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1 AFRICAN DEVELOPMENT BANK Private sector development in Africa Evidence based on AEO European Commission Brussels 12 Sept. 2006 Celine Kauffmann Economist.

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Presentation on theme: "1 AFRICAN DEVELOPMENT BANK Private sector development in Africa Evidence based on AEO European Commission Brussels 12 Sept. 2006 Celine Kauffmann Economist."— Presentation transcript:

1 1 AFRICAN DEVELOPMENT BANK Private sector development in Africa Evidence based on AEO European Commission Brussels 12 Sept Celine Kauffmann Economist OECD Development Centre

2 2 AFRICAN DEVELOPMENT BANK African Economic Outlook African Development Bank OECD Development Centre

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

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

5 5 AFRICAN DEVELOPMENT BANK 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 6 AFRICAN DEVELOPMENT BANK 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 – : 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 7 AFRICAN DEVELOPMENT BANK Some encouraging trends? Reforms to support involvement of locals in PSD – Zambians invested in the stock market in 2000, compared to less than 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 8 AFRICAN DEVELOPMENT BANK 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) Productivity (Shirts/operator) Unit labour cost Africa140.16$ China180.23$

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

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

11 11 AFRICAN DEVELOPMENT BANK 1 Private sector development in Africa: the missing middle A limited access to finance 2 Insufficient and deficient Infrastructure Limited access to market A predatory public sector?

12 12 AFRICAN DEVELOPMENT BANK 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 13 AFRICAN DEVELOPMENT BANK Access to infrastructure: energy bottleneck and exclusion of rural population % total Pop% rural hholds% urban hholds Electricity Water Sanitation Telecom89.7/1000hab TransportRoad: 3.5km/hab Source: Estache, World Bank (2006)

14 14 AFRICAN DEVELOPMENT BANK Electrification rates World average Developing countries average OECD Transition economies Middle East Latin America Developing Asia Africa Sub- Sahara North Africa Source: IEA

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

16 16 AFRICAN DEVELOPMENT BANK Share of firms owning generator by firm size Senegal Morocco Ethiopia Zambia Mozambique Uganda Kenya Tanzania Nigeria Large Small & Medium Micro Source: Eifert, Gelb & Ramachandran (2005) on World Bank ICA data

17 17 AFRICAN DEVELOPMENT BANK Telecom: impressive progress

18 18 AFRICAN DEVELOPMENT BANK 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 19 AFRICAN DEVELOPMENT BANK 1 Private sector development in Africa: the missing middle A limited access to finance 2 Insufficient and deficient Infrastructure Limited access to market A predatory public sector?

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

21 21 AFRICAN DEVELOPMENT BANK Limited capacity Too big Business environment High risk, poor legal enforcement, lack of information High transaction costs High perceived risk Limited capacity Inadequate tools Underdeveloped financial system

22 22 AFRICAN DEVELOPMENT BANK A 4-pronged Approach (AEO4) 1.Improving the business climate –Legal and judicial systems –Tax (UEMOA) and regulatory environment (South Africa) –Information 2.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 23 AFRICAN DEVELOPMENT BANK 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 24 AFRICAN DEVELOPMENT BANK 1 Private sector development in Africa: the missing middle A limited access to finance 2 Insufficient and deficient Infrastructure Limited market integration A predatory public sector?

25 25 AFRICAN DEVELOPMENT BANK 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, whats in it for Africa?, 2006) –Risk of further specialisation –Increased competition on local markets

26 26 AFRICAN DEVELOPMENT BANK Progress in diversifying exports is varied, but remains very limited (Based on AEO diversification indicators) Source: Export Diversification Index, African Economic Outlook 2006 The higher the index, the more diversified the economy Uganda Ethiopia Africa Tanzania Kenya Tunisia Morocco Algeria Cote d'Ivoire Mozambique Cameroon Senegal Madagascar SACU

27 27 AFRICAN DEVELOPMENT BANK 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 28 AFRICAN DEVELOPMENT BANK 1 Private sector development in Africa: the missing middle A limited access to finance 2 Insufficient and deficient Infrastructure Limited access to market A predatory public sector?

29 29 AFRICAN DEVELOPMENT BANK 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 30 AFRICAN DEVELOPMENT BANK Doing business: paying tax

31 31 AFRICAN DEVELOPMENT BANK AEO political indicators Hardening of the regime (and not social troubles) is negatively correlated with private investment and growth No hardening Hardening GDP Growth

32 32 AFRICAN DEVELOPMENT BANK 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 sectors that require huge resources (infrastructure), leveraging private funding and supporting government spending

33 33 AFRICAN DEVELOPMENT BANK Thank you for your attention!


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