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

1 AFRICAN DEVELOPMENT BANKAFRICAN DEVELOPMENT BANK

Private sector development in Private sector development in AfricaAfrica

Evidence based on AEOEvidence based on AEO

European Commission

Brussels12 Sept. 2006

Celine KauffmannEconomist

OECD Development Centre


African Economic OutlookAfrican Economic Outlook

African Development Bank

OECD Development Centre


L. Kasekende (AfDB chief L. Kasekende (AfDB chief economist): economist):

“in most countries, the private “in most countries, the private sector is ready to play a more sector is ready to play a more prominent role but faces huge prominent role but faces huge

constraints”constraints”


11 Private sector development in Africa: the Private sector development in Africa: the missing middlemissing middle

A limited access to financeA limited access to finance

22 Insufficient and deficient InfrastructureInsufficient and deficient Infrastructure

33

44

55

Limited access to marketLimited access to market

A predatory public sector?A predatory public sector?


SMEs in Africa: the missing middleSMEs in Africa: the missing middle(AEO4)(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


The failed potential of The failed potential of privatisation for private sector privatisation for private sector

development (AEO2)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.


Some encouraging trends?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


The costs of doing business in The costs of doing business in AfricaAfrica

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

Africa 14 0.16$

China 18 0.23$


Cost structure, firm-level average, by Cost structure, firm-level average, by countrycountry

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



Composition of indirect costsComposition 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






33

44

55




Top of the list obstacle: weak Top of the list obstacle: weak infrastructure development infrastructure development

(AEO3&5)(AEO3&5)

Major effect of lack & disruption in energy supply

High transport costs

But one major improvement: TELECOM


Access to infrastructure: Access to infrastructure: energy energy bottleneck and exclusion of rural populationbottleneck and exclusion of rural population

% total Pop % rural hholds

% urban hholds

Electricity 14.9 8.3 54

Water 64.1 53.9 82.6

Sanitation 36.5 27.9 54.3

Telecom 89.7/1000hab

0.7 54.3

Transport Road: 3.5km/hab

Source: Estache, World Bank (2006)


Electrification ratesElectrification rates

World average

Developing countries average

0102030405060708090

100O

EC

D

Tra

ns

itio

ne

con

om

ies

Mid

dle

Ea

st

La

tin

Am

eric

a

De

vel

op

ing

As

ia Afr

ica

Su

b-

Sa

ha

ra

No

rth

Afr

ica

Source: IEA


Electricity losses in 2001Electricity losses in 2001

0% 10% 20% 30% 40% 50%

OECD Total

ZambiaMozambique

MoroccoSouth Africa

TunisiaEthiopia

EgyptZimbabwe

GhanaCote d'Ivoire

AlgeriaGabon

SenegalKenya

TanzaniaCameroon

Nigeria

Source: IEA


Share of firms owning generator Share of firms owning generator by firm sizeby firm size

0 0.2 0.4 0.6 0.8 1 1.2

Senegal

Morocco

Ethiopia

Zambia

Mozambique

Uganda

Kenya

Tanzania

Nigeria

Large

Small & Medium

Micro



Telecom: impressive progressTelecom: impressive progress


Strengthening institutional capacities / Strengthening institutional capacities / public sector managementpublic 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)





33

44

55




A limited access to finance A limited access to finance (AEO4)(AEO4)

0 10 20 30 40 50 60 70 80 90

South Africa

Tunisia

MauritiusMorocco

EgyptEthiopia

Senegal

KenyaMali

Botswana

NigeriaBenin

Côte d'IvoireGhana

Algeria

GabonRwanda

CameroonMadagascar

Tanzania

ZambiaUganda

Angola

NigerChad

CongoMozambique

Burkina Faso

Congo, Dem. Rep.

Bank credit to private sector in 2003 (in % of GDP)

IMF, IFS


Limited capacityLimited capacity

Commercial Banks

MicrofinanceInstitutionsSME

Too big Too big

Business environmentBusiness environment

High risk, poor legal enforcement, High risk, poor legal enforcement, lack of informationlack of information

High transaction costs High transaction costs High perceived riskHigh perceived risk

Limited capacityLimited capacity

Inadequate toolsInadequate tools

Underdeveloped financial systemUnderdeveloped financial system


A 4-pronged ApproachA 4-pronged Approach (AEO4) (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)


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)





33

44

55

Limited market integrationLimited market integration



Some trade issuesSome 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


Progress in diversifying exports is Progress in diversifying exports is varied, but remains very limitedvaried, but remains very limited

(Based on AEO diversification indicators)(Based on AEO diversification indicators)

Source: Export Diversification Index, African Economic Outlook 2006

The higher the index, the more diversified the The higher the index, the more diversified the economyeconomy

0 10 20 30 40 50

Uganda

Ethiopia

Africa

Tanzania

Kenya

Tunisia

Morocco

1996

2003

0 5 10 15 20 25 30

Algeria

Cote d'Ivoire

Mozambique

Cameroon

Senegal

Madagascar

SACU

1996

2003


How to escape specialisation?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





33

44

55




The public sector: seen as The public sector: seen as predatory by the private sectorpredatory 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


Rank/ 175

Mauritius 11Seychelles 24Zambia 25Namibia 28Ethiopia 31Uganda 43Botswana 67South Africa 74Ghana 77Mozambique 80Rwanda 83Madagascar 86Malawi 90Sudan 93Gabon 94Zimbabwe 95Nigeria 105Guinea- Bissau 109Tanzania 113Niger 115Burundi 123Kenya 127Morocco 128Burkina Faso 129Togo 130Chad 132Côte d'Ivoire 134Equatorial Guinea 137Tunisia 139Mali 141Angola 142Cameroon 143Egypt 144Congo, Dem. Rep. 147Guinea 156Senegal 159Benin 162Algeria 169Congo, Rep. 170Central African Republic

171Mauritania 173

Doing business: paying tax


AEO political indicatorsAEO political indicatorsHardening of the regime (and not social troubles) is Hardening of the regime (and not social troubles) is negatively correlated with private investment and negatively correlated with private investment and

growthgrowth

0.000.020.040.060.080.100.120.140.160.180.20

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

No hardening

Hardening

GDP Growth


Key messagesKey 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


Thank youThank youfor your attention!for your attention!

Documents

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