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  1. Private sector development in AfricaEvidence based on AEO Celine Kauffmann Economist OECD Development Centre European Commission Brussels12 Sept. 2006

  2. African Economic Outlook African Development Bank OECD Development Centre

  3. L. Kasekende (AfDB chief economist): “in most countries, the private sector is ready to play a more prominent role but faces huge constraints”

  4. Private sector development in Africa: the missing middle 1 2 Insufficient and deficient Infrastructure 3 A limited access to finance 4 Limited access to market 5 A predatory public sector?

  5. SMEs in Africa: the missing middle(AEO4) • Little private sector development, except in south Africa and north Africa • SMEs suffer the most from adverse economic conditions and little conducive business climate

  6. The failed potential of privatisation for private sector development (AEO2) • Under-developed “indigenisation” process, especially in network utilities • A financial policy environment tilted towards foreign investors? • difficulties in borrowing working capital (high interest rates) • large–scale projects requiring heavy capital investment • Stock-markets in their infancy • 1990-2003: only 4% transactions through public floatation • Africa has the highest concentration of the newest and smallest stock markets: market capitalization < $100 million • capital markets often remain means for government to raise loan finance rather than to mobilise capital for industry.

  7. Some encouraging trends? • Reforms to support involvement of locals in PSD • 20 000 Zambians invested in the stock market in 2000, compared to less than 1 000 in 1994 • Directed group participation in Uganda & pre-emptive rights equivalents in Cape Verde • South Africa and the black empowerment: Khulisa offer for launch of Telkom shares on the JSE in 2003 • Intra-Africa FDI & emerging multinationals from North Africa, South Africa (2nd investor in Africa after China with >600 projects in 2004) • Mauritius and the SME development in power sector

  8. The costs of doing business in Africa • Direct costs such as labour costs are not that high Source: Eifert, Gelb & Ramachandran (2005) on World Bank ICA data • Indirect costs account for 20-30% of costs • Energy (largest indirect cost: 1/3 of total), transport, telecom, security… • Red tape, regulation • Limited access to finance • Limited market access(narrow domestic markets, little regional integration, decreasing share in world exports)

  9. Cost structure, firm-level average, by country Mozambique Kenya Tanzania Materials Zambia Labor Uganda Capital Nigeria Indirect Ethiopia India China Morocco Senegal 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Eifert, Gelb & Ramachandran (2005) on World Bank ICA data

  10. Composition of indirect costs Zambia Uganda Energy Senegal Land rent Tanzania Transport Telecom Nigeria Security Mozambique Maintenance Morocco Other Kenya Ethiopia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Eifert, Gelb & Ramachandran (2005) on World Bank ICA data

  11. Private sector development in Africa: the missing middle 1 2 Insufficient and deficient Infrastructure 3 A limited access to finance 4 Limited access to market 5 A predatory public sector?

  12. Top of the list obstacle: weak infrastructure development (AEO3&5) • Major effect of lack & disruption in energy supply • High transport costs • But one major improvement: TELECOM

  13. Access to infrastructure: energy bottleneck and exclusion of rural population Source: Estache, World Bank (2006)

  14. Electrification rates 100 90 World average 80 70 60 Developing countries average 50 40 30 20 10 0 Africa Africa North OECD Sub- Sahara America Latin Transition economies Asia MiddleEast Developing Source: IEA

  15. Electricity losses in 2001 Nigeria Cameroon Tanzania Kenya Senegal Gabon Algeria Cote d'Ivoire Ghana Zimbabwe Egypt Ethiopia Tunisia South Africa Morocco Mozambique Zambia OECD Total 0% 10% 20% 30% 40% 50% Source: IEA

  16. Share of firms owning generator by firm size Nigeria Tanzania Kenya Uganda Mozambique Zambia Ethiopia Large Small & Medium Morocco Micro Senegal 0 0.2 0.4 0.6 0.8 1 1.2 Source: Eifert, Gelb & Ramachandran (2005) on World Bank ICA data

  17. Telecom: impressive progress

  18. Strengthening institutional capacities / public sector management • Setting the right regulatory environment • to promote local business, • to facilitate private sector involvement in PPP • Develop and improve planning function and fiscal management: • To ensure consistency with national development programs • To make the most of increasing number of actors and budget support • To redistribute raw material gains • Promote coordination with infra national entities (Communities) and supra national institutions (regions, NEPAD)

  19. Private sector development in Africa: the missing middle 1 2 Insufficient and deficient Infrastructure 3 A limited access to finance 4 Limited access to market 5 A predatory public sector?

  20. A limited access to finance (AEO4) Bank credit to private sector in 2003 (in % of GDP) IMF, IFS

  21. High transaction costs High perceived risk Limited capacity Inadequate tools Underdeveloped financial system

  22. A 4-pronged Approach (AEO4) • Improving the business climate • Legal and judicial systems • Tax (UEMOA) and regulatory environment (South Africa) • Information • Bringing the SMEs toward the formal financial system • Strengthen SME capacity • Develop financial instruments to mitigate risks (Franchising, Leasing, warehouse receipt, Factoring, associative mechanism, guarantee funds, financial tools to facilitate cross-border investment of local savings)

  23. 3. Adapting existing lending institutions & tools • Expand and strengthen microfinance institutions (Senegal, Benin) • Improve availability of banking services to SMEs (Kenya, Nigeria) • Move towards an integrated system for financing SMEs (Mozambique) 4. Taking advantage of alternative sources of finance (remittances, clusters, linkages) • Remittances from abroad (North Africa, Senegal, Zimbabwe) • Subcontracting (South Africa) / linkages (Zambia) • Clustering (Kenya)

  24. Private sector development in Africa: the missing middle 1 2 Insufficient and deficient Infrastructure 3 A limited access to finance 4 Limited market integration 5 A predatory public sector?

  25. Some trade issues • Limited intra-regional trade • Narrow domestic markets • Tariffs and conflicts limit cross-border exchanges • Limited insertion in world economy • Non-trade barriers • Emerging markets (cf. China and India, what’s in it for Africa?, 2006) • Risk of further specialisation • Increased competition on local markets

  26. Progress in diversifying exports is varied, but remains very limited(Based on AEO diversification indicators) Morocco SACU Tunisia Madagascar Kenya Senegal Tanzania Cameroon Africa Mozambique Cote d'Ivoire 1996 Ethiopia 1996 2003 Algeria 2003 Uganda 0 5 10 15 20 25 30 0 10 20 30 40 50 The higher the index, the more diversified the economy Source: Export Diversification Index, African Economic Outlook 2006

  27. How to escape specialisation? • Focus on one area rather than several (clusters) • Develop comparative advantage in sectors not intensive in infrastructures, “institutions” and not directly in competition with Asian countries

  28. Private sector development in Africa: the missing middle 1 2 Insufficient and deficient Infrastructure 3 A limited access to finance 4 Limited access to market 5 A predatory public sector?

  29. The public sector: seen as predatory by the private sector • Taxation, corruption, inefficient regulation • Doing Business 2007: Africa ranks 3rd in pace of reforms, with Tanzania & Ghana among the top 10 reformers and Rwanda & Nigeria in the top 20

  30. Doing business: paying tax

  31. AEO political indicatorsHardening of the regime (and not social troubles) is negatively correlated with private investment and growth 0.20 No hardening 0.18 Hardening 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 GDP Growth

  32. Key messages • Rethinking the role of States in Africa • Limiting interference with private sector activity but increased dialogue (e.g. in the search for diversification) • Strengthening institutional capacities (regulatory framework and public sector management) • Importance of predictability and consistency: The donor community should not add to the already volatile environment • Scaling-up aid to key sectorsthat require huge resources (infrastructure), leveraging private funding and supporting government spending

  33. Thank youfor your attention!