Dr Dirk Willem te Velde, Research Fellow ODI
Dr Nkosana Moyo, ACTIS
David Chidgey, MP
1. The third meeting in the series was held on Tuesday, 26th October 2004. The meeting was chaired by David Chidgey. The two speakers were Dirk Willem te Velde and Nkosana Moyo
2. Dirk Willem te Velde began by debunking popularly held myths about investment and growth in Africa. These included misconceptions such as;
- FDI to Africa is low
- Business in Africa is not profitable
- All of Africa is doing poorly
- There are too many constraints to investment and African development which can't be overcome.
3. FDI to Africa is low. Dirk Willem te Velde illustrated that while FDI to Sub-Saharan Africa (SSA) in 2003 was US$9.3bn, which presented 5.4% of FDI to developing countries and 1.7% of world FDI, FDI stocks as a proportion of GDP were relatively high in this region and in excess of the average for developed countries. He made it clear that it was quality, not just quantity that was important. Dirk Willem te Velde, also illustrated that it is was however necessary to consider the geographical and sectoral spread of FDI, especially as 60% of inward FDI in SSA between 1998-2002 went to South Africa, Angola and Nigeria, mainly in pursuit of primary commodities.
4. Business in Africa is not profitable. It can be. Taking the example of South African foreign investors, Dirk Willem te Velde illustrated, that banks in Africa produced a return on equity of above 30% (sometimes 50-65%) and that MTN's (telecommunications company) earnings (before tax) margin in Africa was between 25-30%. Essentially Dirk indicated that some developed and developing country foreign investors derived a significant proportion of their profits from Africa (as well as other developing countries) including from retail, consumer goods and oil.
5. All of Africa is doing poorly. Dirk Willem te Velde indicated that this was not the case as around three quarters of African countries experienced positive GDP per capita growth over the last few years. Dirk indicated that the real issue with respect to African performance was that growth should be stronger than it was, investment to GDP ratios were still low and productivity of investment could also be higher.
6. Constraints to investment and economic performance. Dirk Willem te Velde explained that these could be over come and in the long run involved issues concerning trade openness (trade outcomes vs trade policy), geography (landlockeness, tropical climate which increased operational costs) and weak institutions (rule of law, democracy which increased the risk of doing business). In the short to medium term, these constraints included the lack of appropriate and good quality skills and infrastructure; natural resources, good public private interaction, governance and adequate sectoral policies and 'external shocks' (including commodity price shocks, climactic variation, AIDS, conflict lack of sound fiscal and monetary policies, and small market sizes). Dirk Willem te Velde indicated however that several countries including Uganda, Botswana, Lesotho, Cape Verde and Mauritius, Kenya and Rwanda had achieved some success in overcoming their short to medium term constraints.
7. Dirk Willem te Velde then considered business partnerships for development focusing on those that involved public-private interaction. He explained that the role of public and private sectors in partnerships differed by issue for example with reference to local content and human resource development or with reference to infrastructure (eg roads, water telecommunications).
8. Local sourcing. Dirk indicated that FDI had a greater development benefits when linkages with local actors were greater, especially where investment honoured public sector and local content requirements (eg WTO, TRIMs debate, black empowerment). He noted however that there was a lack of linkage promotion programmes for domestic content and a lack of a sufficiently co-ordinated approach to human resource development by private and public sector actors.
9. Partnerships for African Infrastructure. Dirk Willem te Velde indicated that Survey and econometric evidence showed that infrastructure is key for attracting investment and growth and provided an (in) direct impact on poverty. Furthermore he illustrated that the state of African infrastructure was poor, and the gap with most other developing countries was increasing. He noted however that aid to African infrastructure had decreased since the 1990s. Neither had the private sector moved into African infrastructure en masse (with some exceptions) and this was due to the risks, sunk costs, low cost-recovery prospects in many infrastructure sub-sectors. Dirk indicated that there were a few options for addressing this issue including new mechanisms (for example Public Private Partnerships and Guarantees) to push private investors, (although these did not appear to have been very successful on a large scale); improving governance and the climate of investment as a necessary although not sufficient condition for attracting private investment; and (regional) public finance, especially when commercial and economic rates of return differed.
10. Nkosana Moyo supported Dirk Willem te Velde's perspective and concurred that public and private interventions were necessary. Nkosana Moyo indicated that the private sector required infrastructure, sizeable markets, and stability in order to invest with confidence but that apart from South Africa, most SSA could not offer this. Nkosana Moyo outlined 5 key challenges in Africa which inhibited the private sector's development role.
- Ownership Nkosana Moyo stressed that it was imperative that ownership of Africa's development challenge lay in the hands of Africans, who would also be responsible for designing the course of action. Nkosana Moyo also made it clear that it was necessary for Africa to be responsible for its own prioritisation of activities and where funds were disbursed on a 'pay-back' basis, it was also necessary for Africa to develop the plan to ensure that repayment was perceived as possible. He also stressed that the psychological legacy of colonialism, which left some African's and countries thinking that 'colonialists owe it to us' was unhelpful, especially as many countries that had been colonised had progressed.
- Compression of time. Nkosana Moyo reminded the audience that the time in which the developed world had reached its current position was far greater than the dialogue allowed Africa. Instead, Africa was often expected to make a quantum jump which sometimes meant that objectives were unachievable which in turn could have a destructive influence on development performance.
- Capital retention and brain drain. Nkosana Moyo illustrated that the challenge here was to retain capital and skills produced in Africa, for Africa. He indicated that in many years, capital flight exceeded FDI and many skilled individuals were lost to international markets. The challenge here was for developed countries to help Africa 'confront its own demons' and reverse the loss of capital and skills.
- Evolution and clarity of separation of private and public sector. Nkosana Moyo noted that in many developed countries, infrastructure was initially financed through the private sector. It was then possible to privatise services such as the railways to enable private sector actors to upgrade and maintain the infrastructure. In the case of Africa, Nkosana indicated that it was necessary to roll back the dogmatism of privatisation and explore the possibility of partnerships between the public and private sector.
- Perceptions of profit. Nkosana Moyo highlighted the fact that in most African countries it could be perceived that there was ambivalence, especially from the public sector, to the possibility of making profit. He explained that this was because, historically, profit was exported by foreign investors. He noted that there was a need for a health debate on the issue of creating profit.
11. Nkosana Moyo outlined a few key solutions to addressing some of these challenges. Firstly he indicated that there was a need to support and educate indigenous entrepreneurs. He explained that this would be especially beneficial not only because of local job creation, but also because this would improve stability in Africa as ownership would mean that people would 'have something to lose personally' from instability. In turn Nkosana Moyo argued that this would create a platform for private sector led development
12. Secondly, Nkosana indicated that foreign investors would benefit from outsourcing some of their operations to indigenous companies to improve their integration, which in turn would improve stability and would help to facilitate private sector led development
13. Thirdly, Nkosana indicated that an idea pioneered by the Canadians proved to be of considerable value. Under this initiative the Canadian Government employed ACTIS to manage donated funds and asked them to match the value from private sector sources. The Government then subordinated part of their returns to private sector investors in Africa. This was successful in promoting knowledge of Africa and the scope for private sector investment. Nkosana stressed that this proved to be a good model as it not only illustrated the importance of linkages and partnerships but also was useful for cost sharing.
14. As a more controversial suggestion, Nkosana Moyo indicated that there could be a temptation for development partners to invest in a few well performing countries, for example Uganda and Ghana (though he accepted that these were not perfect) in order to enable the volume of resources to be more significant, and also to create useful role models that other countries could aspire to. He posited that this would be an improvement on the current situation where resources were more thinly spread making it difficult to identify clear evidence of change.
15. As a fifth suggestion, Nkosana impressed the need for the promotion of internal public private partnerships as opposed to foreign private and domestic public partnerships in Africa. He indicated that there was a need for smart solutions in order to create a comfort level between the public and private sectors in Africa.
This event looked at investment and growth issues in Africa, and the role of business and the private sector in driving African development.