FEBRUARY 1980 - VOLUME 1 - NUMBER 1
Kaiser Shortcircuits Ghanian Development
Dr. Hilla Limann, Head of Ghana's new civilian government, has a tough fight ahead, dealing with what he has described as his West African country's "abysmal economic chaos." Central to the troubles is a chronic shortage of foreign exchange. External debt payments are $440 million in arrears. Supplies of flour, bread and other basic foodstuffs are severely deficient. 'Annual inflation hovers around 70 percent.
President Limann's administration has planned an array of steps to bring a halt to the crisis. The government has restricted foreign exchange allotments to essentials such as food and oil. Even more extensive measures may be in the works: the government is reviewing the activities of all foreign firms to determine whether they are "in the national interest."
The largest foreign investment in Ghana, and undoubtedly the prime candidate for review, is the smelting operation of the Volta Aluminum Company (VALCO), a Ghanaian corporation almost wholly owned by the California-based Kaiser Aluminum and Chemical Corporation. Kaiser is one of the six multibillion dollar corporations that control 55 percent of the production and marketing of aluminum consumed outside the socialist countries. It controls plants in 30 American states and 18 foreign countries. And its 20-year presence in Ghana offers a classic example of an "enclave' multinational operation that augments a foreign corporation's profits and growth, while contributing little to the economic progress of the Third World country that hosts it. "The Ghanaian government is looking into all agreements with foreign companies, VALCO and all the others," confirms Alex Quaison-Sackey. former foreign minister of Ghana and now his country's ambassador to Washington. The Kaiser-Ghana arrangement, he adds, "is not a happy situation."
Aluminum- the metal with the fastest-growing world demand- is produced in a capital-intensive, three-stage process. First, raw bauxite ore is mined from the earth. Then, it is processed into alumina, an intermediate product that takes the form of a white powder. Finally, it is smelted into finished aluminum ingots. The key to profits lies in two factors. First, the industry has a vertically-integrated, oligopolistic structure, in which relatively few firms control the great majority of all phases of aluminum production and marketing. Consequently, there is little free trading of intermediate products, and those financial interests that control aluminum production, from start to finish, are in the best position to earn high oligopoly profits.
The second crucial factor, and one whose significance is steadily increasing, is access to cheap electrical power. The final stage of aluminum production, smelting alumina powder into aluminum metal, requires massive amounts of electricity. To produce a pound of aluminum, it takes about 8.5 kilowatt-hours of electricity. "The essential fact about aluminum smelting," observes the authoritative Economist Intelligence Unit of London, "is that the company which has access to the lowest possible average cost of electricity will be the most profitable."
In its arrangements with Kaiser Aluminum, Ghana is at the losing end of both of these equations. The country's hydroelectric dam at Akosombo provides the Kaiser smelter at Tema with electricity-70 percent of all the electricity the country generates-at very cheap rates. This electricity contributes o to the high-profit production of one-fifth of Kaiser's worldwide aluminum output.
Meanwhile, Ghana's 20-year- long effort to develop a vertically-integrated aluminum industry of its own has proven fruitless. Before the inception of the Kaiser project, Ghana mined a limited amount of bauxite from the country's ample reserves, and exported the bauxite overseas for processing. The pattern continues to this day: none of the aluminum that Kaiser produces in Ghana is made from Ghanaian bauxite.
"Kaiser is making millions from this World Bank dam on the Volta. Ghana gets nothing. That is exploitation, not development," says Lindsay Mattison, director of the Center for Development Policy, a public interest group that is studying the linkage between publicly-financed hydroelectric dams in the Third World and the multinational metals corporations.
The Kaiser smelter and the Ghanaian hydroelectric scheme-jointly known as the Volta. River Project-were built during the early sixties with ample financing from bilateral and multilateral sources, including a $53 million loan for the hydroelectric facility from the World Bank. President Kwame Nkrumah and his ministers saw the Volta River Project as the first stage in the establishment of an integrated aluminum industry. By fusing Ghana's considerable hydroelectric potential and its 400 million ton bauxite reserve, they hoped to build a foundation for the country's industrial development. In 1956, the United Kingdom, the colonial power in what was then the Gold Coast, drew up a plan to establish a hydro-powered aluminum industry with a massive investment of about $910 million. This proposal was never implemented. Shortly after independence, however, a report by Kaiser Engineering and Constructors, a consulting firm then wholly-owned by Kaiser Aluminum, concluded that the most useful industrial project for Ghana would be an aluminum smelter and hydroelectric dam. The report argued that the project could be built with an investment of $300 million, provided that use of Ghana's bauxite was deferred for the first years of the smelter's operations, and alumina was imported. Ghana and Kaiser agreed to this less ambitious plan, with the understanding that the multinational would attempt to establish an alumina processing plant using Ghana's own bauxite.
Thirteen years after the Kaiser smelter started up, however, Ghana is no closer to the creation of an integrated aluminum industry; it is still overwhelmingly dependent on cocoa exports for foreign exchange. It continues to export bauxite in raw, unprocessed form. I n fact, its annual bauxite exports have dropped 25 percent in the last several years, down to about 260,000 tons.
A recent study commissioned by the government of Guinea-Bissau on the potential for developing that new na tion's bauxite resources, cites Ghana as an example of how a country's bauxite/ aluminum sector can manifest "national disintegration" rather than develop ment. The 1979 report of the Economic Development Bureau of New Haven, Conn. makes the following observa tions to support its claim:
Kaiser never acted in good faith in its professed efforts to help Ghana develop the alumina refining operation necessary for integrated aluminum production, according to one former Ghanaian official closely involved with most of his country's negotiations with the corporation between 1972 and 1977. In 1975, Kaiser and the Japanese aluminum company ARDCO issued a joint letter of intent to explore establishing an alumina refinery. They went on to conduct a feasibility study this official believes was "unduly pessimistic," and the plan was scotched. "Kaiser has been a very clever negotiator," this former official says. "It produced a letter of intent and held out the possibility of an alumina refinery at a crucial time of bargaining over the increase in the electricity rates, and our optimism led us to soften our bargaining position."
Ward Saunders serves as chief executive officer of VALCO from his offices in Kaiser's Oakland, California headquarters. He justifies his company's continued lack of support for an integrated aluminum industry in Ghana on economic grounds. "There are foreign exchange costs of building and operating an alumina refinery, perhaps $500 to $600 million of imported capital equipment and a large amount of caustic soda to process the bauxite once the refinery is operating. Ghana can't afford these extra foreign exchange costs at present."
Kaiser's primary interest in Ghana, however, is not integrated aluminum production, but continued access to cheap electricity from the Akosombo dam, sold to it by the Ghanaian government's Volta River Authority (VRA). And what Saunders fails to point out is that Kaiser pays a relative pittance for the more than two-thirds of the power Akosombo generates, thereby contributing to the lack of Ghanaian financial power he says makes unthinkable an integrated aluminum industry for the country. Meanwhile, the country's residential and industrial demand for electricity has grown to such an extent that the Akosombo dam is being supplemented at a cost of $237 million with a new dam, 20 miles downstream at Kpong, scheduled for completion in 1981.
The World Bank's most recent negotiations with Ghana's VRA concerned finance for this new dam. The bank stipulated an 8 percent rate of return for the V RA as a condition for the new loans. A World Bank official overseeing the Volta River Project freely admits Kaiser's electricity payments are so low that the stipulated rate of return is not even being met.
Renegotiations of the power contract in the past few years have almost doubled the initial rate Kaiser paid Ghana for its power. Yet, at 4.8 mills (.48 U.S. cents) per kilowatt-hour, it remains one of the lowest charges for electricity supplied to an aluminum smelter anywhere in the world, at a time when sources of low-cost electricity are rapidly disappearing. Japan, for instance, has been forced to utilize oil to run the electrical generators powering its smelters. Metals Week recently reported that Japanese aluminum companies now pay an average of 50 to 60 mills per kilowatt-hour for electricity. And in the Pacific-Northwest, U.S. companies have been forced to supplement their low-cost bulk purchases of power from the Bonneville Power Authority with electricity from commercial generators priced at more than 40 mills per kilowatt-hour.
Kaiser's payments to Ghana, however, barely cover the interest and amortization payments on the $117 million in loans taken out to build the Akosombo dam. Little surplus is left to contribute to new productive assets for the country. "If I were a consultant to the government of Ghana, I would advise them not to agree to anything under ten mills," says CarIos Varsavsky, deputy director of New York University's Institute of Economic Analysis and author of an exhaustive survey of the world aluminum industry for the United Nations Center on Transnational Corporations. He notes that countries such as Malaysia and Australia, which are discussing smelter power contracts today, "are talking in the neighborhood of 15 mills."
Kaiser's justification for its hard line against substantial rate increases seems cynical at best. VALCO managing director Saunders, after pointing out that Ghana is too poor to build an integrated aluminum industry of its own, went on to observe that the electricity rate is "reasonable" because "the VRA has low operating costs. We enabled the dam to be built, we enabled Ghana to get electricity. We provide the foreign exchange for Ghana to meet its debt payments on the dam."
Ghana's recent negotiations with Kaiser and bank lenders over the hydroelectric facility at Kpong-a facility that VALCO will tap-has heightened popular concern in Ghana about the country's relationship with the multinational. Students and professionals were particularly critical of the arrangement during the recent campaign leading to the return to civilian rule. During the heyday of Nkrumah, when Ghana still led the twin fight for decolonization and Pan-African unity, the negotiation of the Volta River Project was widely regarded as a great achievement. I n a continent where most countries are still locked into patterns of export and subsistence farming and non-existent industrialization, any project attracting a significant amount of capital was regarded as welcome. But the project has had its critics from its inception and, in retrospect, U.N. analyst Varsavsky considers it "Ghana's original sin."
Kaiser provided only $12 million in direct finance for the smelter it built, with the U.S. Eximbank and Agency for International Development providing $140 million in loans. Ghana directly funded some $60 million of the costs of the hydroelectric dam, with the remaining $117 million in dam construction costs financed by the World Bank as well as Western governmental aid programs. Evidence suggests that the bank and the U.S. government supported the dam-smelter project primarily to promote U.S. business in Africa, and to undercut the potential influence of the Soviet Union.
The actual terms on which Ghana permitted Kaiser to establish its Volta River smelter were highly favorable to the aluminum company. Kaiser got a guaranteed supply of electricity for 30 years, with an option to renew for an additional 20 years, or until 2016.
VALCO was granted a 10-year tax holiday, followed by a 40-year ceiling on the corporate income tax Ghana can levy on Kaiser. (No matter what the corporate, rate in the rest of the economy, VALCO's rate cannot surpass 40 percent, although reductions in the corporate tax rate must be passed along to VALCO.) Finally, Ghana exempted Kaiser from paying any duties on the alumina and other inputs it imports for the smelter for a period of 50 years, or on the more than $280 million in aluminum Kaiser currently exports annually.
These terms may have effectively sold away a major piece of the national patrimony of this African state. But other Third World countries have had greater success in renegotiating one-sided contracts with major multinationals. As Ghana reviews its relations with foreign investors, one must ask why it has failed in recent years to strike a better bargain with the aluminum giant in its midst, , which depends so heavily upon Ghana's hydroelectric potential to make its operations profitable.
First, it is the country's misfortune to have its stake in an industry where financial power is highly concentrated in the hands of relatively few firms, none of whom appear anxious to aid Ghana at the expense of Kaiser. "When you deal with Kaiser, you must deal with all the major aluminum companies," according to Kwaku Gyasi Twum, Washington representative of the African Development Bank and a former senior official in Ghana's Finance Ministry. The major aluminum multinationals seek to prevent develop ing countries from hosting more than one stage of the aluminum production process, precisely to ensure that host countries can't develop bargaining leverage. Through joint ventures among themselves and with smaller aluminum companies, the "big six" cooperate closely and preserve their preeminent position in the industry.
Ghana's bargaining position is particularly precarious, due to the country's seemingly perpetual marginal economic health; economic woes leave little room to maneuver in dealing with Kaiser. Ghana has ordinarily been too close to the brink of economic collapse to risk a sudden decline in foreign investor confidence. Officials apparently feel that a militant stand by Ghana in negotiations with Kaiser (e.g., help us to establish an integrated aluminum industry or prepare to have VALCO nationalized) would deter new foreign investors, already alarmed by the country's soaring inflation rate. Thus, in a vicious cycle of underdevelopment, economic marginality perpetuates economic marginality. "Kaiser is a very important multinational," observes Ambassador Quaison-Sackey, "and you don't want to do anything that would scare away investment. They've always used this as a threat. The whole approach has been one of caution."
This fear is compounded by the World Bank's leverage in the Kaiser-Ghana arrangement. If Ghana attempts to bargain for a better deal, it must face financial sanctions by the World Bank. The latest World Bank loan for the Kpong dam repeats interlocking conditions that have characterized all its lending for hydroelectricity to Ghana. First, the bank is entitled to demand immediate repayment of its loans if Ghana attempts to change the terms of agreement with any of the other lenders without obtaining World Bank consent. This "co-financing" condition is a fairly common part of World Bank operations. But, in an unusual departure, its loan agreements place another, more onerous condition on Ghana: if the country moves to change any of its agreements with Kaiser, without World Bank approval, the bank can call in all its Volta River Project loans. Tobias Asser, the World Bank's lawyer in charge of these agreements, refused to be interviewed. "All I can tell you is that there is a dam funded by the World' Bank and a smelter owned by Kaiser," he says. "Everything else is confidential.")
Yet another factor that has complicated the task of negotiating a better bargain is the lack of stability of the Ghanaian government. Since the 1966 coup that toppled Nkrumah, Ghana has undergone five regime changes and three additional coups. The Limann government represents the country's second return to civilian rule in ten years. "We have not had a stable government in Ghana since Nkrumah," says Quaison-Sackey, citing this lack of stability as a major reason for Ghana's lack of bargaining power.
And, in one of the bitter ironies of the Ghanaian situation, each time it has been economic desperation-crises that a better deal with Kaiser would have dampened-that has been a major precipient of the very coup that have helped to ensure Ghana's continued bargaining weakness.
Meanwhile, Kaiser seems happy to deal in the symbols of development, while it contributes next to nothing to the realities of Ghanaian economic progress. VALCO doesn't have any Ghanaian participation. Ward Saunders explains that the VALCO Fund, to which the corporation contributes in lieu of certain taxes, is an attempt to ensure that Ghanaians do benefit from the project. As established in the initial Kaiser-Ghana agreement, the company is to pay 50 percent of its after-tax profits into the fund, or $200,000, whichever is higher. By manipulating the price of aluminum sold back to the parent corporation, VAL.O can insure that it shows little, if any, profit. To date, it has not paid more than the $200,000 annual minimum. This has been used to, provide Ghana with some housing for crippled children, x-ray equipment for hospitals, and West Africa's first kidney dialysis machine- worthy causes no doubt; but nothing compared to the potential contribution of more foreign exchange from a higher electricity rate or an integrated aluminum industry.
Kaiser's token acts of public relations so impressed the Overseas Private Investment Corporation, the U.S. government agency that insured the Kaiser smelter against expropriation, that it presented its first annual Development Award to the corporation in 1974. According to OPIC, the award is intended to call attention to "outstanding examples of major contributions by U.S. investors to the people of developing nations."
* Kaiser owns 90 percent of VALCU. Reynolds Metals owns the remaining 10 percent.
Nicholas Burnett is an independent writer on foreign and international economic affairs based in Washington, D.C.