Our positive outlook for private participation in Ghana’s infrastructure sector is underpinned by the country’s considerable PPP track record and project pipeline, with energy and transport being key sectors for private investment opportunities.
While current renegotiations of take-or-pay agreements with independent power producers (IPP), which oblige the public utility to pay a fee for electricity it does not purchase from IPPs, will likely weigh on investor interest in the short term, we expect that they will contribute to lower electricity prices and a more financially sustainable IPP programme, particularly if coupled with a reform of electricity distribution.
In the transport sector, the prevalence of debilitated colonial railways will continue to provide ample opportunities for high-value brownfield concessions, following the completion of capital intensive port projects.
The adoption of a PPP law, currently awaiting approval by the cabinet and parliament, will decrease legal and policy risks for private investors in Ghana’s infrastructure sector. While we expect the depreciation of the cedi to decelerate, a persistent depreciatory trend will likely increase revenue risks for foreign investors.
Considerable PPP track record and pipeline underscore private infrastructure investment opportunities In Ghana
Our positive outlook for private participation in Ghana’s infrastructure sector is underpinned by the country’s considerable PPP track record and project pipeline, with energy and transport being key sectors for private investment opportunities.
A total $7.9bn of investment involving private participation in infrastructure since 2000 put Ghana among the top three Sub-Saharan African markets, after South Africa and Nigeria, two significantly larger economies.
The country’s power sector has attracted the largest part of this private investment, $4.3bn, spread across eleven individual projects. Port projects, which attracted $2.1bn, are dominated by the $1.5bn investment in the expansion of Tema port.
Ghana In SSA Top Three For Private Infrastructure Investment
Selected Markets – Private Investment In Infrastructure Since 2000
Source: World Bank, Fitch Solutions
According to our proprietary Fitch Solutions Infrastructure Key Projects Database, public-private partnerships account for almost 20% of planned infrastructure projects in Ghana, highlighting that PPPs will continue to play a significant role in Ghana’s infrastructure sector.
The pipeline of planned PPPs again underscores the significant potential of Ghana’s power sector, as electricity projects account for the pipeline’s largest share. Independent power producers (IPP) play a significant role in Ghana’s power sector, with IPPs contributing a large share of installed capacity.
However, a significant debt burden, with outstanding arrears towards IPPs exceeding $1bn, have prompted the state-owned Electricity Company of Ghana to renegotiate standing power purchasing agreements (PPA) with independent power producers.
While renegotiations of take-or-pay agreements, which oblige the public utility to pay a fee for electricity it does not purchase from IPPs, will likely weigh on investor interest in the short term, we expect that they will contribute to lower electricity prices and a more financially sustainable IPP programme, particularly if coupled with a reform of electricity distribution.
A recent concession of distribution in Ghana was cancelled quickly after its award, but we expect that the government’s existing readiness for privatising distribution will increase further following the national elections in December 2020.
In the transport sector, the prevalence of debilitated colonial railways will continue to provide ample opportunities for high-value brownfield concessions, following the completion of capital intensive port projects.
Currently, two rail projects worth a total $2.8bn are being constructed as public private partnerships respectively involving German and Indian companies and financiers, indicating foreign investors’ confidence in Ghana’s potential as a gateway to West Africa and its hinterland.
Positive legal and policy outlook contrasts with muted view for exchange rate risks
The adoption of a PPP law, currently awaiting approval by the cabinet and parliament, will decrease legal and policy risks for private investors in Ghana’s infrastructure sector.
According to our proprietary Infrastructure Risk/ Reward Index, Ghana’s risk profile already outperforms the Sub-Saharan African average.
Furthermore, our risk outlook for infrastructure investments is tipped to the upside, as the country’s long-term economic risk score exceeds its short-term economic risk score – an agreeable outlook for PPPs’ long-term attractiveness.
Ghana risk profile outperforms regional average
Ghana and SSA Region Infrastructure Risk/Reward Index
Scores out of 100, Higher Score = More Attractive Market. Source: Fitch Solutions Infrastructure Risk/Reward Index.
In 2011, the Ghanaian government implemented the National Policy on public-private partnerships and established the Public Investment Division as a coordinating entity under the Ministry of Finance.
In the absence of a PPP law, which currently awaits approval by the cabinet and parliament, the government has enforced the PPP policy by making project approvals conditional on compliance with the policy.
In light of this, we believe that investor sentiment will stabilise following an expected, albeit narrow, victory by the incumbent New Patriotic Party (NPP) in the upcoming elections in December 2020. In the medium- to long-term, the adoption of the PPP law will contribute to investor confidence by reducing legal risk.
Ghana has further ratified the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, compelling the country to recognise foreign arbitral awards.
Persistent currency depreciation keeps revenue risk elevated for international investors
Perceived revenue risks for international investors in Ghana’s infrastructure sector are expected to persist as the cedi’s depreciation is forecast to continue.
According to our Fitch Solutions Country Risk Team, depreciatory pressure on the cedi will remain in 2021, although the pace of depreciation will slow as the economy recovers from the Covid-19 outbreak. We expect the cedi to lose just 3.1% of its value against the dollar over the year on average, compared to 12.2% in 2020.
Ghana’s exports are expected to recover strongly in 2021 on the back of higher international oil prices, recovering cocoa exports and continued strength in gold shipments. However, imports will also rebound due to rising household consumption and business investment.
As a result, we forecast only a modest narrowing of the current account deficit to 3.8% of GDP in 2021. This persistent deficit will constrain the availability of dollars in the economy and ultimately drive further, albeit more moderate cedi depreciation.
Pace Of Cedi Depreciation To Moderate
Ghana – Exchange Rate, GHS/USD
f = Fitch Solutions forecast. Source: IMF, Fitch Solutions
Multilateral assistance to fund Ghana’s trade deficit will become more constrained once the global Covid-19 pandemic recedes and will also become increasingly conditional on the rebalancing of Ghana’s current account.
Given that rebalancing the external sector through fiscal austerity will be politically unattractive, we expect the government to partially rely on currency depreciation to curb the country’s current account deficit.
