Act, 2012 (“the Act”). Section 6 of the Act empowers the Cabinet Secretary to constitute an area as a land registration unit, as well as vary the unit’s limits at any time.

Under Regulation 4 of the Regulations, the office responsible for land survey is mandated to prepare cadastral maps together with a conversion list for existing titles issued under the repealed land Acts. Thereafter, the cadastral maps and conversion list are presented to the Registrar, who forwards them to the Cabinet Secretary for publication in the Kenya Gazette and two (2) national dailies within thirty(30) days of receipt. The Cabinet Secretary is required to specify in the publication, a date not exceeding four (4) months when new land registration units are to take effect.

It is on this basis that the Notice was published and specified 1st April 2021 as the effective date. All subsequent dealings in the listed parcels will be undertaken in the new registers, under the new land registration units, from that date henceforth. Likewise, all existing registers shall be closed to pave the Way for the operationalization of the new registers by that date. Nevertheless, the closed registers and supporting documents will be retained in both physical and electronic formats.

Any aggrieved person having an interest in a property listed in the Notice, may in the meantime lodge a complaint with the Registrar within ninety (90) days of the Notice’s publication. The person may also register a caution pending clarification or resolution of the complaint. There is also a further avenue for appeal of the Registrar’s decision to court.

Lastly, the Registrar will initiate the process of migration of titles for the affected properties. This will be done by advertising in two (2) national dailies and on radio stations of nationwide coverage, a notice calling upon the concerned owners to apply for new titles in the prescribed format. Each application shall be accompanied by the original title and the owners should make a complaint to the Registrar in the prescribed form (Form LRA 96) set out in the regulations regarding the conversion list or the cadastral map: Pending the resolution of any complaint, apply for registration of a caution in the prescribed form (Form LRA 67) set out in the regulations. registration documents, for proof of ownership. Once new titles are issued, the previous ones will be canceled and retained by the Registrar for safekeeping.

  1. EFFECT OF THE NOTICE

From the 1st of April 2021, all transactions with the outlined parcels of land shall be carried out under the new registers. As such, the owners of those parcels should acquire new titles to enable future effective dealings in their properties. Any aggrieved person may within ninety (90) days from 31st December 2021:

  • Make a complaint to the Registrar in the prescribed form (Form LRA 96) set out in the regulations regarding the conversion list of the cadastral map; or
  • Pending the resolution of any complaint, apply for registration of caution in the prescribed form (Form LRA 67) set out in the regulations.
  1. REGISTRY INDEX MAPS

Vide Press Statement issued to expound on the Notice, the Cabinet Secretary has indicated that the

conversion would also entail the use of Registry Index Maps(RIMs), as registration instruments to replace deed plans, with the use of RIMs expected to minimize land fraud, given that they capture all land parcels within a designated area, whereas a deed plan only captures data on a specified parcel. This would ostensibly make it easier to detect any changes or alterations.

  1. CONCLUSION

It is evident that the conversion exercise is a novel undertaking with far-reaching consequences.  Therefore, the affected proprietors must be vigilant and compliant with all the notices or requirements that the Cabinet Secretary or Registrar may prescribe, to facilitate a smooth transition of their respective properties’ records. In the meantime, they should also where necessary, seek clarification or lodge complaints, to ensure that their concerns are promptly addressed.

Conversion of Long Term Leases to Sectional Units

On 7th May 2021, the Cabinet Secretary for the Ministry of Lands and Physical Planning (the “Ministry”) issued a notice (the “Notice”) informing the general public of the conversion of long-term leases that do not conform with section 54 (5) of the Land Registration Act, 2012 (the “LRA”) and section 13 of the Sectional Properties Act, 2020 (the “SPA”).

Section 54 (5) of the LRA stipulates that the Registrar shall register long-term leases and issue certificates of lease to confer ownership in apartments, flats, maisonettes, townhouses, or offices (collectively “units”). The registration and issuance of title will only be done where the units comprised are properly geo-referenced and approved by the statutory body responsible for the survey of land.

Section 13 (2) of the SPA stipulates that all long-term sub-leases that were intended to confer ownership of an apartment, flat, maisonette, townhouse, or office and were registered before the commencement of the SPA, shall be reviewed so as to bring them into conformity with section 54 (5) of the LRA highlighted above.

 

In a bid to harmonize the foregoing provisions of the LRA and SPA, the Ministry is set to embark on the conversion of long-term leases previously registered on the basis of architectural drawings, to conform with the current land regime. Further, the Ministry has stipulated that from 10th May 2021, it will no longer register long-term leases supported by architectural drawings intending to confer ownership. We however note that as of the date of this alert, the Lands Office, for the time being, continues to accept long-term leases supported by architectural drawings.

The effect of the Notice is that all sectional units shall now be required to have properly registered sectional plans. All sectional plans submitted for registration should be geo-referenced, indicating the parcel plans, the number identifying the unit, the approximate floor area of each unit, and the user of the units. The sectional plans must also be signed by the proprietor and signed and sealed by the Director of Survey.

For purposes of conversion of already registered long-term sub-leases, the owners of the property will be required to make an application in the prescribed form and attach the following documents to the land’s registry:

  • a sectional plan;
  • the original title document;
  • the long-term lease previously registering the unit; and
  • the rent apportionment for the unit.

The Registrar may however dispense with the production of the original title if the developer is not willing or is unavailable to surrender the title, for the purposes of conversion.

Upon submission of the above, the sectional plan will be registered, and the previous register closed. A new register will be opened with respect to each unit in a registered sectional plan and a Certificate of Lease issued. It is indicated that owners will not incur fresh or additional stamp duty charges upon conversion if the requisite stamp duty was paid when registering the long-term lease.

The above developments come in the wake of numerous land-related changes in Kenya, ranging from digitization to conversion of titles issued under old land title regimes to new titles. In spite of the progressive steps taken, there are still some concerns around the conversion process. These include the absence of clearly articulated procedures for conversion; regulatory gaps as the draft Sectional Property Regulations are still at the stakeholder engagement stage; and opacities in relation to ongoing transactions.

We note that the Law Society of Kenya and the Ministry are currently engaged in discussions to resolve some of the issues arising from these legislative gaps. We are, therefore, keenly following these developments and ongoing discussions and shall keep you updated

Google LLC vrs Oracle America, Inc.: The fair use doctrine in copyright law

The Supreme Court of the United States has recently handed down a decision upholding Google’s use of part of the JAVA SE API Code (the SE Code) created by Oracle. Google had, in the course of creating a new Android Platform for smartphone networks, copied approximately 11,500 lines of the SE Code thereby prompting the institution of the suit by Oracle on the grounds of alleged copyright infringement. Google contested this suit, arguing that its use of the SE Code did not amount to copyright infringement as the same fell within the permitted fair use exception under copyright law.

Over the course of protracted litigation, the lower Courts had concluded that Google’s copying of the SE Code did not fall within the permitted fair use exceptions. However, in overturning the lower Courts’ decisions, the Supreme Court found that Google’s adoption of the SE Code in the circumstances of the case fell within the ambits of fair use. In particular, the Supreme Court was of the view that Google could not be deemed culpable of copyright infringement on the grounds that Google only copied what was needed to allow programmers to work in a different computer programming language, without discarding a portion of familiar programming language.

The decision, which is set to upend current thinking within the software developing community, extends the application of the fair use doctrine, in that rights held in copyright, will not be deemed to be infringed where the copied content is applied towards transformative use. Practically, the decision is poised to create wriggle room for developers to use existing codes within licensed software programs, so as to build interoperable platforms, without the risk of incurring liability for copyright infringement.

This view marks a radical shift from the exclusive protections granted under copyright and is likely to offset a multitude of renegotiations of existing multinational software licensing agreements in a bid to set out the permitted uses of licensed software.

Closer home, whereas the decision is of persuasive, rather than binding force in Kenya, the precedent is nevertheless likely to impact software developers and software companies alike, with the expanded use of the doctrine of fair use, quite consistent with the fair dealing doctrine provided under the section 26 (3) of the Copyright Act, 2001.

As such it will be critical for software developers and software companies to undertake a review of their licensing agreements including the terms and conditions to better safeguard their intellectual property.

Ghana Copyright – The Case of Kirani Ayat & Ghana Tourism Authority

Kirani Ayat (‘Kirani’) tweeted on 27th September 2022 that: “The president of Ghana has used my video ‘GUDA’ in this ad to promote Ghana. I was actively reaching out to the Ministry of Tourism in 2018/19 to use this video to push tourism in the North and got a ‘NO’ in reply, yet today it’s in an ad and no one has reached out to me for permission”.

Kirani’s tweet has attracted a lot of comments:

On 27th September, the Joy FM online platform published, ‘Kirani Ayat Calls Out Akuffo-Addo, Tourism Ministry after a promo video featured shots from his ‘Guda’ visuals’.

The Ghana Tourism Authority (GTA) issued a statement dismissing Kirani’s claims and argued that his rights to the content used for the promotional video by the president had not been infringed upon, since they obtained the right to use the contents from an agency.

Samsal, the creative agency mentioned by GTA, has stated that the video it created for GTA is not what has been published and that it never authorized GTA to publish the content.

BBC News Africa reported: “Ghana’s President Nana Akufo-Addo has been accused of using a musician’s work without permission or credit to advertise the country to tourists”.

The above comments raise legal issues related to copyright infringement in Ghana regarding content created by artists. This article examines regulation of copyright in Ghana and the legal issues arising in the Kirani case.

Copyright

Copyright is a right (both economic and moral) that enables creators of literary and artistic works such as writers, artists, painters, musicians, software developers, and others to receive recognition for their creative work. The rights are conferred in the expression and not dependent on registration. The right entitles the author of the creative work to:

  • authorize or prohibit the use of their work by others;
  • claim authorship of the work and demand mention whenever used; and
  • receive compensation for the use of their work.

Effective Copyright System

The essence of copyright law is to confer rights on the author and protect his or her expression from unauthorized use. To effectively achieve that goal, an efficient copyright system must be anchored on three (3) pillars:

  1. Appropriate copyright legislation – the Copyright Act, 2005 (Act 690) and the Copyright Regulations, 2010 (L.I 1962) cater to this.
  2. Sufficiently developed system for management of rights. There are three (3) Collective Management Organisations (CMOs) at the moment, namely:
  • the Ghana Music Rights Organisation (GHAMRO);
  • the Audiovisual Rights Society of Ghana (ARSOG); and
  • CopyGhana (a Reprographic Rights Organisation).
  1. Enforcement – i.e. the system of sanctions to be applied when rights under the law are infringed.

Copyright Infringement

Infringement of copyright is the unauthorized use of copyrighted work in a manner that violates the copyright owner’s exclusive right to produce or perform the copyrighted work. Infringement includes piracy, plagiarism, duplication, distribution, and exhibition in public places. Most affected works are music, audio-visual work (films, music videos, etc.), books or literary work, and computer software.

Any such unauthorized use constitutes an infringement that breaches the author’s rights. Such breaches constitute an offense under the Copyright Law – which provides that offenses include reproduction, duplication, extracts, imitation, and importation (except for private use). A person found guilty of copyright infringement can face civil or criminal prosecution. The civil remedies available under the law include injunction, compensation, seizure, forfeiture, or destruction of offending materials.  In addition to civil remedies, the law provides criminal penalties for violations or infringements which include a jail-term and/or a fine.

Enforcement Measures

The system of sanctions to be applied when rights under the law are infringed are grouped as civil remedies, criminal sanctions, and border measures. A person whose copyright has been violated can approach the court for redress by way of civil action. The court may grant an injunction to prevent the infringement or prohibit the continuation of the infringement. Additionally, criminal prosecution can be initiated when a report is made to the relevant institution. In respect of imported goods, a report can be made to the Customs Excise and Preventive Service to detain the goods.

Legal Issues Arising – The Kirani Context

The issue arising in this case is that Kirani has alleged a breach of his copyright on the basis that permission was not obtained by the GTA for the use of his ‘GUDA’ video. If this allegation is true, it means Kirani can make a claim for copyright infringement. However, GTA will not be considered to be in breach where it is able to establish that it obtained the requisite permission for the use of the ‘GUDA’ video.

A number of legal issues arise based on the above facts: including whether the GUDA video is protected under law; who the GUDA video’s owner is; whether permission was granted by the owner; the rights granted and the terms on which they were granted.

Is the Material Protected Under Copyright Law?

Generally, the protection of copyright is not dependent on registration. Literary work is typically protected under law unless the work has fallen into the public domain. Work that has fallen into the public domain is work with expired protection, work of authors who have renounced their rights, and foreign work that does not enjoy protection in Ghana.

From the facts available, the GUDA video has not fallen into the public domain. Consequently, its use must be subject to permission from the author.

Identify the Owner

Identifying the work’s owner is crucial in obtaining permission. Some kinds of art, such as video content and recorded music, can involve multiple owners. The recognized organizations that currently manage copyright in Ghana are the CMOs listed above. Hence, persons who wish to use copyright work can contact the relevant CMO.

From the facts available, GTA has stated that it obtained rights from Samsal to use the GUDA video for a promotional video. The issue arising is whether the creative agency was authorized by any of the CMOs to grant GTA the right to use the GUDA video.

Rights to Use Copyright Work

Copyright holders have the right to permit others to use their work for agreed purposes. The granting of a permit can be done in one of two ways:

  • Assignment – transfer ownership of the copyright to another person
  • License- grant of a copyright license whereby another person (licensee) is allowed to use the work based on agreed terms.

Generally, licensing is the preferable method as it allows copyright holders to keep the copyright over their work.

  1. Identify the Rights you Need

There is a need to identify the rights needed when asking for rights to use copyright work. Each copyright owner controls a bundle of rights related to the work, including the right to reproduce, distribute, and modify the work. Because so many rights are associated with copyrighted work, the rights needed must be specified.

The GTA has stated that per terms of the MoU[1] it executed with Samsal, Samsal was to “Deliver imaginative and impactful social strategies, such as content or documentaries for the use of GTA ‘as it so wishes”. It is unclear what right Samsal had that enabled it to grant GTA any rights in the GUDA video.

  1. Term/ Payment Negotiation

The length of time for which you are allowed to use a work is often referred to as the ‘term’. Your rights under a license agreement will often be limited in duration.  If there is no express limitation on its use, you are allowed to use the material for as long as you want or until the copyright owner revokes the permission. In reality, the copyright owner can only grant permission for as long as the owner’s copyright protection lasts. Additionally, when negotiating permission to use copyright work, payment must also be negotiated.

From the facts, Kirani did not receive payment for the use of the GUDA video for the promotional video.

  1. Get it in Writing

Relying on an oral agreement or understanding is not sufficient. The user and rights owner may have misunderstood each other or remembered the terms of the agreement differently. This can lead to disputes. It is essential that the two parties enter into a well-drafted license agreement that sets out the license’s use.

Conclusion

We must be reminded that the original intention of copyright law is not to prevent information usage but to protect against infringement. To achieve this, there must be a commitment to safeguarding the rights of both creators and the persons who seek to use their ideas. Many people who violate copyright law may do so simply out of ignorance. There is therefore a need to seek relevant advice prior to using the creative work of others. In the Kirani case, it is recommended that the parties negotiate a settlement – pursuant to which a license agreement is entered into that specifies the consideration payable to the author and terms under which GTA can use the GUDA video.

An Overview of Regional Systems for IP Protection

Intellectual property refers to inventions of the mind that are intangible in nature and are protected such as trademarks, Patents, Copyrights, and related rights and industrial designs.

They are a core component of most businesses in the 21st Century and valuable assets for which management efficiencies are as important as any other asset. The dynamics of globalization and the effects that it has on strategies for every business, whether national or multinational, require that businesses pay closer attention to opportunities that help maximize benefits to the company and reduce costs to free up resources for other strategic interests of the business.

Given its territorial nature, the protection of IP has often been undertaken by local, regional, and multinational entities at the national level. That means that subsidiaries or branches at the national level are left to determine and follow up on the protection and enforcement of IP rights in their respective jurisdictions. This in turn impacts the cost of protection and enforcement, quality control, and ultimately the overall business strategies of the group.

A number of regional and international frameworks for IP protection however exist that can help reduce dispersed protection measures and facilitate central management and uniform strategy formulation for the group without impacting on local peculiarities of the business. Though enforcement ultimately remains territorial, these regional and multinational processes greatly contribute to better and central control of enforcement strategies and facilitate the exchange of best practices.

The ARIPO System

In this edition, we provide commentary on the ARIPO System which is the key Africa region framework of significance to multinationals with Kenyan operations/interests.

ARIPO was the result of an idea mooted at a regional seminar on patents and copyright held in Nairobi in the early 1970s and the first draft agreement on the creation of a regional intellectual property organization was adopted in 1976 by a diplomatic conference – The Lusaka Agreement [also known as the draft Agreement on the Creation of the Industrial Property Organization for English-speaking Africa (ESARIPO)]. The idea was that the organization would serve mainly Anglophone countries. In practice that remains the case with very few exceptions. A number of lusophone and francophone countries have since joined ARIPO (The latest being the Republic of Sao Tome and Principe). Membership remains open to any member of the African Union or the Economic Commission for Africa.

The principal idea behind the establishment of ARIPO was the pooling of resources of member countries in industrial property matters in order to utilize the maximum available resources in these countries to ensure effective protection of industrial property, capacity building, and training of staff in their respective industrial property institutions, development, and harmonization of laws and general efficiencies.

Legal Framework

The Lusaka Agreement on the Creation of the African Regional Intellectual Property Organization (ARIPO)

The Lusaka Agreement was adopted at a diplomatic conference at Lusaka (Zambia) on December 9, 1976, and established ARIPO at Article 1 thereof.

Pursuant to its functions and powers under the Agreement (Article VII) the Administrative Council of ARIPO has developed protocols and regulations that form the background of the legal and operational design of intellectual property protection in member states under the system. These include:

The Harare Protocol on Patents and Industrial Designs within the Framework of the African Regional Industrial Property Organization

The Banjul Protocol on Marks; and

The Swakopmund Protocol on the Protection of Traditional Knowledge and Expressions of Folklore.

Membership to the Lusaka Agreement does not necessarily imply membership to the protocols. Each protocol applies to different aspects of intellectual property and membership to each is voluntary.

The Harare Protocol

The Harare protocol applies to the protection of patents and Industrial designs and currently has 19 contracting States, namely; Botswana, The Gambia, Ghana, Kenya, Lesotho, Liberia, Malawi, Mozambique, Namibia, Rwanda, Sierra Leone, Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe and the Democratic Republic of São Tomé and Príncipe (the latest member as at August 19, 2014).

How the filing System works: brief overview

The Harare Protocol provides a framework for the filing and protection of patents and industrial designs within member states.  The Protocol is supplemented in its provisions by administrative regulations that make further and detailed provisions for the manner in which an application is treated from the date of filing to the grant of patent or refusal as the case may be.

There are principally two regulations under the Harare protocol in this regard;

  1. The regulations for implementing the protocol on patents and industrial designs within the framework of the African Regional Intellectual Property Organization (‘the regulations); and
  2. The administrative instructions under the regulations for implementing the protocol on patents, industrial designs and utility models within the framework of the African regional intellectual property organization (the Administrative instructions)

The regulations are made by the Administrative Council pursuant to section 5 of the Harare Protocol and mainly deal with substantive matters relating to the content of applications filed with the ARIPO office including on the requirements for patentability, the right of priority, Appeal procedures against decisions of patent examiners and treatment of PCT applications under the ARIPO system.

Administrative instructions, on the other hand, are made by the office of the Director General of ARIPO pursuant to rule 2(5) (a) of the regulations and mainly deal with the day-to-day administrative requirements of ARIPO including the formality details in respect of applications under the protocol, filing timings, fees payable for each service, detailed steps in the filing and examination of applications up to grant, notification and communication procedures, the forms to be used for various filings etc.

Patents

In summary, the ARIPO system is registration-based and subject to notifications of refusal by national offices whereas the PCT system is a filing system.

An applicant for the grant of a patent for an invention or the registration of an industrial design can, by filing only one application, either with any one of the Contracting States or directly with the ARIPO Office, designate any one of the Contracting States in which that applicant wishes the invention or industrial design to be accorded protection.

The ARIPO Office, on receipt of the patent application, undertakes both formality and substantive examination to ensure that the invention that is the subject of the application is patentable (i.e. it is new, involves an inventive step, and is capable of industrial application).

If the application complies with the substantive requirements, copies thereof are sent to each designated Contracting State which may, within six months, indicate to the ARIPO Office that, according to grounds specified in the protocol, should ARIPO grant the patent that grant will not have effect in its territory.

For industrial design applications, only a formality examination is performed. If the application fulfills the formal requirements, the ARIPO Office registers the industrial design which has effect in the designated States. However, the same right to communicate to the ARIPO Office within six months that the registration may not have effect in the designated States concerned is reserved.

The Administrative Council, at its Second Extraordinary session held in April 1994, adopted amendments to the Harare Protocol and its Implementing Regulations to create a link between the protocol and the WIPO-governed Patent Co-operation Treaty (PCT). This link commenced operation on July 1, 1994, and has the following effects:

Any applicant filing a PCT application may designate ARIPO which in turn means a designation of all States party to both the Harare Protocol and the PCT;

The ARIPO Office acts as a receiving office under the PCT for such States; and

The ARIPO Office may be elected in any PCT application.

All current Harare Protocol Contracting States are also signatories to the PCT.

The Banjul Protocol

The Banjul Protocol on Marks, adopted by the Administrative Council in 1993, establishes a trademark application filing system along the lines of the Harare Protocol. Under the Banjul Protocol, an applicant may file a single application either at one of the Banjul Protocol Contracting States or directly with the ARIPO Office. The application should designate Banjul Protocol Contracting States as the States in which the applicant wishes the mark to be protected once the ARIPO Office has registered it.

States currently party to the Banjul Protocol are Botswana, Lesotho, Liberia, Malawi, Namibia, Swaziland, Tanzania, Uganda and Zimbabwe. (Total: 9 States.). Kenya is yet to accede to this treaty so trademark filing can only be done locally or through the Madrid system as we shall see in the next edition of the newsletter.

Since 1997, the protocol has been extensively revised in order to make it compatible with the TRIPs Agreement and to make it more user-friendly.

Conclusion

The ARIPO system is highly advised for clients with regional interests. We represent a number of clients in patent applications using the system and recommend it for cost savings and efficient management of the application process (more so for bulk applications) in several member countries.

In the next edition of the newsletter, we shall provide commentary on international filing systems to give a broader perspective for multinationals operating in Africa and beyond.

Two Cents: The Sale & Leaseback Model Alternative

Conventional debt and equity financing models have become largely inaccessible amidst the economic slump that has been occasioned by the global financial crisis. The ramifications of this have been felt in Kenya where there has been a slow-down in lending to the private sector. This has inadvertently resulted in a deceleration of economic growth as traditional lenders have scaled back on loan disbursements. This has also been exacerbated by the capping of interest rates chargeable by banks and financial institutions which was introduced in 2016.

The decline in credit issuance and uptake has affected the recent slowdown of Kenya’s economic performance due to the general election in 2017 which greatly affected the country’s economic outlook. These are clear manifestations of a paradigm shift needed in Kenya in the manner in which capital is raised by various entities. But there is hope, with the world economy bouncing back from the global recession in 2010, reforms have been made in the traditional financing models in Kenya. Against this backdrop, companies now have the recourse to explore alternative financing models to remain competitive and profitable.

Sale and Leaseback Transactions

Sale and leaseback financing has proved to be an attractive option for some companies that seek to keep up with their growth strategies. Essentially a sale and leaseback transaction involves a sale of an interest in property with a reservation on the possessory terms. The underlying characteristic of these kinds of transactions is that the seller acts as a lessee and they raise the capital through the property that they hold by transferring the property to a buyer through the sale. This transaction enables the seller to dispose of the property and obtain capital injection for the business while maintaining the use of the same property at an agreed lease premium for a specified term. This is especially beneficial to a buyer who seeks to incur the least possible maintenance costs of the property.

Characteristics

A sale and leaseback financing model varies from traditional financing models because it typically entails:

A sale of assets by an entity that desires to raise capital from the property to an investor who seeks to achieve a low-risk, high-yield investment

Simultaneous obtaining of a long-term lease of the property by the seller-lessee from the buyer-lessor which enables the continuing possession and use of the property by the seller-lessee in exchange for payment of rentals at an agreed premium

The retention by the seller-lessee of most of the risk and rewards incident to ownership save for the right to mortgage where the lease is an operating lease

Transfer of substantially all the risks and rewards incident to ownership where the lease is a capital lease.

Classification of Leases

Whether a lease shall be classified as an operating lease or a capital lease is usually agreed upon at the inception of the transaction. It is important to classify the lease the parties intend to enter into as both have different effects on the parties.

A lease will be classified as an operating lease where the rental premiums are considered operating expenses in the seller-lessee’s book of accounts, and the property leased does not form part of the seller-lessee’s balance sheet. On the other hand, a capital lease is considered a loan to the seller-lessee and is stated as such in the seller-lessee’s books of account. Most leases in a typical sale and leaseback transaction will be operating leases. However, a capital lease would arise where there is a buyback agreement contained in the lease; there is a buyback option with a defined price in the lease; or the lease value is greater than ninety percent (90%) of the value of the property.

Advantages and Disadvantages

Certain advantages have been identified to inure with the sale and leaseback financing model. One key motivation for adopting this financing model is the tax advantages that flow from these transactions. It has been noted that in the majority of these transactions, the seller is usually motivated by the need to realize immediate loss which is used to offset the seller’s operating income. The seller in essence receives proceeds from the sale of a non-liquid asset, yet retains for a term the use and possession of the asset.

The seller in a sale and leaseback transaction obtains a greater amount of capital through a leaseback than when they opt for conventional types of borrowing.

Needless to say, this financing model is essential in providing working capital to the seller-lessee who will realize approximately one hundred percent (100%) of the market value of the property unlike debt and equity forms of financing which may not result in the same returns. This is especially important in markets experiencing fluctuations in conventional lending sources.

For the buyer-lessor, this financing model allows it to have a hands-off approach to the management of the property as it incurs no responsibility for the operational or managerial aspects of the property which is left to the seller-lessee.

A sale and leaseback transaction also comes with its fair share of challenges, a notable one being a high-interest rate on the lease that the rental property may attract. Tax implications may also be evident with recent changes in the International Financial Reporting Standards.

The fact that the property is no longer under the ownership of the seller lessee also means that the seller-lessee may have no say with regard to the interest that the buyer-lessor will charge on the leased property. This may in the long run mean that the seller-lessee has to incur higher costs in using and managing the property as this responsibility does not rest with the buyer-lessor. This denotes an inherent risk that is evident in many lease arrangements.

It is clear that the sale and leaseback financing model is an option Kenyan companies could consider in their quest to raise capital to finance their growth strategies in the market. Numerous advantages can be drawn from the adoption of this model, especially in light of the drawbacks of conventional financing models.

Moreover, this model is attractive to entities that are unable to attract a wide variety of financing. This financing model may be useful for companies that may want to accrue some capital to use for their expansion initiatives. Ultimately, these entities could benefit from unlocked real estate value, reduction in a company’s investment in non-core business assets, such as buildings and land, and freeing-up of the entity’s cash in exchange for executing a long-term lease

Purchase and Acquisitions of Financial Institutions in Africa- The case of Crane Bank Uganda.

Mergers and acquisitions (M&A) activities have become an important channel for investment in Africa for both global & local market players.  Over the past decade, Africa’s real GDP grew by 4.7% a year, on average—twice the pace of its growth in the 1980s and 1990s. Therefore, the continued desire to purchase and acquire financial institutions in Africa is not by accident. As the continent readies itself for post-pandemic recovery, the opportunities presented by the AFCFTA across Africa and the post-pandemic focus will remain key factors in attracting valuable mergers and acquisition activity. This article examines the case of Crane Bank Uganda Limited (CBL) in Uganda and offers insights on the role of central banks as statutory liquidators and the risks businesses must avoid while doing business in Africa.

CBL was closed and placed under receivership by the Bank of Uganda (BOU) in September 2016 following an audit report that revealed insufficient capital levels, shrinking liquidity ratios, surging loan default levels, and gross mismanagement, among others. The non-performing loan ratio recorded in the bank’s credit portfolio was estimated at 30 percent, a figure higher than the overall industry loan default rate that stood at less than 10 percent during the same period. Bank of Uganda subsequently transferred assets of CBL to DFCU Bank (a rival bank in Uganda) in an acquisition transaction the subject of this article.

Dr. Sudhir Rupareila (largest shareholder) was subsequently sued by BOU as a liquidator for siphoning $111.8 million from the failed bank over three years. The Liquidator equally sought recovery of 48 properties forming CBL’s branch network across Uganda held in the names of Dr. Sudhir Rupareila and Meera Investments as shareholders of CBL.

Uganda’s auditor General’s report revealed that BOU did not carry out a valuation of the assets and liabilities of CBL but relied on the inventory report and due diligence undertaken by DFCU in accepting their bid. BOU invited DFCU to bid for the purchase of assets and assumption of liabilities of CBL on 9th December 2016 while DFCU submitted the bid on the 20th December 2016 a day before the production of the inventory report.  It is not surprising that DFCU 2021 results showed it had lost UGX313 billion or 12% of its customer deposits. Deposits with their lending dropping by 15% from UGX1,775.3 billion to UGX1,508.4 billion affecting the value of their total assets by nearly 10%

Parliament probe into the sale of CBL revealed that there were no guidelines or policies in place to guide the identification of the purchasers of banks to determine the procedures for the sale and transfer of assets and liabilities of the defunct banks to the eventual purchasers and that BoU did not document the evaluation of alternatives and the assumptions arrived contrary to section 95 (3) (b) of the FIA, 2004.

The reliance by BOU on the due diligence undertaken by an interested party and eventual purchaser was imprudent, and an abdication of its role under section 95 (3) of the FIA, 2004. BoU in conducting this sale owed a fiduciary duty and duty of care to ensure that all its activities are conducted in the best interests of the financial institution. Interestingly, the Supreme Court of Uganda on the 25th day of June 2022 placed a check on the supposed blanked authority of BOU as a statutory liquidator holding that liquidation of the defunct Crane Bank did not affect its corporate existence as a company. Once liquidation ended, the Shareholders were entitled to reclaim whatever assets were held by the company after the statutory liquidation. The Directors of Crane Bank successfully blocked the takeover of properties claimed by BOU as statutory liquidator as forming and parcel of the liabilities taken over by DFCU upon acquisition of the defunct bank.

Over-collateralization in Loan Transactions

Availability of credit and at competitive prices are major factors that promote the growth of businesses. Two of the main problems that face Ghana’s small and medium-scale enterprises arethe unavailability of credit and the cost of credit. A critical look at this problem reveals that it is not primarily unavailability but rather, the conditions for accessing available credit that most entities are unable to meet. In particular, the requirements for businesses to provide comfort to financial institutions on their ability to repay the loan and acceptable collateral as a fallback measure in the event that they are unable to repay.

We will take a look at the issues relating particularly to collateral arrangements from both the perspective of borrowers and lenders.

 

Funding of Businesses

Businesses require capital for their operations to generate income. Capital is provided in two main ways through the resources of the business owner or by borrowing from relatives, friends, business associates or financial institutions. Financial institutions lend money to make money. Two factors primarily determine the ability of businesses to obtain credit from financial institutions first, the legal capacity of the entity and second, its creditworthiness.

For a business to be credit-worthy, it must demonstrate its ability to repay the loan given. It can do this by showing that there are potential future receivables that will be available to repay the loan. A business must demonstrate that:

(a) it is able to undertake its required business activities (either produce the products or render the services for which is has been set up);
(b) it has potential consumers or clients ready to take and pay for the products or services (sometimes providing evidence of secure commitments from consumers or clients); or
(c) the income is sufficient to sustain its operations and repay the loan taken.

Lenders will look at the whole business cycle of the entity to conclude on the above factors. Assessing the operations of the business including its potential income is, therefore, key to the ability of the business to secure credit. This will also include looking at the borrower’s previous financial statements to determine the past financial performance of the business. In spite of the borrower’s ability to meet the above conditions, there are events that could happen in the future which may affect the above factors. Lenders, therefore, want a fallback measure to recover loanswhere such future events occur. This introduces the issue of collateral. Typically, if lenders are assured of the above position, the issue of collateral may not arise.

Collateral

Collateral generally covers fallback guarantees and securities available to a lender in the event the borrower defaults in repaying the loan as agreed under the loan agreement. Collateral or security interest may generally cover:

(a) personal guarantee of owners (shareholders) or directors of the company, relatives/friends or business associates;
(b) charges over the assets of the borrower which can include mortgage granted over landed property, charges over vehicles, equipment and machinery, receivables, proceeds andaccounts, rights under various contractual documents, etc;
(c) mortgages or charges over property of owners (shareholders) or directors;
(d) pledge over shares of the borrower (if a company);
(e) pledge of assets;
(f) deposit of title documents;
(g) provision of bills of exchange including post-dated cheques, promissory notes, etc.

Collateral is a fallback measure. Lenders do not grant a loan primarily with a view to enforce the fallback measure (collateral). Lenders must, therefore, require and obtain any of the above collateral only after assessing that there are potential risks to the operations of the business which may affect the future receivables that will be used for the repayment of the loan.

Over-collateralization

Imagine you have a house valued at Ghc150,000. You have applied to the bank for a loan of GHc10,000 for your company and the bank has requested the house as collateral. In addition, the bank has asked that you provide a personal guarantee in the event the company is unable to pay. Then, for good measure, the bank has asked that you pledge your shares in the company as collateral. This situation is the over-collateralization situation. Another example may be where on an application for a personal car loan, the financial institution requires a guarantee from your employer, your salary to be passed through the financial institution with charge over the account, a charge over the car, assigning proceeds from comprehensive insurance over the car, and taking life insurance with proceeds assigned to the financial institution. This is after the usual requirement for the borrower to pay upfront 10 – 25% of the cost of the car. The situation can be compared to intending to kill a fly with a sledge-hammer. From the borrower’s perspective, that is problematic. The issue of over-collateralization has been one of the silent factors discouraging businesses from accessing credit.

Whilst financial institutions may see it as fully underwriting all possible risk, this adds to the cost of credit particularly since the security documents must be stamped and perfected. The cost of stamping is 0.5% of the secured amount for the principal security, and 0.25% of the secured amount for each additional security. It does not matter if all the security are included in the same document. This must be a problem for the financial institution itself as it makes the institution less competitive. Such cost, together with the interest charged, processing and other applicable fees make the cost of obtaining a loan prohibitive for businesses. This feeds into the narrative of high cost of lending. In order to be competitive, financial institutions must be mindful of the type of security and number of securities to take as a fallback position in the event of default of the borrower. A number of ways are suggested below for consideration by financial institutions.

Avoiding over-collateralization

Any of the suggestions below must be implemented within the context of assessing the potential risks that the collateral is to cover. In order to avoid over-collateralization, the following can be implemented:

1. It is not in all cases that a financial institution must request for a collateral. Lenders must assess the creditworthiness of businesses who require loans. Collateral will not be necessary if a business is able to sufficiently demonstrate to a lender that, it is able torepay.
2. Avoid multiple securities which add no additional value. If the value of one security is enough to settle the loan plus interest, stick to one. What is important for financial institutions is that, the value of the collateral is 120% of the value of the loan granted.
3. There is no need to take separate security interests over many assets which essentially are related without any added value. For example, taking a charge over assets of the company and at the same time, taking a pledge of all the shares of the company from its shareholder. There is a direct relationship between assets and value of shares.
4. In case of multiple securities, cap the secured amount relating to each security. An asset valued at Ghc10,000 should not be stated to secure a loan of GHc150,000. The secured amount and the loan amount need not be the same. This will reduce the costs associated with lending, particularly, stamp duty cost.
5. There is no need to take security over assets and another security over the proceeds from the assets. The new Borrowers & Lenders Act has statutorily provided that a security interest in collateral automatically extends to its proceeds. Consequently, doing so will only lead to additional stamp duty cost with no commensurate benefit.
6. Administration under the new Corporate Insolvency & Restructuring Act now provides a viable option for a creditor to recover loan amount. Administration allows creditors together with the administrator to restructure an insolvent business to continue as a going concern in order to settle its liabilities. This option should be explored in the event of default.

The suggestions above are not exhaustive and must be implemented within the specific context of the risk exposure the financial institution intends to cover.

Conclusion

It is important for businesses, especially small and mediumscale enterprises, to always assess the cost of borrowing prior to entering into any financial transaction. A business must check its financial health and ensure that repayment of loans will not have the potential to cripple the business. Where security is required, the business must ensure that the security provided is commensurate with the loan amount plus interest. As much as possible, businesses should attempt to negotiate fair collateral packages rather than settling for over-collateralized loans out of desperation for a loan. Financial institutions should have policies on requirements for collateral and nature of security to take. This will feed into the competitiveness of financial institutions.

Many businesses require financing for growth and financial institutions also need to provide these credit facilities in order to grow. Although lending and borrowing may seem like an everyday transaction and fairly straightforward, it is particularly important for lenders to aim at reducing credit cost while providing financing to businesses. This will make loans more accessible for all types of businesses and will ultimately contribute to business and financial growth for both lenders and borrowers. A win-win for all.

Is Ghana’s Power Sector Ready for Renewables?

Replacing traditional sources of energy completely with renewable energy is going to be a challenging task. However, by adding renewable energy to the grid and gradually increasing its contribution, we can realistically expect a future that is powered completely by green energy -Tulsi Tanti.[founder of Suzlon Energy]

Ghana’s renewable energy sector again took centre stage at the 2022 COP27 where the President of Ghana assured world leaders of Ghana’s commitment to increase renewable energy in its energy mix as part of the nation’s framework on energy transition. In 2010, Ghana set a target to increase the proportion of renewable energy (solar, wind, mini-hydro, and waste to energy) in its energy mix by 10% by 2020 under the Energy Sector Strategy and Development Plan.  This led to the passing of the Renewable Energy Act (Act 832) in 2011 to provide the legal and regulatory framework for renewable energy activities in the power sector. However, according to the 2020 Energy Outlook for Ghana, by the end of 2020, Ghana had attained less than 2% renewable energy in its energy mix. The 10% target has now been pushed to 2030 under the Strategic National Energy Plan (2019). Achieving this target is heavily dependent on private sector participation in power generation. This article highlights the current state of private sector participation in the renewable energy sector and some challenges that make the sector unattractive for private investment. Some suggestions on what can be done to improve the sector are also discussed in the article.

Status of Ghana’s renewable energy sector

Ghana is endowed with abundant renewable energy potential such as solar, wind, biomass, wave, and tidal energy. Act 832 defines “renewable energy sources” as renewable non-fossil energy sources like wind, solar, geothermal, wave, tidal, hydropower, biomass, and landfill gas. Hydro was also defined as water-based energy systems with a generating capacity not exceeding 100MW (i.e. small-scale hydro). Among these, solar energy has been the most popular due to environmental and social factors.  The Energy Commission, which is the regulator of the sector, has since 2011 issued over 140 licenses for the development of grid-connected solar, wind, biomass, waste-to-energy, and small-scale hydro-renewable projects which demonstrates interest in the sector. However, only eight (8) projects have been developed so far. This is one of the reasons the Energy Commission has since 2017 placed a moratorium on the issuance of wholesale supply licenses for the renewable energy sector.  There are seven (7) solar plants, four of which are owned by state-owned power producers (i.e. Volta River Authority and the Bui Power Authority) and two owned by independent power producers (IPPs); one small-scale hydro plant owned by Bui Power Authority and one biomass power plant owned by an IPP. The installed capacity of these seven projects is 112.1MW which constitutes 2.1% of the total installed energy capacity of 5,449.1MW.

With the amendment of Act 832 in 2020, the definition of “hydro” has been amended to remove the capacity restriction and so, all hydro plants regardless of capacity are considered renewable resources. This brings the Akosombo, Kpong, and Bui hydro plants (which together constitute about 28% of the installed capacity) into the renewable energy mix.

Attempts to attract private sector investment

Generally, the cost of renewable energy projects is known to be high in comparison to non-renewable projects due to factors such as the cost of the technologies, difficulty in obtaining equipment and spare parts, and difficulty in finding the expertise for development, operation, and maintenance. However, project costs have been reduced over the years due to increased investment (public and private) in projects, technologies, and the capacity of the developers. One of the major attempts by states to promote renewable energy is to create an enabling investment climate for renewable energy through its legal and regulatory framework.

Ghana’s Renewable Energy Act has attempted to promote investment in the sector by introducing many incentives. These include:

  1. a mandatory connection policy where transmission and distribution system operators are obliged to provide connection services for electricity from renewable energy;
  2. a renewable energy purchase obligation where distribution companies and bulk consumers are required to procure a percentage of their total purchase of electricity from renewable energy sources;
  3. a feed-in-tariff system comprising of a tariff rate determined by the Public Utilities Regulatory Commission (PURC) which was substantially higher than tariffs for power from other sources and was guaranteed for a ten (10) year period; and
  4. the development of the Renewable Energy Fund to provide financial support for the promotion, development, and utilization of renewable energy.

However, with the amendment of the Act in 2020, the purchase obligation is now limited to only bulk consumers. Also, the feed-in-tariff system has been replaced with a competitive procurement system for the purchase of power from renewable energy suppliers. The scrapping of the feed-in-tariff rates may be a result of the reduction in the price of renewable energy systems and the resultant reduced cost of power generation.

Challenges

Considering the number of privately developed renewable energy projects in Ghana, it is clear that the sector has not seen as much private sector investment as expected. Some challenges identified are discussed below.

  1. Access to long-term affordable local funding to minimize capital costs is a major challenge faced by players in the sector. Although the Renewable Energy Fund has been set up by the Act, a cursory glance at the government budget over the years does not indicate any specific allocations to the Fund although budgetary allocations are made for renewable energy development. Related to this is the high cost of financing for power projects in Ghana due to Ghana’s high-risk profile for power projects stemming from the country’s credit rating, history of legacy debt, and potential political risks from changes in government or government policy decisions. These risks tend to make financing more expensive. Also, since there are limited local sources of funding, most players depend on external sources of funds which are usually priced in foreign currency and expose the player to foreign exchange risks.
  2. Another challenge relates to the solicitation process for power projects. Historically, power purchase agreements (PPAs) have been procured through unsolicited proposals from IPPs. This is one of the reasons for the deemed oversupply situation in Ghana which led to the termination and re-negotiation of some PPAs by the Government of Ghana in 2018. In the absence of a transparent, competitive power procurement process that is based on a needs assessment, private players cannot risk such investments. It is worth noting that in 2019, the government issued a policy for the Competitive Procurement of Energy Supply and Service Contracts. However, this policy is yet to be fully implemented.
  3. The limited availability of experienced personnel in Ghana to construct, operate, and maintain renewable energy technology is also a challenge for private players in the sector. The absence of local capacity necessitates expensive foreign expertise which increases project costs. The Energy Commission (Local Content and Local Participation) (Electricity Supply Industry) Regulations (L.I. 2354) which was passed in 2017 intends to bridge the local capacity gap by including mandatory training and employment of locals to build local capacity over time, adequate monitoring is required to achieve local content objectives.
  4. Land acquisition is also a major challenge for renewable energy projects especially solar and wind which usually require large tracts of land. Land acquisition in Ghana is, however, fraught with a lack of certainty on ownership of land, multiple sales, and encroachment on project sites. These challenges with land acquisition do not attract investment in the sector.
  5. Another challenge is the knowledge gaps in the potential of renewable energy. The general perception is that renewable energy is expensive due to the high initial costs and therefore, renewable energy is not regarded as an economical source of power especially for non-residential purposes. However, the costs of renewable energy technologies have reduced significantly over the years making it a cost-effective source of power compared to non-renewable sources. Also, the role of renewable energy in reducing carbon emissions and combating climate change makes it not only economically beneficial but environmentally sustainable.

Recommendations

A lot can be done to make our renewable energy sector more attractive.

  • First, the institutional framework must adopt a more “investor-friendly” approach. This may take the form of creating a well-resourced Renewable Energy desk at the Energy Commission which liaises with other regulators particularly, GRIDCo, the Environmental Protection Agency (EPA), Lands Commission, Ghana Investment Promotion Centre (GIPC), Ghana Immigration Service, National Fire Service and local authorities for all the permits, licenses or any other assistance the developer may require from these institutions. Such a one-stop shop for all regulatory matters will simplify the process for market entry and operation.
  • Also, incentives can be introduced to promote private-sector participation. This may take the form of discounted prices for license and permit applications from regulators, provision of land or support with land acquisition, and assistance with access to utility and infrastructure. Also, the development of a carbon market for the trading of carbon credits can be explored as an option to incentivize companies to reduce emissions. For example, the development and utilization of renewable energy power projects will generate carbon credits for organizations which can be traded. Certainly, such a market will require some regulation, and the Government of Ghana has indicated that a carbon market policy is being developed. Such incentives will encourage investment in the renewable energy sector.
  • Another way of enhancing participation in the sector is to develop and implement a procurement process that is open, transparent, competitive, and based on a needs assessment. Also, all state entities and agencies must be aligned with this policy to ensure uniformity across the sector. This will help to create certainty in the sector which will encourage private sector participation.
  • In line with the objective of the Local Content Regulations, there must be emphasis on technical training and capacity building which aligns with the needs of the renewable energy industry. This will require coordinating with the technical and academic institutions to ensure that the training provided by these institutions aligns with the capacity needs of the industry. Moreover, the implementation of the Local Content Regulations must balance the interests of both local and foreign players so as not to discourage foreign participation. To this end, the Energy Commission should develop a pool of qualified domestic players and service providers that foreign players can partner with to meet local content and local participation requirements.
  • Admittedly, access to local funding is crucial and Ghana may not be in the position to provide grants from internally generated funds. However, some sources of local funding can be exploited. For example, The 2021 Guidelines on Investment of Tier 2 and 3 Pension Scheme Funds have introduced Green Bonds as part of the products in which pension funds can invest. According to the Guidelines, pension funds can invest up to 5% of the Scheme Asset under Management (AUM) in Green Bonds and this can be used to provide local funding for renewable energy projects. Also, the Ghana Infrastructure Investment Fund (GIIF) and the newly set up Development Bank of Ghana (DBG) can look into creating sustainable financing products or programs designed specifically for the sector. There are numerous external funds that Ghana can take advantage of to enhance its renewable sector. For example, Ghana has benefited from several grants and programs of the African Development Bank such as the Sustainable Energy Fund for Africa (SEFA), Leveraging Energy Access Finance Framework (LEAF), and the Scaling-Up Renewable Energy Program in Low-Income Countries (SREP) for investment in various aspects of the renewable energy sector. These funds must be applied judiciously towards accessible local financing either through direct government funding or incentivizing local commercial banks to finance renewable energy projects.
  • Finally, to increase demand for power from renewable sources, effort must be put into creating public awareness of the need to support the sector as a way of combating climate change and its associated effects. With the combined efforts towards environmental sustainability, it can be expected that there will be increased demand for renewable energy power as a way to reduce carbon emissions. This can already be seen in the growing interest in solar systems for homes, green offices, electric vehicles, and solar-powered streetlights, among others.

Conclusion

The opportunities for renewable energy exploitation in Ghana are endless. For developing countries like Ghana, the transition from conventional energy to green energy will be gradual but must be intentional. To see real impact, the investment climate must support private sector participation if Ghana must meet and possibly exceed its 10% renewable energy mix target by 2030.

The laws are not to blame? A commentary on the non-performance of state-owned enterprises in Ghana.

 “SIGA is a new institution and I expect that you would help develop a new culture… the attitude must be new king, new law; a new authority, a new culture; a culture of accountable governance and of respecting the norms; sensibilities and practice of good corporate governance.”

These were the words of the President of the Republic of Ghana during the launch of the State Interests and Governance Authority (SIGA). SIGA is the new authority established under the State Interests and Governance Authority, Act 2019 (Act 990)  (‘the SIGA Law’) to ensure that companies and other entities in which the government holds shares are efficiently run and adhere to good corporate governance, and ultimately make profit.

Typically, state-owned enterprises are established for the following reasons:

  • Addressing market failures by providing public goods and funding for key infrastructure projects.[1]
  • Supporting vulnerable social groups by protecting jobs in so-called sunset industries.[2]
  • Ensuring stability and affordability of public utility prices.[3]
  • Promoting industrialization, particularly by launching new industries with significant start-up costs and long-term investments.[4]
  • Limiting non-state ownership in specific industries such as the arms and network industries (for national security reasons).[5]
  • Serving as vehicles of innovation, knowledge dissemination, and technological spin-offs.[6]

Entities with state interest

In many of the world’s major economies, state-owned enterprises play an important role[7] and the case in Ghana has been no different.

In many of the world’s major economies, state-owned enterprises play an important role and the case in Ghana has been no different.

After Ghana attained independence, the government realized the need to develop the economy in certain major areas. The government felt that some services were so fundamental that the companies that provided them had to be controlled by the State and not left completely in private hands.[8]

Successive governments have therefore owned or held stakes in businesses operating in key sectors of the economy such as agriculture, agro-processing, mining, commodity trading, manufacturing, utility service provision, and hospitality. This deliberate policy led to the establishment of a myriad of entities with varying levels of government ownership and control.

Under the SIGA Law, businesses that are owned in whole or part by the government are classified under four main groups. They are either State-Owned Enterprises, Joint Venture Companies, or Other State Entities.

State-owned Enterprises (SOEs) are entities whose shares are wholly held or controlled by the Government of Ghana. They are usually entities set up for commercial purposes and may take the form of special-purpose vehicles like ESLA Plc. and Ghana Amalgamated Trust (GAT).[9]

The last published State-Ownership Report by SIGA[10] stated that there are a total of 132 SOEs in Ghana.

Joint Venture Companies (JVCs) are business arrangements in which different persons or entities contribute capital, labor, assets, skill, experience, knowledge, or other resources useful for the business and share the profits and risks associated. Under Ghana’s State Ownership law, JVCs are those entities in which the government holds majority or minority shares.

Other State Entities (OSEs) are entities that, though not wholly or partly owned by the State, are nevertheless brought under the purview of the SIGA. The Minister of Finance, with supervisory authority over the SIGA, has the power to declare an entity as a Specified Entity; thus, bringing it under SIGA‘s ambit. Examples of Other State Entities are regulatory bodies and statutory agencies.

This article is an inquiry into the issues that underlie the poor performance of a significant number of entities with state interest and provides a commentary on whether the challenges are attributable to the legal regimes that have governed state-owned enterprises.

Down memory lane

State Enterprise Secretariat (SES-1965)

The SES-1965 was first set up by the State Enterprise Secretariat (SES), 1965 Legislative Instrument (L.I. 47) to ensure the efficient running of state enterprises and was directly responsible to the President. The SES had four main divisions;

  • Planning and Statistics Division
  • Accounts and Audit Division
  • Inspectorate Division
  • Personnel and Training Division

A look at the structure of the SES-1965 reveals that it was set up mainly to supervise and check the operations and financials of the fifteen (15) manufacturing enterprises and six (6) mixed enterprises that were under its jurisdiction.[11]  The SES-1965 was short-lived as a result of the 1966 coup, but it failed in its short lifespan to achieve its mandate because it did not wield the power to ensure that its efficiency measures were implemented.

Some scholars have attributed the SES-1965’s failure at the time to the blurring of the responsibilities of the President, Ministers, and the SES-1965 itself.[12]

State Enterprises Commission (SEC-1976)

The SEC-1976 was established by the Supreme Military Council Decree, 1976 (SMCD 10). This was a commission of a maximum of five members and headed by a chairman. The chairman was supposed to be a Ghanaian of distinction with a minimum of ten years of practical experience in an executive position in business or administration

It is interesting to note that to qualify for the chairmanship of SEC-1976, one had to be at least forty years of age. The rather interesting provision restricting the age of the chairperson may be attributed to the tensions that existed at the time between relatively junior officers in government and the senior commanders of the armed forces.[13] The senior commanders of the armed forces who had just captured power from junior military officers perhaps wanted to keep the younger ranked officers in check by preventing them from holding influential positions.

Its members were to be appointed by the political administration at the time[14] and the SEC-1976, as a corporate body, was answerable to the Head of State. The SEC-1976 had both advisory and executive powers over the operations of all statutory corporations. It could recommend the revision of the objectives of any statutory corporation, perform a management audit of officers of statutory corporations, review operations, staff strength, and conditions of service, as well as recommend the closure or reclassification of any entity that was ill-conceived or could not make a profit.

During a parliamentary debate on May 27, 1981, the following reasons were given as to why the SEC-1976 was unable to live up to expectations.

  • The range of functions and responsibilities assigned to SEC-1976 was too enormous for its size and capacity.
  • It never had its full complement of members over the entire period of its existence.
  • It did not have the staff strength and competence to effectively supervise and control the operations of the corporations.
  • It had no say in the appointments of the chief executives and directors on the Board.
  • There was an overlap in the mandate of some of the ministries and the state-owned enterprises, resulting in unnecessary political interference. This was worsened by the fact that the ministries themselves did not have the time or expertise to supervise or coordinate the corporations.
  • Notwithstanding the challenges associated with ministries, the corporations tended to gravitate toward their parent ministries in dealing with their operational challenges rather than SEC-1976.
  • The government did not provide the needed capital and financial support.

State Enterprises Commission (SEC-1981)

The SEC-1981 was established by the government of the Third Republic of Ghana after a period of military rule. The enactment of the State Enterprises Commission Act, 1981 (Act 433) replaced the State Enterprises Commission (SEC-1976)One of the key features of SEC-1981 was that it had no executive powers and its functions were mainly advisory.

While the totality of SOEs made a loss during the year in review,

SOEs with minority government interests made a profit.

The State Enterprises Commission Act, 1981 (Act 433) separated the commercial corporations from non-commercial ones. The functions of the SEC-1981 were limited to the industries that were intended by the government to act as purely commercial entities and operate on commercial lines. This change was a reaction to the lack of capacity of the SEC-1976 to adequately supervise all the covered entities.

State Enterprises Commission (SEC-1987)

This was set up by the State Enterprises Commission Law, 1987 (P.N.D.C.L. 170) which repealed the SEC-1981.  It had thirteen objectives, many of which were a repetition of the objectives of its predecessors. Some of the new objectives were the examination of investment proposals of the entities, ensuring the payment of appropriate dividends to the government, recommending government guarantees, credit, and financing, provision of consultancy services at an agreed fee to be paid into the Consolidated Fund, and the possibility of engaging the services of a consultant where it requires such services.

Entities with state interest[15] were required to submit annual reports and any documents required to the SEC-1987. PNDCL 170 proscribed any expansions or modifications without the approval of a feasibility report by the SEC-1987. The SEC-1987 was answerable to the President through the Minister. The SEC-1987 also had disciplinary powers in the form of recommending the dismissal, suspension, or forfeiture of an officer who contravened the provisions of the State Enterprises Commission Law, 1987 (P.N.D.C.L. 170).

State Interests and Governance Authority (SIGA)

SIGA was established by the enactment of the State Interests and Governance Authority (SIGA) Act 2019 (Act 990) after the findings of a joint Government of Ghana and World Bank study[16] recommended that the management of SOEs be streamlined and centralized under the government’s oversight to strengthen corporate governance, transparency, and accountability.

Under Act 990, SIGA has five objectives, which are to:

(a) Promote within the framework of government policy, the efficient or where applicable, profitable operations of specified entities;

(b) Ensure that specified entities adhere to good corporate governance practices;

(c) Acquire, receive, hold, and administer or dispose of shares of the State in state-owned enterprises and joint venture companies;

(d) Oversee and administer the interests of the State in specified entities; and

(e) Ensure that:

(i)  State-owned enterprises and joint venture companies introduce effective measures that promote the socio-economic growth of the country including, in particular, agriculture, industry, and services per their core mandates; and

(ii) Other State entities introduce measures for efficient regulation and higher standards of excellence.

It, however, has as many as thirteen functions as opposed to the two of its immediate predecessor. Notable among these functions are the development of a Code of Corporate Governance, assessing the borrowing levels of SOEs by the Public Financial Management Act[17], advising the government on the removal of chief executive officers and board members of SOEs, coordinating the sale and acquisition of entities with state interests, ensuring adherence to annual performance contracts signed by entities with state interest and advising the minister with oversight over the authority.

Having gone back in time to scan the legal regime governing entities with state interest, it is clear that most of the predecessors of SIGA had the power to punish, or at least, recommend the removal of officers who failed to perform their corporate governance duties.

The current law, Act 990 specifically in sections 4 (i) and (j), empowers SIGA to:

(i) Advise the sector minister on policy matters for effective corporate governance of specified entities;

(j) Advise government on the appointment and removal of chief executive officers or members of the boards or other governing bodies of specified entities;

These wide powers notwithstanding, SIGA, in its latest State Ownership Report[18], only lamented the failure of entities with state interest “to honor their reporting obligations”, and noted that it is “a flagrant violation of the Public Financial Management (PFM) Act, 2016 (Act 921)” and condemned the practice as “a most unfortunate development that needs to be remedied’’.

The paradox of performance

From the foregoing, it can be concluded that the inability of entities with state interest to be efficient and profitable is not caused by a poor legal regime, but by poor implementation of the legal regime. It appears that the less interest the government has in a commercial venture, the more likely it is that the entity will be run efficiently and profitably.

In 2020, SOEs (wholly government-owned) recorded an aggregate loss of GH¢2.61billion while JVCs (with 10-50 percent government ownership) recorded an aggregate profit of GH¢11.81million. Entities in which the government holds an interest of not more than 10 percent[19] made an aggregate profit of GH¢11.25billion.

Although these figures ought to be considered within the context of the impact of the COVID-19 pandemic, the trend is quite conspicuous. While the totality of SOEs made a loss during the year in review, SOEs with minority government interests made a profit.

While the totality of SOEs made a loss during the year in review,

SOEs with minority government interests made a profit.

SOEs and JVCs have been reporting net losses and net profits, respectively for quite some time now. Net loss for SOEs in 2017 stood at GH¢1,289million compared to net losses of GH¢2,115million and GH¢30,144million for 2016 and 2015 respectively. JVCs made net profits of GH¢711million in 2016 and GH¢800million in 2017.[20]

Appointments of key personnel to SOEs are usually spoils of war to the lieutenants who fought alongside the king in the trenches during the election campaign. This practice, which was identified as far back as the days of the State Enterprise Secretariat in 1965, must be changed, or at least, balanced with a mechanism that compels the rewarded lieutenants to comply with the corporate governance principles enshrined in the law.

If these are not done, irrespective of the number of times the king changes the law, or the institution implementing the law, the words of Jean-Baptiste Alphonse Karr will still hold truth.

“Plus ça change, plus c’est la même chose”, to wit:  the more things change, the more they stay the same.

“Turbulent changes do not affect reality on a deeper level other than to cement the status quo. A change of heart must accompany experience before lasting change occurs.”

References

[1] Vickers, John, and George Yarrow. 1991. “Economic Perspectives on Privatization.” Journal of Economic Perspectives, 5 (2): 111-132.

[2] H. Christiansen Balancing Commercial and Non-commercial Priorities of State-Owned Enterprises. OECD Corporate Governance Working Papers no.6 OECD Publishing, Paris (2013)

[3] P. Matuszak, B. Kabaciński Non-commercial goals and financial performance of state-owned enterprises – some evidence from the electricity sector in the EU countries J. Comparative Econ. (2021), 10.1016/j.jce.2021.03.002

[4] A. Musacchio, S.G. Lazzarini Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond (first ed.), Harvard University Press (2014)

[5] Robinett Held by the Visible Hand: the Challenge of State-Owned Enterprise Corporate Governance for Emerging Markets World Bank, Washington, DC (2006)[5]

[6] P. Castelnovo, M. Florio Mission-oriented public organizations for knowledge creation L. Bernier, M. Florio, P. Bance (Eds.), The Routledge Handbook of State-Owned Enterprises, Routledge, London & New York (2020)

[7] Maciej Bałtowski, Grzegorz Kwiatkowski, State-Owned Enterprises in the Global Economy June 2, 2022, by Routledge

[8] Mr. K.Addai-Mensah, Member of Parliament for Bantama during the Second Reading of the State Enterprises Commission Bill May 22, 1981

[9] State Ownership Report 2020 – Ministry of Finance of the Republic of Ghana

[10] State Ownership Report 2020 – Ministry of Finance of the Republic of Ghana

[11] Public Corporations in Ghana (Gold Coast) during the Nkrumah Period – Dr. Dennis K Greenstreet

[12]   Public Corporations in Ghana (Gold Coast) during the Nkrumah Period – Dr. Dennis K Greenstreet

[13] Singh, Naunihal (26 August 2014). Seizing power: the strategic logic of military coups. Baltimore, Maryland: Johns Hopkins University Press. pp. 89 & 139. ISBN 978-1421413365.

[14] The Supreme Military Council

[15] With the exemption of 79 entities stated in the Schedule to P.N.D.C.L. 170

[16] On the corporate governance framework of the various SOEs from the year 2013 to the year 2015.

[17] Public Financial Management (PFM) Act, 2016 (Act 921)

[18] 2020 State Ownership Report

[19] Mostly mining companies

[20] 2017 State Ownership Report