HPL_Group I Case Analysis_Nutrifix Ghana_26.03.15.v1.0

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Cas

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Gh

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Inc.

Binus Business School,

MM Executive Batch 20

Presented by Group I

Alexander Christian

Dina Sandri Fani

Ridwan Martawidjaja

Jenna Widyawati

Case Study AnalysisNitrofix Ghana, Inc.

About the CaseInvestment opportunity offered by the Ghanaian government to Nitrofix to establish a

fertilizer plant in Ghana

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Firstly approached in 1981 in Limann’sregime

Negotiations had proceeded fitfully as the Limann government was overthrown during military coup took place on Dec 31, 1981

Nitrofix was hesitant to enter into the agreement due to Ghana’s past political instability and economic chaos

Bawol Cabiri recontacted Craig Michael Lee in mid-1982 with more favorable terms and condition

Form joint venture plant to be operated in Ghana with the following options:

Either with private Ghanaian entrepreneurs

Either with the government

About the CaseInvestment opportunity offered by the Ghanaian government to Nitrofix to establish a

fertilizer plant in Ghana

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Impressed by Calibri’s knowledge and understanding and by the potential profits of the project

Recommendation on investment decision must be made by Lee by considering the following aspects:

The conditions of the Ghanaian economy

The political climate in Ghana & West Africa

The existence of a Ghanaian and/or African market for fertilizer

Ghana’s policies toward foreign investment

The financial arrangements

About GhanaThe 1st country in sub-Saharan Africa to gain independence with no luck in economy

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Received independence from Great Britain in 6 March 1957

This status of Ghana as a Commonwealth realm would continue until 1960, when after a national referendum, Ghana was declared a republic

Dr. Kwame Nkrumah was the 1st Prime Minister

The richest country in Africa at the time of independence; thanks to its position as the world’s largest cocoa exporter

Invested a substantial part of its revenues in education at all levels resulted to high level of literacy

Basic ambiguity took place at the beginning years of independence: capitalist vs. socialist

About GhanaGhana at the time the investment was planned

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Political Situation

Political instability triggered by coup

01Economy Situation

Doomed day for Ghana as the fallen

economy

02

Investment Policy

Encouraged foreign investment however

deemed as a rigid policy

03Market for

fertilizer

The use of fertilizers was growing;

however investment cost was so high

04


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Political Situation

Political instability triggered by coup

01

Crises on the political leadership

Incapability of envisioning the future of Ghana

Lack of vision Hesitation in taking most

necessary but politically risky steps

Lead to major economic crises

19661st military coup. Overthrew Nkrumah as the president

1969Military stepped aside. Dr. Kofi Busia was elected president

1972Another military coup. Bringing to power a group the National Reconciliation Council (NRC)

1979Coup conducted by a group of junior air force officers, Jerry Rawlings served as a new president. Stepped aside 3 months later after the election of Hilla Limann

1979 - 1982Reconstituted Ghana’s Parliament. Limann’sregime. Institutionalized a program of economic reforms

1982 Another coup. Rawlingserved as a President for the 2nd time.


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1966

• Overthrew Nkrumah• Attempted to liberalize the

economy• Create more attractive climate

for foreign investment

1969

• World cocoa prices fell• Inflation heated up• The balance-of payments deficit

worsened

1972 - 1979

• Ballooned in inflation, the government deficit, the money supply, & the balance-of-payment deficit

• Clamped on wage & price controls

• Nationalization High idle capacity due to raw materials & spare parts scarcity

Limman’s regime

• Institutionalized an economic reforms program

• Enabled the country to meet its obligations on its foreign debts

• Enacted a new Investment Code: assured protection & a fair RoI for foreign investors

Economy Situation


economy

02

Major economic crises took place

Country was deeply in debt Currency vastly overvalued Foreign exchange reserves

close to zero High dependency to the

vagaries of the world cocoa market

Borrowing power from the IMF


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Post-independence

• Tried to control private investment

• 4 categories of enterprises, i.e. state enterprises, private enterprises, joint state/private enterprises, and cooperatives

1963

• Passed the Capital Investments Act

• Set up a scheme of priorities & incentives to attract foreign investor

• Mostly capital-intensive & high-tech plants

1972 - 1979

• The cumbersome administrative procedures prevented from utilizing the foreign aid

• Proliferation of controls and hindrances for foreign companies continued

• Some foreign companies pulled out of the country

Post 1979

• Dismantled regulatory & admin barriers to investment

• Establishment of special incentives program, e.g. certain tax exemptions, custom duties exemptions, guaranteed manufacturing or establishment licensees

• Agriculture would be the 1st

priority for development & investment

Tried to create friendly environment for foreign investors

Establishment of special incentives program

However, not consistent as hindrance and economic barriers to investment still exist

Investment Policy

Encouraged foreign investment however

deemed as a rigid policy

03


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Agriculture: a way of life of Ghana

• Employing 60% of the labor force

• Produced 42% of the GDP in 1980

• Only 13% of suitable for farming were under cultivation

From traditional into mechanization

• Shifted from traditional, labor-intensive into use of mechanization

• Lead to increased need of fertilizer as mechanization lead to rapid deterioration of the depletion of soil nutrients

Declined on cocoa production

• Main source of Ghana’s foreign exchange earnings, accounting for 65% in an average year

• Employed 11% of the nation’s labor force

• Was believed to account for a large part of its fertilizer usage

• Had declined steadily since 1960

Fertilizer consumption tend to be decreasing

• Institutionalized an economic reforms program

• Enabled the country to meet its obligations on its foreign debts

• Enacted a new Investment Code: assured protection & a fair RoI for foreign investors

• Dismantled regulatory & admin barriers to investment

Gloomy outlook for fertilizer

Many imponderables factors in estimating the growth potential of the Ghanaian fertilizer market

The use of fertilizers was growing; however another source revealed the consumption of nitrogenous fertilizers had declined somewhat after 1976

Market for fertilizer


economy

04

About Nitrofix, Inc.Well known, medium-sized U.S. manufacturer of nitrogenous fertilizers

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Specialized in setting up plants to serve the local market in smaller countries overseas

1st international ventures in 1960 in the smaller countries of Western Europe

Expansion operation in 1970’s into friendly 3rd World countries such as the Philippines, Indonesia, and Venezuela

Shifted in international operations expansion strategy:

100% ownership in each overseas subsidiary in 1960s

JV with local partners by establishing more suitable terms and conditions

About Craig Michael Lee

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Craig Michael Lee

Project AdvisorHired by the VP of Nitrofix Inc. as the

Project Advisor to the VP for its

international division

01

Responsibility

Responsible for conducting deep pre-analysis in exploring Ghana investment

opportunity

02Analysis Factors

Condition of the Ghanaian economy, political climate in

Ghana & West Africa, the potential

market of fertilizer, & Ghana’s FDIs policies

03

Recommendation

Invest/not invest decision; financial &

ownership arrangements, & plant type and size decision

04

Deep AnalysisProblem faced by the company in making this investment

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Political instabilityFast changing

decision in regulation making that may impact to future

operations

01Poor economic

situation

Scarcity in raw materials & spare

parts; high inflation, skilled labor

shortage, reserves close to zero

02Uncertainty in

fertilizer market

Growth potential of the Ghanaian

fertilizer market is hard to predict;

declining trend in nitrogenous fertilizer

consumption

03

Complex Financial & Ownership Arrangements

Difficulties of having loan financing due to

high interest rates

Nitrofix did not have lot of money available

for soft loans

High overhead expenses and taxes

04

Deep AnalysisLeadership question faced by Lee

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Commitment towards foreign investment

Do the Ghanaian government really have the commitment toward foreign investment?

01

Capability of envisioning the future of Ghana

Was the Ghanaian government being able to envision the future of Ghana?

02

Courage to make politically risky decision

Do the government have the courage to make politically risky decision

03

Deep AnalysisOur thoughts about the investment

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Investment options

Private InvestmentFull investment by

Nitrofix

01Joint State Enterprise

Nitrofix and Ghana bear share of investment

02

Operator

Government provide full investment in

physical asset, Nitrofixprovide technology and management

03

Private EnterpriseFull investment by Nitrofix

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• Full control on operation

• Maximize profit

• Prone to political change• High risk investment• Might not have full

support from government

Point of negotiations:

1. Government to provide incentives in the form of relief on tariff and fees

2. Government to provide support to dismantle regulatory and administrative regulation

3. Government will receive lower price of fertilizer with steady supply that will support government program in agriculture

4. Nitrofix will provide employment to locals and absorbing educated workers which will prevent them from working at another country

5. Government will benefit from knowledge transfer in fertilizer manufacturing

Joint State EnterpriseNitrofix and Ghana bear share of investment

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• Potential support from government

• More flexible to political change

Medium risk and still at some degree prone to political change

Potentially have unwanted government intervention in operation


1. Government provide 60% investment and Nitrofixprovide another 40%

2. Profit sharing will be 50-50

3. Both partner have equal involvement in operation and control

4. Pushing for taking 20,000-ton plant employing steam-reforming technology at first

5. Nitrofix will only be responsible for equipment and skilled labor provision

6. Government will benefit from knowledge transfer in fertilizer manufacturing

OperatorGovernment provide full investment in physical asset, Nitrofix provide technology and

management

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• Lowest risk

• Resistant to political change

• No government intervention on operation

Government might not have enough financial capability to support this option


1. Ghanaian government will bear 100% overhead cost especially for equipment, raw material, and machinery

2. Nitrofix will bear the responsibility of skilled labor, technical knowledge and management provision

3. Nitrofix will get certain fee percentage from the nettprofit

4. The Ghanaian government must provide guaranteed immigration of necessary expatriate personnel and certain tax exemptions & remittance guarantees for such personnel

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HPL_Group I Case Analysis_Nutrifix Ghana_26.03.15.v1.0

Leadership & Management

Transcript of HPL_Group I Case Analysis_Nutrifix Ghana_26.03.15.v1.0