US embassy cable - 04ACCRA1784

UNCLAS SECTION 01 OF 03 ACCRA 001784 
 
SIPDIS 
 
SENSITIVE 
 
MCC FOR ROD NORMAN 
TREASURY FOR ALEX SEVERENS 
 
E.O. 12958: N/A 
TAGS: KMCA, EFIN, ETRD, ECON, GH, MCA 
SUBJECT: READOUT OF MCC CEO PAUL APPLEGARTH'S VISIT TO GHANA 
 
Summary 
------- 
1. (SBU) Millennium Challenge Corporation (MCC) CEO Paul 
Applegarth visited Ghana August 23-24, conducting site visits 
and meeting with President Kufuor, Finance Minister Osafo 
Maafo, and the Ministry of Finance team in charge of 
preparing Ghana's Millennium Challenge Account (MCA) compact. 
 The GoG's MCA team outlined a preliminary MCA proposal, 
identifying infrastructure, agro industry, private sector 
development, social infrastructure and good governance as 
possible targets for MCC funding.  They envision a USD 
300-400 million program over four years.  GoG officials 
acknowledged they are in the early stages of the process, but 
aim to sign a compact before year-end.  CEO Applegarth also 
met with donor representatives.  End Summary. 
 
MCC Visit to Ghana 
------------------ 
2. (SBU) MCC CEO Applegarth, John Hewko, VP for Country 
Relations, Maureen Harrington, Senior Advisor to the CEO, and 
Rod Norman, Director, Africa Department, visited Ghana August 
23-24 to conduct meetings with GoG officials and civil 
society representatives.  They also visited sites that 
represent sectors the GoG is considering for MCC funding. 
The Ambassador and Embassy officers accompanied Applegarth 
and MCC staff for the August 24 meeting with President 
Kufuor, where Applegarth congratulated Ghana on its selection 
as an MCA-eligible country and assured the President that the 
MCC was prepared to work with the Finance Ministry team on 
developing a MCA compact.  (Comment:  Kufuor was pleased that 
the visit had gone smoothly and expressed his dedication to 
the MCA principles and intention to push for completion of 
the GoG MCA compact.  However, he was uncharacteristically 
subdued, and was clearly worn out by his constant campaigning 
throughout the country in the run-up to the December 
elections.  End Comment) 
 
August 23 Site Visits Highlight Energy and Agriculture 
--------------------------------------------- --------- 
3. (SBU) Applegarth, the Ambassador, and the MCC team visited 
Athena Foods Limited, a fruit juice processing company that 
receives USAID technical assistance.  GoG officials selected 
this site because, as company executives explained, while the 
company is rapidly increasing exports to the U.S. and Europe, 
lack of access to investment capital, congested ports, 
unreliable electricity and water supply, and low worker 
capacity have limited growth. 
 
4. (SBU) The GoG also organized a visit to Akosombo Dam to 
give Applegarth a visual idea of the energy sector issues -- 
inadequate generation and poor distribution -- that make it 
difficult to do business in Ghana.  Joshua Ofedie, CEO of the 
Volta River Authority (VRA), which operates the dam and is 
responsible for power generation and transmission in Ghana, 
explained that the dam, built in the 1960s, no longer 
produces sufficient power to meet Ghanaian demand, which is 
increasing at 10 percent a year.  Although the GoG 
supplemented hydro-power with petroleum-fired thermal power 
plants, high oil prices make it more economical to import 
electricity from Cote d'Ivoire's gas-fired plants.  Ofedie 
made a strong case for completing the West Africa Gas 
Pipeline, which will bring in cheap natural gas from Nigeria 
to power Ghana's current and planned thermal plants, and 
would also allow Ghana to export power in support of the West 
Africa Power Pool.  He also argued that major reforms are 
needed to improve transmission and distribution, some of 
which are ongoing with World Bank and other donor support. 
 
GoG Organizational Structure for MCA Compact Development 
--------------------------------------------- ----------- 
5. (SBU) The Government of Ghana (GoG) has established a 
"Core MCA Team," headed up by a London-based consultant, 
Michael Ansah, to manage the compact development process. 
This team is comprised primarily of Finance Ministry 
officials.  The "MCA Working Group," comprised of private 
sector and civil society representatives, and including the 
core group, will conduct the initial technical review of 
proposed projects and recommend a program to the "MCA 
Steering Group," which is comprised of eight cabinet 
ministers and two representatives of local think tanks.  The 
Steering Group will oversee the MCA Working Group, and will 
finalize the program and will vet it in public forums. 
 
Meeting with MCA Core Team 
-------------------------- 
6. (SBU) On August 24, Finance Minister Osafo Maafo and the 
MCA Core Team members briefed Applegarth on the team's work 
to date.  Team leader Ansah presented a preliminary outline 
of the GoG's plan to use MCC funds to support its overall 
strategy for economic growth, as outlined in the Ghana 
Poverty Reduction Strategy (GPRS).  Osafo Maafo emphasized 
that the consultation process is a key feature of their 
program and also explained that considerable consultation has 
already taken place and will continue so that full consensus 
is achieved.  Ansah explained that the components of the 
GoG's proposal would address Ghana's principal constraints 
and vulnerabilities. 
 
Constraints to Growth 
--------------------- 
7. (SBU) Ansah listed the constraints to growth in Ghana that 
MCA funding would address:  1) inadequate energy, roads, and 
telecommunications infrastructure; 2) financial capital, 
particularly the lack of long term credit; 3) inadequate 
health and education; 4) low agricultural productivity; 5) a 
weak private sector; 6) poor government coordination and 
monitoring; and 7) weak government institutions.  Osafo Maafo 
stressed that financial sector reform is also critical. 
 
Key Economic Vulnerabilities 
---------------------------- 
8. (SBU) Ansah and Osafo Maafo identified a number of 
critical vulnerabilities to growth that call for greater 
diversification of the economic base.  Ghana is heavily 
reliant on foreign exchange earnings from cocoa and gold 
exports, which together bring in 70 percent of total foreign 
exchange.  Crude oil consumes 25 percent of Ghana's foreign 
exchange earnings, and 25 percent of oil imports go to 
produce electricity.  Hydro-power is insufficient to cover 
local demand, and the GoG is increasingly concerned about the 
impact on the economy (and government budget) of high energy 
import costs. 
 
GoG MCA Concept -- A Summary 
---------------------------- 
9. (SBU) Ansah stated that the GoG's proposal would be 
anchored on investments in infrastructure, particularly in 
energy, roads and telecommunications, as the backbone for 
accelerating sustained growth in agro-based industry and 
private sector development.  The GoG's goal is to position 
Ghana as a major player in the ECOWAS market of 250 million 
consumers and would also make Ghana more competitive in the 
world market. 
 
10. (SBU) The GoG plan will also focus on expanding economic 
opportunities in rural areas by developing linkages between 
larger commercial businesses and rural production units.  The 
GoG will support the concept through efforts to develop a 
pro-active policy environment conducive to trade and 
investment.  The strategy would call for complementary 
efforts to strengthen health and education services and to 
develop a stronger institutional framework for addressing key 
economic policy and trade reforms.  The policy framework 
would also address capacity building of democratic 
institutions at all levels: national, regional and local. 
 
11. (SBU) Osafo Maafo echoed VRA CEO Ofedie's argument that 
the insecurity in energy supply and the related import bill 
is a serious impediment to growth and investment and, hence, 
to reducing poverty.  Energy will, therefore, figure 
prominently in the GoG's MCA compact.  Specifically, the GoG 
will want MCA to support completion of the West Africa Gas 
Pipeline (and gas distribution systems) and construction of 
new thermal power plants.  Other projects mentioned included 
the rehabilitation of Ghana's ports, developing large 
commercial farms and related export processing facilities, 
and reforming the financial sector. 
 
Policy Environment 
------------------ 
12. (SBU) Osafo Maafo stressed the GoG's commitment to a 
strong policy reform agenda.  He highlighted the ongoing 
effort to reform "public sector financial management" and 
stated that the GoG had pushed several laws through 
Parliament recently that were designed to improve financial 
management and auditing, and create a transparent and 
streamlined public procurement process.  The GoG is also 
implementing comprehensive financial sector reforms, 
beginning with new banking and insurance laws, and 
introducing legislation to encourage savings mobilization 
(Long Term Savings Bill) and capital market development (the 
Venture Capital Bill). 
 
Cost, Timeline and Outcomes 
--------------------------- 
13. (SBU) Ansah stated that the GoG's proposed budget for the 
program would be between USD 300 and 400 million over four 
years.  Osafo Maafo noted that the Core MCA Team would 
justify the price tag, costing out each of the elements and 
setting up an evaluation and monitoring program to ensure 
measurable results would be achieved.  The GoG's long-term 
goals for the MCA program are to increase employment, income 
and foreign exchange earnings.  Ansah estimated that 
investments in the energy sector would result in savings from 
lower oil imports of 15,000 barrels/day, the equivalent of 
about USD 900 million over the four-year period.  He said the 
target increase in foreign exchange earnings from higher 
exports is USD 1 billion/year; the target increase in GDP 
growth rate is 3 percent/year.  Osafo Maafo added that other 
objectives include increasing literacy rates and improving 
health and educational facilities. 
 
MCC Reaction to GoG Draft Proposal 
---------------------------------- 
14. (SBU) Given that this was the first opportunity to 
analyze the state of MCA preparations in Ghana, the MCC team 
limited advice and criticism and focused on pushing GoG 
participants to narrow the scope of their proposal. 
Applegarth noted that the preliminary proposal was very 
broad, covering almost every aspect of the economy.  He and 
other MCC team members argued that the GoG's goal should be 
to prioritize the various components and focus on the 
critical projects, their potential impact, and means to 
monitor and evaluate implementation and results. 
 
Next Steps 
---------- 
15. (SBU) The Core MCA Team plans to consult further with the 
MCA Working Group in developing its concept paper, which it 
will then provide to the MCC for review.  The goal for 
completing the concept paper is September 2004.  Following 
additional consultations with stakeholders, the GoG Cabinet 
and the MCC, the GoG will submit a draft proposal to the MCC 
later in the fall.  Ansah commented that the GoG's goal was 
to negotiate and sign a compact with the MCC by late fourth 
quarter of 2004. 
 
Donors Push for MCA as Budget Support 
------------------------------------- 
16. (SBU) During a lively dinner with other development partners, 
including the main participants in the Multi-Donor Budget 
Support group, donor representatives argued strongly in favor 
of running MCA funds through Ghana's budget.  Their main 
justification is that direct budget support encourages the 
government to take responsibility for managing the funds and 
promotes improved financial management and capacity building. 
 Applegarth responded that the U.S. government believes 
budget support encourages dependency, since the recipient 
government becomes accustomed to using the assistance to fund 
recurrent expenditures and begins to treat it as a reliable 
revenue stream.  However, he stated that he would be willing 
to continue this debate in the future. 
 
Comment 
------- 
17. (SBU) The GoG's presentation, while professional, gave 
the impression that MCA funds would somehow result in the 
overhaul of the entire economy.  Minister Osafo Maafo and his 
team agreed with MCC comments that it needs much more 
specificity.  The President and Minister Osafo Maafo are 
committed to the MCA program, and we are sure they consider 
completing a compact one of the GoG's top priorities. 
However, they and the entire government are distracted by the 
election campaign.  MCC CEO Applegarth's visit should 
reinvigorate the GoG effort, but their timeline may be overly 
ambitious.  End Summary. 
YATES