Why are Local Equity Participation Requirements (LEPRs) important in Ghana's economy?
How do we strike a strategic balance between upholding LEPRs and promoting critically required foreign direct investment (FDI)?
How can the promotion of LEPRs be advanced in the context of a lack of local capital depth?

These key concerns draw attention to the important interactions that exist between attracting FDI and promoting the growth of the local investment in our economy. Overcoming these obstacles is crucial to maximising FDI potential and promoting inclusive, sustainable growth for all Ghanaians.

This article explores the potential benefits and implications of mandating companies with LEPRs in various sectors to list on the Ghana Stock Exchange (GSE). This strategy will ensure broader Ghanaian ownership and participation by making shares in critical sectors accessible to a wide range of local investors. Leveraging the GSE can significantly enhance the effectiveness of LEPRs. When such companies are required to list on the GSE, shares become available to indigenous retail investors, pension funds, and other institutional investors, thereby democratising investment opportunities and fostering a culture of local ownership. Additionally, listing on the GSE increases transparency and accountability, which can attract more investors and boost market confidence.

The proliferation of FDI in any developing economy is a welcome development. The inflow of capital leads to job creation, infrastructure development, human capital development, and fiscal benefits to help support essential government services.

However, to ensure that the benefits of FDI are maximised and equitably distributed, many countries implement localisation policies. Localisation involves ensuring that local businesses, workers, and resources are significantly integrated into sectors traditionally dominated by foreign entities. Key elements of localisation include:

• Local Content Requirements: which are regulations that mandate that a certain percentage of goods, services, and labour used in a particular industry or project must come from local sources; and
• LEPRs: which are policies that require a specified portion of ownership or equity in businesses, especially in critical sectors like mining, oil and gas, and telecommunications, to be held by local investors or the government. This ensures that a share of the profits and decision-making stays within the country.
In Ghana, these policies aim to ensure that the economic benefits of key industries such as oil and gas, mining, fintech and telecommunications are shared with local businesses and citizens, promoting sustainable economic growth and development. Specific targets for local content and participation are set, which foreign companies must meet to operate within the country.
State of LEPRs in Ghana

Ghana has adopted a steady trend of LEPRs in crucial sectors of the economy where investment is heavily dominated by foreign entities. This is an attempt to ensure substantial local involvement in key industries. In the upstream petroleum sector, entering a petroleum agreement or obtaining a petroleum licence mandates 5% equity participation by an indigenous Ghanaian company. Additionally, non-indigenous companies providing goods and services in this sector must form joint ventures with indigenous Ghanaian companies, with the latter holding at least 10% equity participation. The downstream petroleum sector requires between 50% to 100% equity participation by Ghanaian entities for various categories of licences.

In the fintech sector, there is a 30% Ghanaian equity participation requirement as a licencing condition. The telecommunications sector mandates equity participation ranging from 30% to 70% for network operators, service providers, and frequency holders, depending on the specific licence or authorisation. In the power sector, electricity distribution activities initially require 30% equity participation, increasing to 51% within 10 years of operation, while electricity sales and brokerage activities require 80% equity participation by Ghanaians, increasing to 100% within 5 years. Renewable energy businesses are required to have an initial 15% local equity participation, to be increased to 51% within 10 years of operations.
The mining sector is the first sector to impose a mandatory listing requirement. A mining company is required to list at least 20% of its equity on the GSE if its planned expenditure exceeds a determined limit within 5 years of operation. Under the Draft Guidelines developed by the Minerals Commission and the GSE, the listing requirement would apply to mining companies that have been operating for more than 5 years and have a capital expenditure threshold of USD 100,000,000.

The current model for complying with the above LEPRs requires entities in the relevant sectors to demonstrate compliance as a condition for obtaining the requisite licence or authorisation from the regulator. The current model faces significant challenges including:
• limited capital and expertise among local investors – many Ghanaian investors lack the financial resources and expertise necessary to purchase significant equity stakes in capital-intensive industries like oil and gas or mining. This limits meaningful local participation and ownership; and
• creation of ‘front’ companies – there is a risk that foreign companies may create 'front' companies that nominally meet the local equity criteria but are beneficially controlled by foreign interests. This subverts the goals of LEPRs and undermines the intended economic benefits.

The current model also does not effectively promote accessibility and awareness among the general population, restricting broader participation in the economy by ordinary Ghanaians. To address this, leveraging the capital markets through the GSE presents a viable option for consideration. Companies may be required to list a portion of their equity on the GSE within a defined period for the purposes of meeting LEPRs.

Role of capital markets and leveraging them to enhance LEPRs
Capital markets play an important role in a country's economic development because they allow for the mobilisation and allocation of long-term funds. Capital markets can play a crucial role in bridging the gap between foreign investment and local involvement in the framework of LEPRs, ensuring that the economic benefits are distributed more widely throughout the economy.

One way this may be achieved is to mandate companies subject to LEPRs across various sectors to list on the GSE to fulfil these requirements. For instance, holders of a category of mining licence in Tanzania are required to list at least 30% of their shares on the Dar Es Salaam Stock Exchange to enable local participation. Similarly in Kenya, a holder of mining licence is required to list at least 20% of its total shares on the Nairobi Stock Exchange within 3 years after commencement of production.
Ghana can glean valuable insights from these examples and adopt same for the purposes of our LEPRs. This strategy ensures broader Ghanaian ownership and participation by making shares accessible to a wide range of local investors.

Regulatory adjustments, including amending the relevant legislations containing the LEPRs to compel compliance, would be required to implement this strategy. This approach will not only enhance compliance with LEPRs but also promote transparency and good corporate governance.
Alternatively, Special Purpose Vehicles (SPVs) may be utilised to acquire shares from companies required to meet LEPRs. These SPVs could be established across different sectors to offer diversification of investment risk and would be listed on the GSE.

As part of these measures, consideration could be given to providing allotment preferences for Ghanaian investors to ensure that local investors benefit from these opportunities. This offers a structured and accessible means for local investors to own shares indirectly in companies subject to LEPRs.
The investment guidelines for pension funds permit up to 20% of their Assets Under Management (AUM) to be invested in listed ordinary shares or non-redeemable preference shares, with a per issuer maximum limit of 10% of the market capitalisation of the relevant issuer. As of 2022, private pension funds controlled 74% of the total AUM of all pension funds, amounting to GHS 34.5 billion. Despite this substantial control, the primary investment model for these funds has been heavily skewed towards government securities, with 77.5% of their AUM invested in government securities in 2022. Given that pension funds are encouraged to invest domestically to promote a favourable investment climate, there is a compelling need to diversify their portfolios.

Private pension funds can help boost the localisation drive by investing in the shares of companies listed on the GSE under the LEPRs. Listing these companies will provide the right incentive for private pension funds to invest, thereby supporting the localisation agenda.

Concluding reflections
In summary, this article has highlighted the potential of leveraging the GSE to meet LEPRs. Mandating companies with LEPRs to list on the GSE presents a promising strategy to ensure broader local ownership and participation. In enhancing transparency and democratising investment opportunities, this approach can strengthen Ghana's economy. Balancing LEPRs with the need for FDI, while addressing local capital shortages, is crucial for sustainable and inclusive growth. Through effective localisation policies, Ghana can harness the full potential of both local and foreign investments.

Joel Telfer Jnr, Associate- Financial Institutions & Capital Markets

Bentsi-Enchill, Letsa & Ankomah