South African firms’ problems in Ghana highlight how investing in Africa is often trickier than it seems, says G Pascal Zachary

Mr Zachary is the author of "The Global Me: New Cosmopolitans and the Competitive Edge"

The west African country of Ghana faces a telephone crisis. State-owned Ghana Telecom, which is stuck with antiquated equipment, awful service and scant capital, needs a big injection of cash and a new management team. South Africa’s national phone company, Africa’s telecoms leader, has continental ambitions, money and the expertise to turn around an ailing phone carrier. So, early this year, Ghana’s government asked South Africa’s national telephone company to rescue Ghana Telecom.

The offer seemed inviting. Ghana’s telephone market is potentially lucrative. The country is the most tranquil in west Africa. A new government has stabilised the economy with an uncharacteristic (for Africa) brew of fiscal restraint. But telephony remains a central barrier to growth. Forty-five years after the country’s independence, Ghana Telecom provides only 200,000 landlines for a phone-starved population of 20 million. Mobile-phone usage has exploded in recent years and now outstrips wired telephony in volume, but landlines are essential for emerging business services.

Yet South Africa turned down Ghana’s invitation to manage its telecoms company. Why? Because having hit unforeseen hurdles in Ghana and elsewhere in Africa, South African investors are now thinking twice before taking the plunge. The upshot is that, eight years after the end of apartheid, South Africa’s economic influence on the rest of sub-Saharan Africa is less than it could be.

It is not all bad news. South Africa’s engagement in the sub-Sahara has grown rapidly. It sets the standard for foreign investment in many African countries, especially those in the southern cone. Even in Ghana, whose capital of Accra is 4,600 kilometres from Johannesburg, South African investors have made their mark, launching the country’s largest furniture store, buying a brewery, opening an important bank and launching a cable and satellite television service. South Africans have also invested in Ghana’s gold-mining industry. "Ghana is one of the better places to be in Africa," says Jan Mosterd, a South African who serves as managing director for west Africa of Barnetts, a furniture and appliance retailer.

Since entering Ghana in 1998, Barnetts has grown rapidly, opening eight stores in the Accra area. The company, a division of Profurn of Johannesburg, offers up-market goods at competitive prices and has brought a new professionalism to Ghana’s fragmented furniture and appliance businesses.

South African investors are put off by the lack of clear rules in Ghana governing competition in its telecoms sector

Most furniture and appliances in Accra are sold at roadside stands. The few proper stores are crowded and offer a limited choice. Barnetts, by comparison, displays refrigerators, televisions and living-room sets in spacious showrooms. In another innovation, the retailer offers customers the chance to pay for goods over time, making monthly payments on top of a 15% downpayment. Other retailers require full payment at purchase. "It was a new concept and we needed to explain and educate," says Barnetts’s Mr Mosterd.

Standard Bank Group of South Africa has also made inroads into Ghana, operating there (and in 14 other African countries) under the name of Stanbic Bank. Stanbic established its presence in Ghana in 1999 and now has three offices and 1,000 depositors. It earned a net profit last year (for the second year in a row). The bank concentrates its loan activities on a small number of larger borrowers, but plans to widen the customer base. Its officers are confident that their choice of Ghana will earn dividends over time. "The stage is set for more South African investors to come here," says Raymond Langmead, Stanbic’s general manager in Accra.

Opportunities in retail, services and banking illustrate Ghana’s potential for South African investors. But they also highlight the country’s limitations. Frustration over investment opportunities reflects a larger pattern in sub-Saharan Africa: many countries are struggling economically, and even when they win a promising investment they often cannot fully realise its potential.

Consider Ghana’s brightest business success in 2001: the opening of a high-tech facility by a US company that is a leader in offshore data processing. The company, ACS, processes insurance, credit-card and other forms from such customers as American Express, United Parcel Service and various health-insurance providers. Two years ago, ACS chose Accra as the home of its first African operation. The company grew rapidly, hiring nearly 800 people at a single site last year. The growth drew much attention in job-hungry Ghana. President J A Kufuor made a surprise visit to the facility and then asked the advice of ACS’s country manager, Bossman Hammond, on how Ghana might grab more jobs in the area of information technology.

Buoyed by the blessing of Ghana’s president, ACS planned to double its workforce. But it faced an unexpected problem. Though wage rates for data entry in Ghana are among the lowest in the world, the company was shocked to find that its office rent was the highest of any of its locations. ACS had initially rented space in a government-owned high-rise in central Accra. Even as President Kufuor lauded the new enterprise, government bureaucrats insisted that ACS could only obtain additional office space in the same building at prices that rivalled rents in New York or London. The bureaucrats were ultimately persuaded to lower the required rent, but not before ACS put its expansion plans on hold, pending the construction of its own facility elsewhere.

South African companies have also had some big disappointments. Recently, South African Airways sought to buy a stake in state-owned Ghana Airways, whose losses and poor service record have put a strain on both its customers and the government. Ghana Airways offers no commercial flights within the country and only spotty schedules around west Africa. The airline’s main foreign routes are to London and New York. South African Airways, with its international muscle, seemed like the sort of sophisticated partner that Ghana’s government might want. Yet the Ghanaian government, despite voicing a philosophical bent toward privatisation, has so far avoided tackling the airline’s chronic problems. It seems unwilling or unable to make bold decisions about the ailing carrier. Frustrated by the uncertainty, South African Airways recently withdrew from discussions.

In the case of Ghana Telecom, South African investors still seem well positioned to strike a deal. But according to people familiar with the situation, South Africans are put off by the lack of clear rules about competition in the telecoms sector and unrealistic expectations about the value of Ghana Telecom.

Ghana liberalised its telephone sector in the late 1990s, when it invited a US firm to compete against Ghana Telecom. But the company was stymied by a fundamental barrier to profitability: Ghana Telecom essentially capped the number of calls that its phone numbers could receive from the American firm’s customers. It did so by making an insufficient number of switches available to handle traffic between the two companies. The rapid growth in mobile-phone volume, meanwhile, outstripped Ghana Telecom’s ability to open enough circuits between wireless and wired customers, creating a chronic problem of dropped and incomplete calls. The telecommunications mess has hampered economic growth. "Every industry in Ghana will benefit from a stronger telecoms environment," says Nii Quaynor, Ghana’s leading computer expert and chief executive of NCS, a computer consultancy in Accra.

Much of the blame for the telecoms mess lies with the previous government of Jerry Rawlings, who ruled Ghana for nearly 20 years (first as military dictator and then as elected president). When Mr Rawlings opened Ghana’s telecoms sector to competition in the late 1990s, the government pledged to issue clear competition rules. Those regulations are yet to be issued, despite business’s repeated calls. "Without a regulatory framework and clear and consistent application of the rules, competition won’t work in Ghana because business can’t plan for or profit from their activities," says William Taylor, the Ghana country manager for Western Wireless International. The US telecom company, based in Washington state, does business in Ghana as West-Tel.

A South African official agrees that real regulatory reform will ignite investor interest in Ghana’s telecoms sector. "Regulations must be inviting to investors," he says. "Ghana must give us incentives."

Impediments to foreign investment in Ghana leave the country highly dependent on foreign aid, even for basic infrastructure. Ishmael Yamson, chairman of Unilever Ghana, has calculated that last year foreign aid and loans accounted for 88% of the government’s infrastructure investments. This reliance on foreign financing, when combined with the country’s 2001 trade deficit of $843 million, means Ghana is "dangerously over-dependent on aid, grants, loans and now debt forgiveness, while our capacity to consume foreign exchange continues to expand," Mr Yamson told Unilever shareholders in April.

This description of Ghana’s economic plight could apply to many sub-Saharan countries. That is why South African investors must constantly weigh the potential rewards of expansion on their continent against the risks of becoming ensnared in another country’s economic crisis and red tape.