Since the collapse of the socialist system in the former Soviet Union and Eastern Europe, and the changes that have taken place elsewhere, the private sector accounts for the bulk of economic activity globally. Throughout the world, recent economic growth and development have predominantly come about as a result of private sector endeavor. There is no reason to believe that Africa should be any different, and yet to date, the private sector in most African countries remains relatively underdeveloped.
Individually and collectively, African countries are currently articulating a vision of accelerated growth and poverty reduction. This is also the goal of Africas development partners. But effective and sustained poverty reduction needs much higher levels of broad-based economic growth than have hitherto been realized. Although governmental actions and external support are undoubtedly necessary, the required levels of growth will only be attained and maintained as a result of sustained private sector activity. The private sector is not, however, a panacea for all of Africas difficulties. But with the right conditions and support, it can, as elsewhere in the world, generate the wealth to stimulate growth, the revenue to improve public services, and the employment to lift people out of poverty. For the poor and unemployed, access to an income earning job is the surest way out of poverty and deprivation. At the same time, the increased revenues accruing from expanded private sector activities would enable governments to invest in social service improvements.
The private sector also provides the principal opportunity for facilitating Africas integration into the global economy. This has taken on added importance given that official development assistance to the continent has decreased significantly from its peak in the mid-1990s and the state-dominated economic model is no longer seen as an alternative. A new development paradigm is needed if Africa is to avoid further marginalization. The New African Initiative, adopted by African leaders in July 2001, embodies such an approach. Among other things it envisages and underscores the substantial contribution to be made by the private sector. The G-8 leaders have since endorsed the principles outlined in the Initiative.
Perhaps for the first time since independence, there is a real opportunity for the private sector to meaningfully contribute to development in Africa. Both the international context and the policy environment in a number of countries is now much more conducive to business than in the past; a new generation of private sector actors who understand the global environment and the need for competitiveness is emerging; and Africas partners are increasingly aware that a true partnership with the continent involves enhanced trade and investment, in addition to development assistance. Africas future prosperity and progress, and its place in an increasingly challenging world, will depend on the extent to which African governments, the private sector itself, and external partners can work together to overcome the constraints that still inhibit the private sector, and to support its growth.
I. Business Potential and Opportunities
In many African countries a variety of constraints would seemingly limit the prospects for viable business activities and significant economic growth. Yet, a closer look indicates considerable possibilities for new investment, as well as for diversification and expansion of existing business activities. As appropriately underlined in the New African Initiative, the private sector can be the principal agent for utilizing and developing Africas natural and human resources.
New and existing prospects
Given that the continents rich mineral deposits are relatively unexploited, mining offers many prospects for foreign and domestic private investment. However, since most domestic private companies lack the technical and financial resources required for mining and oil operations, African governments and their private sectors must explore creative ways to attract foreign partners. In line with its all-round importance to African economies, agriculture and related activities provide relatively easy opportunities. Not only is there domestic and regional demand for the production and supply of modern inputs for the sector, considerable scope exists to increase the value of agricultural products through processing. Both traditional and non-traditional agricultural exports can also be expanded, provided that product quality, packaging and delivery standards can be met.
Whether based on the further processing of primary products or not, industrial production for domestic markets is a principal avenue for growth and diversification. Over time, some of the industries catering to this demand may branch out into production for export. Textiles and footwear, the usual entry points for value-added manufactured exports, should become more attractive as some of Africas external partners have recently taken significant steps to remove all import barriers for Africa-originating textiles and apparel. Trade, including export/import, is a traditional area of business in which there are ample prospects for modernization and improvement of efficiency and competitiveness. Export-related businesses in particular have considerable scope for expansion in both regional and global markets, with export to neighboring countries providing opportunities to sharpen and upgrade competitiveness for the wider and more demanding global market.
Africas natural endowments and its cultural/historical heritage are assets that could be the bases for a strong private sector-led tourism industry. The scope for growth is large, and the investment and skill requirements are relatively less demanding, although competitive services including infrastructure, good accommodation and catering, efficient tour operators, safety and health are essential. An additional benefit of the tourist trade is its positive linkages to related activities such as handicrafts, financial services and transport, that create opportunities for small and medium enterprises.
The potential for expansion of banking and finance for savings mobilization and for financing development can also be profitably tapped. Among other services, new and interesting possibilities connected to the revolution in information technology are emerging. Examples include the provision, by Africa-based enterprises, of accounting, data-entry, back office operations, and even components of architectural and engineering design for companies based elsewhere. Such contractual services are easily provided via the internet. The comparative advantage of Africa-based enterprises lies chiefly in their lower personnel costs, provided the skills base is developed.
While the inadequate provision of infrastructure is a major constraint facing the private sector, it is also an opportunity to be exploited Although traditionally dominated by the public sector, it is now well-understood that increased private sector participation in infrastructure is a more effective way of financing investment and improving operating efficiency. The telecommunications sector in particular is increasingly open to participation and outright ownership and management by private enterprises.
The current state of the private sector
The extent to which the potential for increased private sector activity in Africa is realized will depend to a large extent on the private sector itself. With the clear exception of South Africa, the modern private sector is relatively underdeveloped, in large part due to past governmental policies. In most countries a significant proportion of large companies employing in excess of a hundred workers are still either state-owned enterprises or multi-national corporations, although privatization is gradually changing this. Medium sized firms with a workforce of between fifty and a hundred workers are more frequently the product of local private initiative, often beginning as small or microenterprises. With the exception of mining and other extractive industries, often conducted as enclave operations, larger firms are most usually based in the main urban areas where facilities and services are relatively better.
Outside of traditional agriculture, the bulk of the domestic private sector in most countries is made up of small scale firms employing up to fifty workers, and microenterprises that typically employ less than five. They are usually family-owned or sole proprietorships providing employment to the owners themselves, apprentices and other family members. They engage in a wide range of activities, and because entry and exit barriers are usually low, serve as an important channel for entrepreneurs from all sections of society, especially women, the poor, and minority groups. Small and microenterprises are often characterized by organizational flexibility and are found in both urban and rural areas. They offer considerable potential for economic development, among other things serving as a training ground for entrepreneurs to develop management skills, complementing larger firms by catering to niche markets, acting as incubators for the development of new products, and functioning as sub-contractors.
In many African countries, the informal sector is expanding much more than the formal sector, and is thought to generate considerable though unrecorded wealth. The size of the informal sector is due in part to the plethora of rules and regulations that constrain formal sector growth. The informal economy encompasses a diverse range of activities, including petty trading, simple processing of raw materials, informal provision of finance, and cross-border trade. It also serves as a fallback coping mechanism for those who cannot find employment in the formal sector. Many micro and small scale enterprises operate in the informal sector, and some larger firms are also said to run informal sector operations to avoid taxes and compliance with regulations. Moreover, in some instances the state itself, the economy and society in general have become increasingly informal.
Microenterprise development offers an opportunity for transition from the informal to the formal sector. However, microenterprises should be encouraged to operate as commercial ventures from the outset. Too often they are seen as quasi-charitable ventures, rather than as actual businesses. Throughout the world, small and medium enterprises (SMEs) have played an important role in terms of employment creation and as entry points into private sector activity. But, in spite of their numbers, their development has largely been neglected. Although not all SMEs can or should graduate into larger operations, growth should be feasible for some, provided it is accompanied by sound management and marketing strategies, and appropriate financial, accounting and audit practices.
As the private sector develops, it is likely to become more diverse and multi-faceted, catering to domestic, regional and international markets. The business potential exists, but needs to be exploited. At all levels, the private sector will have to focus on enhancing the quality of its products, improving its productivity and increasing its competitiveness. It will also have to be more creative in exploiting new technologies and taking advantage of the opportunities that these provide. To facilitate export-led growth, firms also need to move up the value-chain in terms of production for export, and ensure that their products meet international standards.
Although still at a relatively low level of development, the private sector in Africa is changing. Innovative, well-educated, entrepreneurial businesspersons who see success in terms of ability and competitiveness rather than political connections, are establishing themselves. So too, a range of foreign companies are willing to discount the negative images of the continent and take a chance on investing in Africa. These are promising beginnings. However, the emergence of the modern, diverse private sector that is needed in the 21st century will depend not only on the private sector itself, but also on the support of African governments and their external partners.
II. The Role of Governments
To date, very few African countries have managed to generate a truly conducive environment for private sector activity. Although many governments now espouse the idea of private sector-led development, it is by no means certain that they are aware of the full implications or are ready to implement the profound changes it requires. While the private sector itself must be proactive, the responsibility for addressing existing constraints and creating a stable policy framework lies primarily with governments. Obviously not all governments are faced with the same challenges, but creating an enabling environment requires on-going effort to ensure stability, improve governance, and maintain a coherent macroeconomic framework. Achieving this will not necessarily be easy, and in some cases will require fundamental changes in the way governments see their role. Although the New African Initiative signifies a political willingness on the part of African leaders to seriously address the development of the continent, achieving results will require sustained commitment to action.
Political, governance and regulatory environment
The primary task facing African governments is to ensure the stability and security without which sustainable economic development is impossible. Much of Africas recent past has been characterized by political upheaval, inefficient single-party regimes and military rule. Even today, the ongoing violent conflict in some countries continues to negatively affect the image of the continent as a whole. Political and legal uncertainties have inhibited the development of the private sector by increasing risk and deterring long-term productive investment in favor of short-term gains. Stability and security requires that governments respect human rights and democratic processes, as enshrined in their own laws. It also calls for political systems based on inclusion, tolerance and participation. Although progress has undoubtedly been made, most African countries are still in the process of political transition, and face challenges of ensuring peaceful political succession and developing the institutions that uphold the rule of law.
Governments need to take actions that will produce positive results in the short-term, while continuing to implement longer-term reforms. Governmental predictability, accountability and transparency, along with impartial enforcement of the rule of law, are essential elements of an enabling environment for private sector activity. In an attempt to attract investment, several governments have established investment promotion offices and enacted investment codes, as well as a variety of incentive schemes such as tax breaks. However, such measures are unlikely to succeed in a climate of overall unpredictability. The legal and regulatory framework in particular is important to ensure protection from state coercion, as well as arbitrary actions and corruption. Both domestic and foreign entrepreneurs need to be assured that their assets will be secure and that contractual obligations will be upheld. In this regard, property rights are of singular importance. In many instances, specific attention will be required to make sure that women entrepreneurs and investors are afforded the same legal rights and protections as men. Innovative mechanisms to grant legal land ownership rights on the basis of established use could enable small businesses to meet collateral requirements for loans, thus opening the way for them to obtain credit.
Improvements also have to extend to the regulatory environment, which in many instances is overly complex and lends itself to confusion, delays and corruption. Complicated licensing requirements, customs procedures, and tariff and tax structures are commonplace, and make doing business more difficult as well as add to transactions costs. Reducing, streamlining and simplifying regulatory procedures would do much to create a more conducive, investor-friendly climate. However, this does not imply unfettered private sector activity. Rather, it is the responsibility of governments to institute a clearly-defined and understandable legal and regulatory framework, and then ensure that it is rigorously and impartially enforced. Experience has shown that this is likely to increase efficiency as well as reduce opportunities for corruption. Both foreign and domestic investors are discouraged by pervasive corruption as it limits competition and increases the cost of doing business. Although broad coalitions of government, the private sector and civil society are needed to combat corruption, governments have a specific responsibility to address regulatory problems.
In a number of countries, the growth of the private sector has been hampered by weak public sector institutions. Thus far, civil service reform has often focused on reducing the wage bill rather than on improving standards. Although budgetary constraints make it difficult, strengthening the public sector to enhance service delivery may require increasing the levels of pay in order to attract, retain and assure the integrity of highly skilled officials. There is also need for transparent, merit-based recruitment and promotion procedures, and in-service training and career development opportunities. While decentralization of government functions may lead to more responsive governance, attention to capacity building at the local level is essential. Increased public sector professionalism would not only result in greater efficiency, but would also contribute to a more business-friendly environment.
Macroeconomic and trade policy framework
Just as political instability deters productive private sector activity, so too does macroeconomic uncertainty. This underscores the need for consistent application of sound economic policies and maintenance of a stable and predictable macroeconomic framework. The challenge facing governments is to create an incentive and institutional structure that permits economic agents to channel investment toward productive and competitive enterprises and sectors. Trade and exchange rate policies, as well as tax and tariff structures, can significantly affect the competitiveness and profitability of businesses, while high statutory taxes encourage informal, rather than formal, business activity. Most countries need to broaden and deepen economic and structural reforms, within a framework of established priorities. Such reforms would considerably improve the business climate. However, responding to the varied and sometimes competing demands of their international development partners can make it difficult for governments to retain focus on their own reform agendas.
Although experience to date is mixed, privatization offers considerable opportunities for private sector expansion. In addition to facilitating the withdrawal of government from direct involvement in business, privatization sends a strong positive signal to the private sector, especially when accompanied by trade and financial sector reforms. However, care is needed to ensure that the most suitable models are adopted. Proper planning and institutional arrangements are also essential to avoid the replacement of a public monopoly with a private politically-connected monopoly, to protect the interests of the labor force, and to provide adequate opportunities for the participation of the domestic private sector. Furthermore, privatization needs to be based on an appropriate legal and regulatory framework, and the rights and responsibilities of both the public and the private sectors need to be clearly specified and understood.
At present, Africa accounts for only about two percent of world trade and its share of manufactured exports is even lower. Governments should take advantage of preferential access to the European market and the recent US African Growth and Opportunity Act to encourage private sector exports. They also need to be more informed about, better prepared for, and more actively engaged in, international trade negotiations, particularly at the WTO. Furthermore, governments have to more systematically consult and involve the private sector in multilateral trade issues and negotiations. Although international agreements are important, so too are regional arrangements. Serious commitment to regional integration could lead to enhanced cross-border trade. Although a number of regional integration institutions have been formed, actual progress has been relatively slow, largely because governments have not taken decisive action. Harmonization of laws and regulations, removal of formal and informal barriers to cross-border trade, and standardization of procedures would make export to regional markets easier, while larger integrated markets would also be more attractive to foreign investors.
Export Processing Zones
In some countries, the export processing zone (EPZ) concept, which provides for duty-free import of inputs with the provision of industrial facilities and services, has been used to attract foreign investors to set up industries that produce mainly for exports. The main expected benefits to the host country are employment and in time, transfer of technology and know-how. In Africa, Mauritius and Tunisia provide the most successful examples of EPZs. However, the export processing zones concept has not worked well elsewhere. In some instances, the expected foreign exchange benefits have not ensued, while in others, governmental interference and lack of competitive services have impeded operations.
Human resources, infrastructure and financial intermediation
The cost and availability of trainable labor is one of the primary determinants of competitiveness and productivity. In several countries, labor laws and regulations have acted as a deterrent to both the foreign and domestic private sector. While minimum standards need to be assured and workers rights protected, low labor costs are a comparative advantage that African countries need to exploit. Although the private sector itself can and should help to develop skilled labor, the responsibility for basic education lies with governments. Worldwide, no country has sustained economic progress without literacy rates of well over fifty percent. In African countries, concerted efforts are required to increase enrollment rates and to improve the quality of education. Attention must also be given to the imperative of educating girls. Current education systems do not necessarily meet the needs of private enterprise, nor do they promote the innovation and creative thinking that encourages entrepreneurship. African governments face a dilemma of where to target educational resources in primary or tertiary education. Improved access to primary education would increase the opportunities available to the poor, while universities provide the skills and expertise that underpin development.
Developing the human resource base requires attention to health, as well as to education. The already difficult task of ensuring basic health care is worsened by the HIV/AIDS pandemic, which is overwhelming the capacity of most governments to cope. The long-term effects of this need to be taken into consideration. Not only will it place a burden on already overstretched health care budgets, but it will reduce the economic potential of countries. Both governments and the private sector need to take the impact of HIV/AIDS into account, both in terms of labor losses and the cost of providing treatment for employees
Inadequate infrastructure raises transaction costs and increases the difficulties of doing business in many African countries. Unless the provision of physical and communications infrastructure can be improved, and the costs radically reduced, it will be difficult for the private sector in Africa to become more globally competitive. Africas transport costs are the highest of any region. Although the situation varies from country to country, the continent is generally poorly served with transport networks, communications, and utilities. Complete reliance on public ownership and provision of infrastructure resulted in inadequate investment as well as poor management and high service costs. Those African countries that have experienced protracted conflict are also faced with the challenges of reconstructing destroyed infrastructure. While improvements in all infrastructure is needed, increased and affordable access to communications technologies is essential if African countries are to benefit from and participate in the emerging knowledge and information-based global economy.
Financial sector development is a necessary component of Africas growth strategy. The accessibility, quantity, quality and cost of finance is almost as important as physical infrastructure to the private sector. However, financial systems are still weak, capital markets are quite rudimentary, and heavy government borrowing from the banking system tends to crowd out the private sector. As a result, in most countries credit to the private sector is generally both modest and costly. Governments are faced with the challenge of restructuring banking systems in ways that minimize the costs to taxpayers, reduce the likelihood of recurring crises, and develop sound and competitive banking and non-bank financial institutions. Liberalization has to be accompanied by measures to improve financial sector governance, including robust systems of prudential supervision and regulation. Specific action may also be necessary to ensure that women entrepreneurs are afforded equitable access to financing facilities. A regional approach to financial sector development that harmonized monetary and macroeconomic policies and encouraged the development of regional capital markets would greatly facilitate regional trade by increasing competition, cutting costs and lowering risks to the private sector.
III. Responsibilities of the Private Sector
Despite recent progress, economic growth rates in Africa have not been sufficiently high to have a significant impact on poverty reduction. Much greater levels of investment are needed to stimulate growth. This will require that the private sector takes a leading and active role. In addition to generating employment, the private sector directly finances training and skills-development, and serves as the principal link to the global economy through foreign trade. Moreover, a competitive business environment can result in lower prices for essential consumer goods and services, thus making them more affordable to the lower income segments of the population. The reason that African economies remain underdeveloped must in part be attributed to the relative lack of a large and diverse private sector, with modern business know-how and entrepreneurial capacities.
A proactive private sector
Private enterprises should take a proactive stance to their own development, productivity and competitiveness, and meet appropriate standards of governance and corporate citizenship. In addition, they need to take advantage of the opportunities offered by privatization. Governmental involvement in the economy remains considerable, even though privatization had grown to a total value of over six billion dollars for Sub-Saharan Africa by the later 1990s. In contrast to microenterprises and SMEs that usually supply well-known products in response to additional or neighborhood demands, more organized medium and large enterprises may have to be more systematic in the development of products and services. In particular, those intending to cater for the export market both regional and global need to know the nature of the competition, required quality standards, and conditions relative to reliability and efficiency of delivery.
Knowledge has increasingly emerged as one of the most important factors for sustained growth, both for individual enterprises and for a countrys economy as a whole. To achieve and retain competitiveness, businesses must generate knowledge or else have access to that generated elsewhere. Acquiring the right to production and distribution of an international (or national) brand sometimes through franchise operations or production under license offers the advantages of association with a well-tried and easily recognizable trade mark. However, such arrangements may also have disadvantages, including restrictions with respect to market area covered and obligations not to carry competing brands.
Often, innovative business ideas fail to convert into marketable products and services because of difficulties in securing the financial resources for investment and working capital. In many countries, the depth and breadth of the financial infrastructure remains a problem, but one that the private sector itself could help to overcome. Admittedly, the overall policy and institutional setting and the capacity of the central bank to independently exercise supervisory authority play important roles in encouraging and facilitating the formal financial sectors growth. But within such a framework, the private sector could establish and run banking and other financial intermediaries, including savings and loans institutions, insurance companies, pension and venture capital funds, and stock exchanges, all of which serve to mobilize domestic savings and channel these as credit to other businesses.
A developed financial sector, together with a liberalized and credible policy framework, may be instrumental in attracting significant external investment capital and even in reversing and luring back flight capital. However, for most countries the practical and feasible approach in the medium-term would be to strengthen privately-owned commercial banks. Although changing as a result of privatization, public ownership of commercial banks continues to be the norm in a number of African countries. Also, commercial banks, whether private or public-owned, continue to use significant portions of their loanable funds for the purchase of Treasury Bills rather than extending credit to businesses. The development of SMEs and micro-enterprises in particular has been hampered due to chronic lack of financing from banks. On the equity side too, the private sector is likely to be the main source of capital. Although financing can be raised through direct sales of equity to individuals and businesses, neither stock exchanges nor venture capital both common sources of financing elsewhere are well-developed in Africa.
Private foreign sources of finance may be accessed through foreign direct investment (FDI), portfolio investment (channeled through stock exchanges), and borrowing from foreign credit institutions and suppliers. Of these, the latter two can be burdensome and even lead to financial crises, particularly in economies that have prematurely carried out financial liberalization without commensurate strengthened regulatory supervision of the financial sector. By contrast, FDI shares in the business risk, is not debt forming, and is usually accompanied with additional positive elements including access to technology, management know-how and established markets. However, there are cases where FDI and foreign borrowing come as a unified package. Moreover, a reasonably well-developed market for portfolio instruments may serve as a credible exit channel for eventual disposal of FDI holdings.
Enhancing productivity and competitiveness
The long-term profitability and viability of business enterprises depends on their ability to continuously improve productivity and expand markets. In manufacturing and other processing operations, the choice of equipment and technology is an important determinant of overall productivity. An equally if not more important factor is labor in particular the extent to which workers have undergone general and specialized training to upgrade their skills. For profitability and competitiveness, it is crucial that wage levels be closely related to the productivity of labor.
Productivity is a major determinant of competitiveness, and the feasibility and survival of export-oriented businesses in particular is intimately tied to competitiveness. The competitiveness of, and the profits to, African producers and exporters are negatively affected by innumerable and costly chains of marketing and handling. As Africa-based enterprises attempt to enter and penetrate export markets and move up the value chain, they are likely to encounter more demanding customers, willing to pay more for a product but stricter in terms of service and quality standards. This is true not only for export production industries but also for other foreign exchange earning service industries such as tourism. To retain their competitive edge, exporters need to know both their customers and their competitors. African private sector organizations need to become more proactive in securing specialized knowledge of the competition, including its cost competitiveness, product differentiation, and market penetration.
With tariff liberalization, even firms that predominantly cater to the domestic market will be open to challenges from cheaper imports. For enterprises with ambitions to operate in or expand to regional and global markets, the need to achieve and constantly maintain competitiveness will be even more compelling. Linkages with established foreign enterprises through FDI, contractual arrangements for the acquisition of know-how, or through strategic marketing connections can help to improve competitiveness. In effect, such arrangements if correctly negotiated, ensure access to technology, and management and marketing know-how. Of course, labor and managerial skills, knowledge and experience, the policy and institutional framework, the availability and cost of raw materials and other inputs, and the adequacy and efficiency of infrastructure also have significant implications for competitiveness.
Although it would be normal for firms, particularly those in export businesses, to initially base their operations on low-wage labor and access to domestic raw material, comparative advantage cannot be sustained for long only on static competitiveness, derived from natural endowments. It is necessary to build dynamic competitiveness based on training and skills development, and the acquisition of up-to-date technology and know-how. To stay competitive Africa-based exporters have to move up the value chain through further processing and domestic value-adding of hitherto raw exports, and also gradually shifting to manufactured exports. Strong external linkages may play a decisive role in such technology-upgrading and movement towards high-value exports.
As previously indicated, lack or inadequacy of essential infrastructure also reduces the competitiveness of African firms. Though traditionally governments were the sole providers of infrastructure services in most countries, many of these are now being fully or partially privatized, and there is significant and growing private involvement, particularly in such areas as telecommunications. The form of private participation varies from independent ownership and management (predominantly telecommunications and increasingly electric power supply), build-operate-transfer (roads), concessioning (railways), partial share ownership (airlines), to management contracts (ports). The private sector itself can be part of the solution to and not the helpless victim of inadequate and inefficient infrastructure. However, whatever the form and extent of private participation, there needs to be a strong, transparent and efficient regulatory system to ensure fair pricing, and adequate service-delivery.
Corporate governance and business partnerships
Good business practices and standards are essential to the integrity and long-term sustainability and growth of private enterprises. While many elements make up good practice, enterprise governance and corporate citizenship are crucial for the protection of the rights and interests of those who have the most stake in the business. Good corporate governance, like good public governance, is based on accountability and transparency. It requires enactment and enforcement of comprehensive company laws and regulations, maintenance of complete public share registers, independent external audits, and protection of shareholder rights. As businesses grow from sole proprietorship and SMEs toward larger and more structured organizations with more shareholders, the institutionalization and implementation of proper corporate governance becomes more compelling. Good corporate practices also build public confidence in the private sector. To a certain extent, the private sector is still viewed with suspicion in a number of African countries in part because of a poor past record of corporate governance.
Good corporate citizenship is built on awareness of and responsiveness to those whose interests are affected by the enterprises activities, the most obvious stakeholder group being the companys workforce. The common interest that both management and labor have in the survival and prosperity of the enterprise can be promoted by a variety of consultative mechanisms. Consumers are another group of important stakeholders that firms need to pay attention to. Whether products meet specified quality and safety standards matters a lot to consumers, as does the pricing of products. Host cities and localities have a stake in the success of businesses located in their jurisdictions, while the impact of a companys operations on the environment is of interest to society at large, as well as to the community where production facilities are located. Obviously, good corporate citizenship means refraining from corruption, avoiding anti-competitive practices, and generally conforming to the rule of law. Increasingly it is also demonstrated by corporate support of social and economic development programs.
There are ample opportunities for establishing and promoting business-to-business linkages, networks and associations. One category of such collaborative arrangements is vertical relationships between suppliers and customers. Such relationships are increasingly taking the form of vertical integration along major parts of a supply chain. Multi-national corporations are usually engaged in such vertically-integrated businesses, and transfer pricing between downstream and upstream components of their vast operations usually is a complex and controversial issue. Africa-based enterprises could benefit from vertical relationships with well-established foreign partners. Similarly, linkages whereby SMEs supply intermediary inputs to major production enterprises could promote the growth and development of these smaller companies. Horizontal associations can facilitate collaborative research, as well as joint procurement of inputs and marketing of products, particularly by SMEs. Input supply and product marketing can also be managed by a separate and appropriately-organized trading company. Particularly where critical inputs are sourced from abroad and production is also destined for export, such trading companies can provide vital and specialized services to SMEs and even large enterprises.
Traditional forms of business associations, including chambers of commerce, serve many purposes, including linking business communities with foreign counterparts. They also represent the interests of business before public bodies. They can be used for training and capacity development, and for organizing trade fairs. Too often in the past, the positive contribution of such associations was undermined as a result of political patronage and interference. The creation of enterprise networks has revolutionized the conduct of business in most parts of the world. Networks emanating from private initiative are free from the limitations imposed by formal structures that seek to legislate economic cooperation. This flexibility allows private sector participants more latitude to mould the modus operandi of the business networks to meet their needs. The West African Enterprise Network is one example, and the creation of similar networks in Eastern and Southern Africa have led to the formation of an umbrella-organization, the Africa Enterprise Network. Increasingly, foreign involvement, trade and investment do not necessarily or automatically mean non-African. Whether on a regional basis or on a ad-hoc bilateral basis, co-operation among private enterprises in different African countries can be of mutual benefit.
IV. Support of External Partners
External partners can have a significant role in supporting the private sector, both by providing increased official assistance and by opening their markets to African exports. For Africas development partners, the impulse to support the private sector lies in its potential contribution to economic growth and poverty reduction. However, bilateral partners are also concerned to develop new markets and expand opportunities for their own private sectors, as well as to discourage and minimize economically-induced migration. Although they respond to incentives, foreign private investors are attracted by opportunities for profitably expanding their operations, provided that the risk is manageable. One of the reasons that foreign private investment in Africa is low is because of perceptions that the potential return is outweighed by the risks involved.
Early in the 1990s private capital flows to developing countries overtook official development assistance, and now stand at several times the level of official transfers. However, ninety five percent of FDI to developing regions went, and continues to go, to just ten countries, most of them emerging market economies in Asia. Africa managed to attract only a small share, and the bulk of this went to oil-producing countries. Obviously, much greater efforts are needed to attract private capital, particularly given the decline in official development assistance.
Although in the past they have not particularly focused on the private sector, Africas development partners can today make an important contribution to its growth by assisting governments to improve the overall climate for private sector activity. In many countries, development assistance agencies already fund programs directed toward increasing governmental predictability, improving the rule of law, countering corruption, and strengthening public institutions. Provided that these are designed and implemented with the private sector in mind, they can all help to support it. Assistance can also be targeted toward removing specific constraints, such as complex regulatory procedures and requirements. Although over time overall improvements in governance will help the private sector, specific focus on issues such as protection of property rights, development of contract law and the implementation as well as the enactment of investment codes will yield greater results in the short term. The same is true for assistance with tax and tariff reform, or privatization.
A variety of instruments exist through which assistance to the private sector can be channeled, including those of the European Commission under the Cotonou Agreement, the World Bank group, the African Development Bank, and the investment agencies of many bilateral partners. Also, most development assistance agencies already fund programs to support microenterprises and SMEs. To the extent that these promote the adoption of sound business practices, and also allow small-scale entrepreneurs to acquire managerial and technical skills, they can be very useful. However, development programs targeted at SMEs are often relatively short-term and piecemeal. An integrated strategy and even coordination of efforts could lead to greater efficiency.
Development partners could also target support toward specific groups of entrepreneurs, such as women, in order to facilitate their acquisition of necessary skills and resources. Several development agencies run extensive training programs, that could help private sector operators to gain a variety of business skills and qualifications, as well as experience. Some externally-financed training programs for microenterprises have achieved considerable success and could perhaps be expanded. As many micro and small-scale entrepreneurs operate in the informal sector, such programs could also support their transition and integration into the formal economy. Given the importance of the new information and communication technology to competitiveness and effective integration into the global economy, assistance targeted at increasing access and capacity in this area could be instrumental in raising the competitiveness of African entrepreneurs.
Given that one of the major constraints to the expansion of the private sector at all levels is access to affordable financing, development of the financial sector and actual provision of financing for specific activities could be helpful. Externally-supported financial institutions that provide start-up and working capital to small businesses on commercial terms appear to have made promising starts. Once established, such ventures aim to become self-sustaining and function as proper financial institutions catering to a targeted market.
Governments of partner countries and international institutions can also promote and support foreign investments in African countries by providing investment guarantees against non-commercial risks. Such guarantees can cover the political risk related to specific financial transactions, trade arrangements and direct investments in African countries that commercial financial institutions are unwilling to take. These mechanisms and measures are commonly employed for business transactions and investments in other regions of the world, but less so in Africa, and need to be promoted and supported there also. More extensive use of private sector firms by development assistance agencies could also expose them to the opportunities that exist in African countries.
MIGA and PROPARCO jointly promote private investments
Established in 1977 as a key component of Frances overseas development assistance, the goal of the Sociéte de promotion et de participation pour la cooperation économique (PROPARCO) is to promote private investment to help strengthen economies and contribute to sustainable development. The company is majority-owned by the French Development Agency (AfD), with the remainder shared by 41 private shareholders. It operates in a variety of ways, providing equity and quasi-equity investments, loans guarantees, and a host of other services.
In July 2001, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, and PROPARCO signed an agreement that will enable the institutions to work together to identify possible projects for guarantee coverage, with a special focus on small and medium-sized enterprises and large infrastructure, mining and industrial projects. The agencies will co-insure and reinsure each others projects. It is expected that the agreement between the two institutions will enable them to expand their portfolio, particularly in Africa.
Source: PROPARCO and MIGA
Appropriate external support for regional integration initiatives in general, and for specific measures such as harmonization of legislation, removal of tariff barriers, and streamlining of customs procedures, could assist export-oriented businesses as well as improve the climate for export-led growth. Similarly, assistance to develop African government and private sector expertise on WTO rules and requirements could facilitate their more effective participation in trade negotiations. Support could also be provided to enhance the capacity of African governments and entrepreneurs to deal with foreign investors, most of whom have greater resources and more specialized knowledge.
However, Africas development partners could be more coherent and consistent in their overall approach to African countries. While many have encouraged, and even provided assistance, for the development of the private sector, they could also further expand market access for African products and help African exporters take advantage of current opportunities. It is not entirely reasonable for Africas partners to urge African countries to pursue economic liberalization and promote the private sector while they themselves practice protectionist trade policies. Improved market access favorably impacts on the export earnings of countries, while at the same time serving to strengthen the private sector itself. Such improved market access does not only consist of lowering or eliminating tariffs and non-tariff barriers. It also covers the elimination of state subsidies to national producers and exporters that distort competition and work to the detriment of African producers.
Foreign private investment
In the past, and to some extent still today, foreign investment in most African countries was primarily supply-oriented, serving to guarantee the supply of raw materials to developed countries. While such investment provided employment and an important source of revenue for African governments, it generated little domestic manufacturing or ancillary industries and services. Foreign investments of this type had few positive linkages and were usually managed as enclave activities. As a result, at times they served to create a negative impression of the foreign private sector in African countries.
Properly managed and operated, however, foreign investment can contribute much to national economies by creating employment, stimulating local enterprises, and developing skills. Direct investment, joint ventures, and supply contracts between local enterprises and foreign skilled personnel all provide opportunities for local companies, and their managers and professionals, to upgrade skills and experience. Today, foreign collaboration can particularly help to address the digital divide that may leave African countries and businesses further disadvantaged. Properly arranged, such collaboration can facilitate and enable African companies to take advantage of new technologies that can reduce production and marketing costs as well as link them to customers and markets.
There are also indirect means by which foreign investors can support the development of the private sector in African countries. Joint chambers of commerce look after the business interests of individual members, while aiming to promote mutual investment and trade between their respective countries of origin. SANEC, as described below, is one example of this type of collaboration. Other organized forums that group individual enterprises from African and other countries include associations of importers or exporters, private-private partnerships oriented toward specific industries, and business networks.
SANEC: The South African Netherlands Chamber of Commerce
The South African Netherlands Chamber of Commerce (SANEC) was established in 1992 by its Founding Members, with the goal of promoting trade and investment on a bilateral basis.
Its aim is to foster business relations between South Africa and the Netherlands and thus to achieve closer economic ties and better mutual understanding to the benefit of both countries.
More specifically, its objective is to promote increased exports, imports, business services, tourism and investment in close cooperation with., and support of, its members and clients. It operates on commercial principles.
SANEC also aims to promote South Africa as a springboard for Dutch companies into Sub-Saharan Africa and for the Netherlands to act as a gateway for South African companies wishing to enter the European Community.
Like their domestic counterparts, foreign investors can make an important contribution to the development of African countries by functioning in a socially-responsible manner and including social programs as part of their operations. In practice a growing number of foreign companies demonstrate such behavior, recognizing that while private business must make a profit, acceptance by local communities is also important. Foreign companies should obviously meet the standards set by the OECD convention on combating corruption in international business transactions. Although the responsibility for enforcing the convention lies with governments, the codes of conduct and anti-corruption policies that many companies have voluntarily adopted are helping to set new standards for international business practices.
For many African countries foreign loans have in the past been both a blessing and a burden. While in the short-term they have allowed for the importation of much needed capital and consumption goods, over the long-term they have often led to problems when projects failed, money was diverted from its objectives or squandered, and exports failed to generate sufficient foreign exchange to finance repayment. Foreign loans from commercial sources (including export credits) are not likely to gain in importance in most African countries as long as their current debt burden persists. The relative weight of their debt burden has further undermined the creditworthiness of countries. This discourages foreign sources of capital, including private investment and commercial credits.
There are undoubtedly opportunities for the private sector in Africa, and the climate for business is definitely changing in most countries. But much more needs to be done, and concerted action is needed by all parties. African governments need to adopt pro-business policies, based on facilitation rather than control. For its part, the domestic private sector has to proactively take advantage of the openings that political and economic reforms are creating. There are also enormous benefits to be gained from government-private sector collaboration in, for example, providing infrastructure, education and skills training. Recognizing the importance of increased dialogue, several African countries are establishing formal government-business forums based on the East Asian experience, in some instances including organized labor. Provided they are open and accountable, such mechanisms, including investor councils, can make a real contribution to creating a pro-business policy environment and improving government-private sector relations.
Africas official development partners are increasingly recognizing that the private sector has an integral role to play in reducing poverty on the continent. Through their assistance programs they can help to improve the climate for business, and directly support the expansion of the private sector. They can also provide incentives for their own private companies to invest in Africa. Foreign firms can obviously have a tremendous impact, through their investments, the skills they bring and the opportunities they afford. But they will not invest simply because they are asked to. They need to be convinced that Africa is changing and that the changes are real.
The GCA recognizes the imperative of reducing poverty in Africa, and the central importance of the private sector in achieving this through broad-based and sustainable growth. It is for this reason that the private sector and African development was selected as the theme for the GCA Plenary (Gaborone, October 2001). By bringing together representatives of African governments, their development partners and the foreign and domestic private sector, the Plenary provides an opportunity for them all to engage in open discussion of how they can work individually and collectively to overcome constraints and promote and support the expansion of the private sector. The GCA is also committed to supporting the development of the private sector, and recognizes the positive contribution it can make to the New African Initiative (NAI) as this is implemented. The goals articulated in the NAI cannot be achieved by governments alone. Partnership with the private sector and civil society, as well as the support of the international community, will be essential. In many of the areas emphasized by the Initiative, such as agriculture, exports, communications technology and infrastructure, the private sector can and should take a lead role. At the same time, progress in other aspects of the Initiative, such as governance and regional cooperation and economic integration, will help to improve the environment for the private sector in African countries.