Spurring business to invest in Africa’s future

Loading cocoa at Côte d’Ivoire’s port of Abidjan: Members of the country’s NEPAD Business Group are working with the government to help promote economic recovery in the wake of the civil war.

Photograph: Panos / Sven Torfinn

Since the signing of a comprehensive peace agreement in March 2007, Côte d’Ivoire has been healing the wounds of a civil war that divided the country for more than four years. Major challenges remain in reconciling different political and ethnic groups and in reviving the confidence of a vibrant business sector that once made the country one of West Africa’s economic powerhouses.

Local business leaders believe that the New Partnership for Africa’s Development (NEPAD), adopted by African leaders in 2001 as the continent’s comprehensive plan for economic, social and political advancement, has a key role to play in helping to mobilize the private sector for Côte d’Ivoire’s recovery. The NEPAD Business Group in Côte d’Ivoire, set up a few months before the peace agreement, has been in “constant dialogue” with the government to “set up building blocks for a post-crisis plan,” says its president, Guy M’Bengue, who also heads the country’s export promotion agency.

In fact, Mr. M’Bengue told Africa Renewal, the Ivorian private sector managed to minimize the damage of the war by keeping intact the country’s industrial base, “despite the difficult times over the last five years.” But if renewed investment is to be encouraged, business confidence must be restored.

The NEPAD Business Group, now with more than 100 members, has been urging the government to undertake legal, tax and customs reforms. So far the authorities have reduced the value-added tax and begun paying off public debts owed to private businesses, measures that have helped “to create trust between the government and the private sector,” says Mr. M’Bengue.

The Ivorian group also joined with the government to organize a forum for businesses to learn about NEPAD-sponsored infrastructure development projects that are being financed by the African Development Bank (ADB). The group expects further dialogue with the government in developing more incentives for the private sector, as part of a broad plan for post-conflict recovery.

Reforms under way

Whether involved in post-war reconstruction or not, many countries across Africa are carrying out reforms to create a “sound and conducive environment for private sector activities,” as specified by NEPAD.

Ghana, Côte d’Ivoire’s immediate neighbour to the east, is overhauling its public sector to encourage efficiency and provide more incentives for private business. The port authority’s operations have been streamlined to speed the clearing of goods, and all major ports and harbours have been linked on a computer network with relevant government departments and agencies to simplify the processing of imports. Reforms at the agency that registers companies have cut the time needed to start a business from several months to 42 days.

Textile factory in Lesotho: Lower tariffs and changes in government policies can do much to stimulate private investment.

Photograph: Associated Press / Ben Curtis

“We have adopted a pro-business stance aimed at achieving widespread private sector–led growth throughout the country,” John-Hawkins Asiedu, a director at Ghana’s Ministry of Trade, Industry and Private Sector Development, told Africa Renewal.

South African Minister of Trade and Industry Mandisi Mpahlwa told a NEPAD projects conference in South Africa in November that the increase in economic growth in many African countries in recent years can be attributed, at least in part, to the fact that many governments are addressing critical issues such as “investment in infrastructure, the promotion of a stable investment and business environment, as well as private sector development.”

The World Bank, in a Doing Business report issued in 2007, found that a total of 24 African countries implemented reforms during the year, making it simpler to start businesses, strengthening property rights, enhancing investor safeguards, increasing access to credit, easing tax burdens, expediting trade and reducing costs. “Doing business has become easier in some parts of Africa,” the report said. It ranked Ghana and Kenya among the world’s top 10 “reformer countries.”

Suspicion and obstacles

However, many African countries continue to have weak private sectors and low levels of private investment. Analysts point to a variety of factors that contribute to this shortcoming: institutional failures, weak legal systems, inadequate infrastructure, poor policies, bureaucratic red tape and unclear government regulations and operations.

Historically, domestic business has not been systematically involved in Africa’s development. Following independence, some governments viewed the private sector with suspicion, while others could find few local entrepreneurs with the capital or skills to play a notable role. State-owned enterprises therefore emerged as the main institutions for promoting the development of Africa’s industry and infrastructure.

Many countries across Africa are carrying out reforms to create a “sound and conducive environment for private sector activities,” as specified by NEPAD.

“Over the years, private sector involvement became an afterthought,” explains Emmanuel Nnadozie, chief of the NEPAD Support Unit of the UN Economic Commission for Africa (ECA). But that has begun to change, he adds. “There is more realization that the private sector is the engine of growth and cannot be ignored in Africa’s development process.”

Whether a domestic company can bring in “money, skills, business expertise or develops new businesses around existing projects,” argues Ini Urua, the NEPAD division manager of the Africa Development Bank (ADB), “the [private] sector is essential.

Peer pressure

One means for encouraging African countries to move business closer to the centre stage is the African Peer Review Mechanism (APRM). Established in 2003 as an initiative of NEPAD, it is a system of voluntary “self-monitoring” through which African countries review each others’ political and economic management. In addition to drawing attention to such political issues as democracy and human rights, it helps participating countries look closely at their systems of corporate and economic governance.

Building a road in Tanzania: Unfortunately, private sector involvement in infrastructure projects in Africa has been limited.

Photograph: Peter Arnold Inc. / Jorgen Schytte

At a roundtable on strengthening investment and reform in NEPAD countries, held in Zambia in November, Kojo Busia, the head of the ECA’s APRM Support Unit, noted that such peer reviews help countries identify further reforms they should carry out. Following up on such commitments, he added, “is perhaps the most crucial stage in contributing towards improving the investment climate of APRM-participating countries.”

Kenya completed its first peer review in 2006, and out of that process launched an ambitious programme to reform its business-licensing procedures. Previously there were more than 1,300 separate regulatory measures on the books affecting businesses. To build a warehouse, for instance, a company had to complete 10 different steps, including obtaining a building permit, seeking approval of project plans and architectural drawings from the municipal authority, and obtaining an occupancy certificate. Over the last two years, 118 licensing requirements were eliminated and eight others simplified. The World Bank expects that another 900 will be simplified or removed in the near future.

So far, 27 African countries have signed on to the APRM process. Those demonstrating a willingness to reform by joining the peer review process may expect increased support. One source of backing is the Investment Climate Facility (ICF) for Africa, which is headquartered in Dar es Salaam, Tanzania, and finances projects aimed at improving the continent’s business environment. It provides assistance only to countries that have joined the APRM. The ICF has been endorsed by African leaders and is financed by multinational corporations, the governments of the UK, Ireland and the Netherlands, the European Commission and the World Bank’s International Finance Corporation.

The ICF’s first project, in Rwanda, is helping the government establish a commercial court to speed up the process of resolving business disputes and creating a new agency that will handle all the steps for registering a company or small business. When the project is completed, ICF Chief Executive Omari Issa told Africa Renewal, “it should be possible to register a business within days, either online or from any province, instead of several weeks.” Previously, companies could be registered only in the capital, Kigali.

Capacities limited

Even where governments have become more favourable to private business involvement, the size and nature of the sector can be a hindrance. “Most businesses are largely family-owned,” notes Mr. Urua of the ADB. “They don’t want to open up and that is a big drawback.”

Beyond willingness, there is the problem of ability. At an international business forum organized by the NEPAD Business Group in Nigeria in 2005, Nigeria’s then President Olusegun Obasanjo noted that businesses in Africa confront serious constraints of “capacity and capital,” although “they remain vital to the NEPAD process.”

A 2006 report by the UN Office of the Special Adviser on Africa, surveying the role of the private sector in West, East and Southern Africa, found that in comparison with foreign firms, domestic companies have been less involved in the implementation of NEPAD projects. The report attributed this to the greater capacity of foreign firms for undertaking construction projects.

This domestic shortcoming is especially evident in regional projects to build roads, gas pipelines, power grids, telecommunications networks and other large-scale infrastructure linking two or more neighbouring countries. In 2002, African leaders adopted a Short-Term Action Plan (STAP) to realize selected NEPAD priorities. About half of the $7 bn to be mobilized for construction projects under the STAP was expected to come from private businesses. However, admits the ADB, “private sector participation in infrastructure investments in Africa has, so far, been somewhat limited.”

Limited capital or expertise is not the only obstacle. According to Mr. Urua of the ADB, businesses also hold back because they perceive the investment climate to be poor for a variety of reasons, including political instability, inadequate national and regional policies and unclear or weak legal and regulatory structures.

Ending monopolies

Omari Issa, with the Investment Climate Facility, emphasizes the legacy of earlier state policies. The private sector, he maintains, “is willing to invest in infrastructure, but there is lack of legislation and structure to guide such investments in almost all the countries.” Business, he notes, “has to compete with the state, making investment in infrastructure unattractive.”

In Ghana, the state-owned Volta River Authority (VRA) has had a virtual monopoly over the bulk production and supply of electricity since 1961. It generates power from thermal plants using crude oil and from the Akosombo Dam using hydro-energy. The oil generators produce a kilowatt hour of electricity for the equivalent of 10 US cents using crude oil, while the cost with the hydro plant is just 2 cents. The VRA then sells the power to the Electricity Company of Ghana, the main state-owned distribution company, at 5–7 cents a kilowatt hour, using the profits from hydro generation to subsidize the high cost of producing with oil.

This arrangement has some drawbacks. When there is not enough rain to keep water levels in Lake Volta sufficiently high to run the dam, electricity shortages may result. The system also tends to “crowd out” independent power producers, because they simply cannot compete. The government is currently reforming the power sector to end the VRA’s monopoly and make private investment more attractive.

Firmino Mucavele, chief executive of the NEPAD Secretariat, based in Johannesburg, South Africa, urges African governments “to repeal laws that create monopolies” and to set up “regulatory bodies to encourage competition.”

Political will and expertise

Any attempt to implement an initiative across many countries will inevitably face serious challenges. One of the “big issues,” says Mr. Urua, is achieving sufficient political will from national and regional leaders and organizations. “You are working through countries,” he says, “and without tacit support at the political level, you can’t drive the regional integration agenda forward.”

The ADB official cited the examples of the West African gas pipeline, which is to bring natural gas from Nigeria to Benin, Togo and Ghana, and the Mozambique–South Africa natural gas pipeline. “The heads of state put their political weight behind the projects and helped to ease any regulatory issues that would have stalled them.”

Another issue, Mr. Urua adds, is the ability of Africa’s various regional economic groups, which are responsible for implementing NEPAD regional projects, to actually follow through. Even the stronger ones, such as the Economic Community of West African States or the Southern African Development Community, do not always have the financial resources or technical know-how to design and effectively manage the projects. “You can’t develop your region,” argues Mr. Urua, “if you are borrowing technical expertise all the time without developing your own.”

However great the challenges, many agree that much more needs to be done to get the private sector better involved in making the NEPAD initiative a reality. And now is the time, affirms Lynette Chen, head of the NEPAD Business Foundation in South Africa. “NEPAD is only six years old and needed a long process of planning.” However, she says, “We are at the imple-mentation stage now.”