Proposal for Enabling Investment in Cocoa Processing

Plants in Ghana

April 26, 2012

Ellen Ai, Virginia Castro, Yvonne Chen, Maridela Ortiz, and Anish Tailor

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Table of Contents

Introduction .................................................................................................................................... 1
I. Proposed Value Chain Investment: Cocoa Processing Plants ............................................................ 3
Proposed Asset......................................................................................................................... 5
II. Sources of Capital ....................................................................................................................... 6
Commercial Bank Loans ........................................................................................................... 6
Social Impact Investors ............................................................................................................. 6
III. Capital Structure ........................................................................................................................ 7
IV. Rates of Returns, Risks and Risk Mitigation ................................................................................. 9
V. Potential Partners and Next Steps ............................................................................................... 10
VI. Execution Plan: 2-year Plan ...................................................................................................... 15

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I. Introduction
The team has identified the cocoa value chain as the best potential investment opportunity for the
economic development of Ghana based on the following main reasons:
1) Ghana has a clear competitive advantage in cocoa production
2) Cocoa makes up a larger production supply than all other crops
3) The cocoa industry is the source of income and livelihood for about 25 percent of
Ghana’s population [1]
4) The Cocoa sector receives vast government support

The cocoa sector is Ghana’s economic backbone. Ghana is not only the second largest producer
of cocoa in the world, but it produces the world’s highest quality cocoa. The cash crop accounts
for about nine percent of Ghana’s GDP and makes up about one-third of the country’s export
revenues, totaling over US$1.5 billion. While we also considered rice, Asia continues to have the
comparative advantage in that industry. Rice has a production of about 200,000 metric tons
compared to over 730,000 metric tons of cocoa production. Additionally, cocoa production
expands over 1.2 million hectares while rice harvesting occupies only about 123 thousand
hectares. More importantly, adding value to the cocoa chain will benefit more people since the
cocoa industry employs about 60% of the total labor force of the agriculture sector.
Remarkably, Ghana exports over eighty percent of cocoa in its raw state. Only between 13-22
percent of cocoa beans are processed locally into cocoa powder, liqueur, paste, and butter.
Furthermore, the government has set forth a policy that aims to increase local processing to at
least 40 percent of cocoa production.

Under this context, the team has chosen to focus on the investment opportunity in cocoa
processing facilities. The team decided to forego investing in production because entities such as
COCOBOD[2], the World Cocoa Foundation, Starbuck, Hershey’s, Cadbury, the Bill and
Melinda Gates Foundation, and many other NGOs and non-profits have developed programs that
help increase production and establish sustainable cocoa farming practices in Ghana. While there
is still a way to go to decrease the cocoa yield gap and implement efficient and sustainable
farming practices, we felt that this part of the value chain already receives a lot of attention and
investment by larger entities whereas processing SMEs lack the attention and access to finance.

The following criterion supports the choice of cocoa processing:

1) Agro-processing adds value and higher profit to the cocoa chain
2) Low installed capacity compared to worldwide processing
3) Reduces post-harvest losses
4) Promotes price stability
5) Expands demand for local agricultural produce
6) Provides an opportunity for private investment for economic growth
7) Provides technical jobs for people not involved in farming

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8) Government policy support

One of the main challenges facing Ghana is to add value to its cocoa production, mostly because
it requires significant investment from overseas. COCOBOD wants to unite with foreign
investors in reshaping Ghana’s most cherished industry. Internal processing is encouraged by the
government through incentives such as price discounts, extended credit for payment, permission
to import essential machinery, conferment of Export Processing Zone status on companies
operating in the zone, inter alia.[3] For example, COCOBOD (the government’s cocoa regulating
body) discounts beans from the minor light crop season, which runs from May to September, to
local processors. The government wants to enable private companies to position themselves
profitably in adding value to raw cocoa beans before export against the fluctuating world market
prices of cocoa, and more importantly to enhance the revenue generation potential of cocoa
sector in general.

The processing of cocoa offers higher product returns. Cocoa accounts for a small proportion of
retail chocolate prices since chocolate products incorporate other raw materials (an average plain
chocolate bar contains 26.6% of cocoa). The effect of declining cocoa prices have been offset by
real increases in some of these other costs, keeping real chocolate prices relative stable.
Processing, marketing, real labor, and distribution costs, incurring in consuming countries, have
tended to increase over time while production costs at origin have declined.[4]

Additionally, in support of its policy to increase local processing, COCOBOD has taken positive
steps to liberalize the cocoa processing agribusiness. The largest processing company in the
country—the Cocoa Processing Company—is state-owned, but in a further commitment to
privatization, the Government of Ghana intends to sell a 25 percent stake in the company via the
stock exchange in Accra. Competition is important and especially the opportunity for SMEs to
succeed and contribute to Ghana’s economic development, but currently processing is highly
concentrated. Three main processing plants have a total installed capacity of 84,000 metric tons;
only about 11percent of total annual production.

Finally, Ghana is missing the key to establish a successful cocoa and chocolate industry
nationally, namely, a local market. Cocoa and chocolate are not part of the local diet; only high-
income consumers can afford imported products for consumption.[5] Cocoa has the potential to
provide nutritional and caloric value through consumption by residents. Moreover, Ghanaian
youth are increasingly hesitant to dedicate themselves to farming. Processing plants can provide
an alternative for youth to gain technical skills and still participate productively in the cocoa
sector.

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Proposed Asset
The proposed project is a new processing plant that Akanfo Cocoa Processing Ltd, a private LLC
established in 2003, needs financing for. Currently, Akanfo is authorized to process cocoa beans
into cocoa liquor, butter and powder for the export market. The company has two shareholders
with all its shares issued equally to the shareholders. Akanfo proposes to install a 2000 Kg/hr
cocoa processing plant for the production of cocoa liquor. The plant would comprise of a hopper
with filter unit, silo, dosing device, screw conveyor, bucket elevator, cleaning machine,
pretreatment dryer, winnowing plant, roaster, spindle mill, pumps and storage tanks. Akanfo is
seeking US$ 5,500,000. The company already has a portion of the needed capital investment, is
capable of providing the operation and management services, and has secured the land on which
to build the plant; thus, it is an ideal candidate for financing.

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II. Sources of Capital

Commercial Bank Loans

Ghana has a relatively healthy and robust banking sector. Thus, the group chooses commercial
banks as a potential source of capital. Since 2010 the banking sector has been marked by
recovery propelled by key players like Ghana Commercial Bank Ltd and Barclays Bank of
Ghana Ltd, who posted very strong results that year. The rebound in profitability was due to
improvements in the credit markets which allowed banks to improve the quality of their loan
portfolio and release capital that had previously been set aside for credit losses. Growth in
operating assets, non-interest bearing deposit and wider interest margin also contributed to the
favorable profitability. The Bank of Ghana also requires banks to comply with Basel II and III,
so the banking sector underwent some redesign and retooling of management information
systems in order to comply with these regulatory requirements. Other positive trends observed in
the banking sector include a strengthening of risk management practices, an increasing support
for trade financing, and a rationalizing and aligning of staff cost-to-revenue.

There are currently 28 private banks operating in Ghana, and the top quartile makes up 53% of
the total banking industry. They are mainly domestic banks, and specialize in a full spectrum of
commercial banking. Agricultural Development Bank is the only bank that is focused on
agriculture, with 9% of market share. The Bank of Ghana is the government-run body that
provides regulatory oversight for the industry. Under the Bank of Ghana’s umbrella, banks such
as Ghana Commercial Bank, Barclays Bank, Standard Chartered Bank, Ecobank, and Stanbic
Bank are included. The banking sector has 70% of assets highly dependent on interest bearing
liabilities.

Proposed banks for this project include banks that have already expressed interest in investing in
cocoa such as those belonging to Ghana Cocoa Board’s 17th annual pre-export facility: Stanbic
Bank Ghana, Standard Bank, Crédit Agricole, ICBC, Ghana International Bank and SMBC.

Social Impact Investors

The processing plant requires large financial capital inflows -- which range from buying the
beans to paying monthly operational costs. Several impact investors, including Acumen Fund,
Incofin’s Rural Impulse Funds and Root Capital, already dedicate themselves to agriculture in
sub-Saharan Africa. Local investors, or diaspora, can be convinced to invest by strengthening
existing players. Currently agricultural finance almost exclusively focuses on short-term
financing. Therefore, social impact investors can play the role of “patient capital”, extending
capital to serve long-term needs.

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III. Capital Structure
The group’s proposed investment structure for Ghana cocoa processing plant is shown as the
following graphic.

This Ghana cocoa processing plants will consist of equity capital from Ghanaian social impact
investors (19%) and loans from commercial banks with operation in Ghana (61%), as well as the
existing equity ownership of 20%. These two external financing sources of capital will invest
direct to the processing plant company. Social impact investors and commercial banks will
respectively provide equity and debt financing to the proposed processing plant company.
USAID will provide partial guarantees (up to 50% of the total debt) on the commercial bank
loans.

The processing plant company we propose in this structure is Akanfo Cocoa Processing Ltd,
which requires $6,800,000 USD to establish a 2000 Kg/hr modern cocoa processing facility. The
company could put up to $1,300,000 USD (amounting to almost 20% of the total project cost)
and use the financing from the equity investment ($1,292,000 USD) and loans ($4,148,000 USD)
to complete the specific project. Expected loan term is five years with at least a one-year
moratorium period. The loan facility will be secured by the execution of a legal mortgage over
land and buildings, future sales cash flow and USAID partial guarantee.

In traditional lending system, borrowers can only provide low value collaterals such as
inventory, plant equipment, etc, in additional with a highly volatile future sales cash flow. The
lenders, such as Ghana commercial banks, usually bare high risk. In order to cover the risk, it
requires a lending rate as much as 26%. Consequently, this high lending rate leads to the inability
of repayment and few borrowers could actually achieve the commercial bank loans. However,
with USAID’s partial guarantees, we expect the lending rate to decrease to 13%, as low as half
of the original market rate. This dramatically reduces the burden of interest payment

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The social impact investors’ equity investment accounts for 19% of total project investment, less
than 20%. Thus, Akanfo would not lose control in terms of operation because of dominating in
ownership. Moreover, with the additional equity investment of social impact investors, the total
equity would account for 39%. Consequently, with a half loan guarantee by the USAID, the non-
guarantee part (around 31% of total cost) would be covered by total equity. This will further
enhance the possibility of lower and affordable debt interest rate.

Among social impact investors, the main issue of attracting equity is around convincing them
that agriculture can be a viable investment. For commercial banks, they need to be convinced
that the borrower has the capacity to repay a loan and that they have enough information to
properly assess and manage credit risk, as larger, individual loans using equipment as collateral
have higher default rates than typical commercial banking customers. At the same time, both of
these investors can convinced that they will have higher returns (fees and interest) and because
the loan size is large (economies of scale). In terms of returns, prices for chocolate have doubled
between 2006 and 2011, due to crop shortages, conflict in the Ivory Coast, and increased
consumption of chocolate (especially of dark chocolate, which requires more cocoa). Therefore,
it is a very valuable cash crop that has a promising future.

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IV. Rates of Returns, Risks and Risk Mitigation

According to interviews with industry experts, an internal rate of return on processed cocoa in
Ghana with processing plant located with peri-urban to urban situations can range from negative
to 40%.

Notably, there are several risks that are tied to cocoa processing in Ghana that investors must
consider and try to mitigate. First, while cocoa bean prices are fixed1, fuel prices can fluctuate
and have a negative effect on the costs of production. Second, machinery can become disrupted
or malfunction, thus creating huge opportunity costs in terms of missed production and
considerable costs to fix. Third, exchange rate risk from foreign investors can reduce the rate of
returns if the cedi appreciates. Fourth, an economic downturn may force the plant to lower
production in response to lower demand. Fifth, lending is often subject to politically-motivated
market interventions such as interest rate controls, subsidized credit that discourages
competition, and ad-hoc debt forgiveness, which distorts markets and discourage formal
financial institutions from lending to agriculture.

Fortunately, there are several tools and financial instruments that can mitigate the financial risks
in the form of guarantees and insurance.

To mitigate operational risk, some specific methods are the following:

1) Technical assistance: Social impact investors are able to use a relationship-based approach,
with more intensive due diligence, in order to encourage investment officers to become familiar
with the unique aspects of the business, and allow them to build in flexibility and enhance
repayment.
2) Piecemeal growth: The plant focuses on providing one product at scale to one market (cocoa
butter and liquor to the export market) so investment management processes can be standardized,
which lowers costs and improves scalability.
3) Focus on fixed and movable asset investment: the investment focuses on processing
equipment, which provides an effective collateral substitute.

1
Regulator Cocobod is the sole buyer for the country's cocoa at a fixed rate of 3,280 cedis (2012).

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V. Potential Partners and Next Steps
The potential partners and projects we have identified are as follows:

I. Top Quartile Commercial Banks:

● Agricultural Development Bank Limited
● Barclays Bank of Ghana Limited
● Ecobank Ghana Limited
● Standard Chartered Bank Ghana Limited
● Ghana Commercial Bank Limited
● Agricultural Development Bank Limited
● Stanbic

II. Processing Plants Projects:

Project Name Akanfo Cocoa Processing Ltd- ESTABLISHMENT OF MODERN COCOA

PROCESSING FACILITY

Project Intention The project seeks to introduce more efficient cocoa beans processing for export. This is in
line with the Government's policy of enabling private companies to add value to raw cocoa
beans before export and as a response to the fluctuating cocoa bean price

Company's Nature Akanfo Cocoa Processing Limited has been incorporated in February 2003 as a privately
of Business owned limited liability company in Ghana. Akanfo is authorized to process cocoa beans
into cocoa liquor, butter and powder for the export market. The company has two
shareholders with all its shares issued equally to the shareholders.

Year of 2003
Establishment

Description of the Akanfo proposes to install a 2000 Kg/hr cocoa processing plant for the production of cocoa
Project liquor. The plant would comprise of a hopper with filter unit, silo, dosing device, screw
conveyor, bucket elevator, cleaning machine, pretreatment dryer, winnowing plant, roaster,
spindle mill, pumps and storage tanks.

Type of Financial
Cooperation

Company's Input US$ 1,300,000

Anticipated US$ 5,500,000

Partners' Inputs

Contact Details Akanfo Cocoa processing Company Ltd

23 Mango Avenue
Asylum Down
P. O. Box CT 4712
Cantonments, Accra

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Fujotek Ltd- ESTABLISHMENT OF A CHOCOLATE MANUFACTURING PLANT
Project Number
Sector
Project Name
Project Intention
Company's Nature of Business
Year of Establishment
Description of the Project
Type of Cooperation
Company's Input
GHA-047
Agric & Agro Processing
Fujotek Ltd- ESTABLISHMENT OF A CHOCOLATE
MANUFACTURING PLANT
The projects aims at establishing a plant to manufacture chocolate
of world class quality by adding value to Ghana's semi-finished
cocoa products. This is based on identified high demand/market for
chocolate products in and outside the country
Limited was incorporated in 1998 with the objective of promoting
trade and
investment between Ghana and other countries. In 1999, the
company was awarded a five year contract by the State of Missouri
(USA), after a competitive bidding process, to
promote the state's products and services in Sub-Saharan Africa.
Presently, while Fujotek still continues to assist the State of
Missouri in various forms when the need arises, it predominantly
serves as a Manufacturers' Representative in respect of companies
in various parts of the world.
A notable achievement of the company include the assistance
granted to the Tema Cocoa Processing Company in acquiring
cocoa cake milling machines etc. Fujoteck, over the years, has also
engaged in the imports medical sutures for Hospitals and 100%
white cotton calico for the batik industry. The initial shareholders
of the company, as at the time of incorporation were Johnny
Kumah & Hon. Fuzzy. Current shareholders include John
Colerangle and Brig. Gen. EDward Lord Attivor (Rtd). The current
Board of Directors include Johnny Kumah, Brig. Gen. Edward
Attivor. Sampson Narteh Yoe and Dr. Victor Amoah.
1998
Description of the plant or service facilities:
At present, the company utilizes office space located at No. 28
Jungle Road, Christian Services Centre, East Legon, Accra. It has
obtained land of two acres located in Somanya (in the Eastern
Region) for the purpose of implementing the proposed project. The
promoters also have access to lands located in Otinshie (East
Legon) and Tema, all in the Greater Accra Region, which could be
made avaible for the project.
Commercial,Financial,Technical
US$190,000
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Anticipated Partners' Inputs US$2,300,000

Mahob Holding Company Ltd- ESTABLISHMENT OF COCOA PROCESSING PLANT

Project Number GHA-042

Sector Agri & Agro Processing

Project Name Mahob Holding Company Ltd- ESTABLISHMENT OF COCOA

PROCESSING PLANT

Project Intention Project seeks to establish a processing plant to produce semi

finished products such as cocoa liquor, cocoa powder, cocoa cake
and butter from cocoa beans for export, particularly Europe. The
facility is projected to have a processing capacity of 26,000 to

Company's Nature of Business
Mahob Holding Company Limited, a wholly owned Ghanaian
company is establishing an integrated cocoa processing plant in
Takoradi in the Western Region of Ghana. The company is
registered with 1,000,000 ordinary shares of no par value with
shares equally shared between Margaret Poku (Business Executive
and a banker) and Hilda Boachie - Adjei (Business Executive and
Managing Consultant).

Year of Establishment 2008

Description of the Project
The plant requires about 26,000 MT of cocoa beans annually. The
company has entered into a bean supply agreement with the Ghana
Cocoa Board which states amongst others that; the supplier will sell
up to 15, 000 MT of light crop beans in the initial year and
subsequently 20,000MT each year for five years. If need arise,
company will supplement local supply with import from Cote
d'Ivoire

Ownership rights and licences

Company has acquired 10.2 acres of land

Type of Cooperation Financial, Production

Company's Input US$9,603,000

Anticipated Partners' Inputs US$34,397,000

Source: Ghana Investment Promotion Centre http://gipcghana.com/potential.php

III. Risk Mitigation Entities: USAID, MIGA

IV. Social Impact Investors: Injaro Investments, Root Capital, Acumen, Agpo

V. Technical Assistance/ Quality Management: COCOBOD, IFC, OPIC, Ghanaian

Government, OXFAM, Monitor Group, ANDE, Cadbury, and Hershey.

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Barriers to Entry
The main barriers to entry will be met with respect to the specific Cocoa processing plants
aforementioned and the social impact investors. For the processors, a main barrier to entry might be that
their financial health does not approve them for commercial loans even with a guarantee. On the other
hand, for the social impact investors, certain funds have restrictions as to what types of risky investments
they are allowed to pursue. It falls within the fiduciary duty of the portfolio manager to preserve investor
capital. Depending on the credit profile of these projects, some funds may have to screen out these
opportunities

Next Steps
The next steps in implementing this project will consist of seven factors to ensure a successful strategy
implementation. Also, the execution plan set forth below can be completed within 2 years. The table
below outlines the next steps 7s framework. Each factor is interdependent and the relative importance of
each factor will vary over time. The 7S Framework is useful way of checking that all the bases for the
strategy are covered.

Strategy The executive committee must develop a consensus on strategic plan and set
milestones for the project as well as set investment milestones.

Structure Given that there 4 entities involved in operating this structure, a flat
organizational structure supports innovation. This will consist of:
● Task Oriented Teams
● —Teams cross functional
● —Decentralized decision making
● —Strategic collaboration with the raw cocoa suppliers

Systems There ultimately needs to be central depository for communication between

all parties. Creating a virtual exchange platform would greatly benefit, not
only this project but other projects that are looking for financing.

We propose creating an exchange where processing plants that are looking

for debt financing can be matched with a coalition of banks that are willing
to provide guaranteed loans. The processing plants seeking financing will all
be vetted and pay a fee to be a part of this exchange platform for the cocoa
processing plant industry.

Style Managers from all parties must be flexible and agree to a set of best
practices for participating in projects and encouraged community
involvement in the areas in which they are developing.

Staff From the processing plants to the banks who are providing the financing.
There needs to be —quality management practices in place.

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Superordinate The executive committee should create a charter that provides guidance long
Goals term vision for the cocoa processing industry.

Skills Continuous technical training and development of employees and

partnerships with international community of cocoa processors will be
critical to the success of this project as is working with reputable cocoa
suppliers.

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VI. Execution Plan: 2-year Plan

Step I: Establish legal agreements with targeted processing plants, commercial bank, and diaspora fund
managers to secure financing transactions. Include covenants and investor protection clauses.

Step II: Create a executive committee of all parties involved whose fiduciary duty will be to will be able
to oversee implementation of this project and that resources are properly allocated.

Step III: Create a central communications depository for all parties to transact and communicate.

Step IV: Hire management consultants to develop and oversee strategy and plan roll out.
● Identify contact points and executive leadership from each party involved
● Facilitate communication
● Advisory for business operations, strategic goals, and

Step IV: Adopt best practices across all parties involved and implement training and development
programs.

Step V: Launch project

Step VI: Evaluate processes and investment returns.

In summary, the investment in Cocoa processing plants in Ghana will have a the strongest economic
impact out of the the crops our team has investigated. The rationale supporting this is that the Cocoa crop
has been identified as a core competence for the Ghanaian government, especially with a governing
COCOBOD, however processing Cocoa is not.

Although this industry is very well developed and funded, the Ghanaian government could benefit from
exporting processed finished goods. This will create jobs and drive economic growth in the local
economy. The proposed structure of providing a mix of guaranteed debt from commercial banks,
diaspora/impact investors, and equity contributed by the processing plants themselves will create a
structure in which everyone has a stake, including the companies that are receiving the financing, this
reducing the investment risks and granting access to this much needed capital injection.

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Notes

[1] http://www.fao.org/docrep/008/a0013e/a0013e06.htm
[2]http://www.roundtablecocoa.org/documents/RSCE2%20Abidjan%20-%20Dr%20Amoah%20-
%20Representative%20public%20sector%20Ghana.pdf
[3] http://www.roundtablecocoa.org/documents/RSCE2%20Abidjan%20-%20Dr%20Amoah%20-
%20Representative%20public%20sector%20Ghana.pdf
[4] Gilbert, C.L., 2007, 31-32), Value chain analyses and market power in commodity processing with
application to the cocoa and coffee sectors, 14-03-2008
[5] http://www.oecd.org/dataoecd/35/30/41302232.pdf

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APPENDIX 1: Professor Reed Click’s grading notes: COMMENTS ON PROJECT II - GHANA

The work turned out to be very good. Many areas of the concept note need more development,
even if it’s just to add description. For example, the section “Why invest in cocoa?” is good, but
would benefit from a bit of discussion on why you choose cocoa over alternative crops. It looks
like you are looking at cocoa in a vacuum. Your reference to a competitive advantage in cocoa
production might work better as a reference to comparative advantage since you are mainly
considering the position regarding trade with the rest of the world. More areas for development
are described below. There are also some mistakes in the prose; e.g., your reference to a “fare
wage” on page 6 should be to a “fair wage.”

I think one of your great finds was the clear statement of the cocoa processing plants identified
by the Ghana Investment Promotion Center. Annex I shows three, although the third one doesn’t
seem to have an “Anticipated Partners’ Inputs” amount. How did you choose Akanfo over the
others? I still think there would have been opportunities to do all three somehow, especially
sequentially, but I understand that you may have gotten different advice from USAID. Your
“Summary of the Business Opportunity” is good, and the capital structure you propose is
appropriate. I do think you could have developed the description of Akanfo in the body of the
concept note, and add some explanation as to why you chose Akanfo instead of something that
was not already on the drawing board. However, I do like the fact that you leveraged the Ghana
Investment Promotion Center information. I found the full project proposal online, and see that
you could have described several aspects of the project in more depth. It isn’t clear how much
you used the project proposal beyond the facts in the table you present.

In the discussion of the capital structure, you could provide more compelling discussion of why
social impact investors are appropriate sources of capital, as opposed to other equity sources
(such as private equity). If the key is that impact investors can provide “patient capital,” explain
why patient capital is necessary. If the key is that they need to be “personally interested in
seeing the development of Ghana (PowerPoint presentation)” then diaspora investors (via
Homestrings?) might be more important, although this isn’t really the same as impact investors.
The discussion on page 10 is a bit garbled. I am also wondering what the exit strategy would be,
since I didn’t see any discussion of this in the concept note. I also think you have too much
general discussion of banking in Ghana, and not enough information suggesting why banks
would loan for cocoa processing. You say that there are “large returns on high quality semi-
finished cocoa exports” but never really document that.

On page 11, you “suggest reading the financial statements of the proposed business.” Did you
investigate whether such statements are available? It seems that the firm should have a business
plan, especially since the investment opportunity is listed at the Ghana Investment Promotion
Center. Did you try to contact Akanfo by any chance?

Element Points Possible Your Score

Presentation and Concept Note 100 90

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