Two weeks ago a certain Chardonnay won the prestigious gold

							African Private Sector is the Key to Africa’s Growth
Garry Whitby and Burger Muller

Growth in Africa reached 5.1% last year, the highest for eight
years, and the IMF predicts higher growth next year of 5.3%. For
Africa to meet the Millennium Development Goals (MDGs),
however, it needs sustained growth of 7% per annum over the
next ten years.

There were 14 countries with growth in excess of 5%, and 13 with growth rates
between 3 and 5%. Mozambique has achieved sustained growth rates in excess
of 7%, by introducing economic reform policies. Africa get less than 1% of the
world’s FDI, but countries that have introduced economic reforms have achieved
increased FDI, such as Ghana, Ethiopia, Mauritius, Tanzania and Uganda. But the
most attractive countries in which to do business remain South Africa, Egypt,
Morocco and Nigeria, because of their large markets. Africa has the highest
investment returns over the last two years.

Better governance, fiscal certainty, stability and peace are preferable for the
private sector to grow and create jobs, but experience has shown in Africa that
this is not always possible, nor a pre-requisite (but the risk must be weighed
against the returns); a growing private sector creates more revenue for
investment and development. It is the prime engine for growth and development
of Africa.

Niall Fitzgerald, the Chairman of Reuters and long term supporter of development
in Africa, said at the recent World Economic Forum in Cape Town, that growth in
Africa will come from the private sector, but “ … the reality is that investors can
choose if, and where they invest … investors have choices …”. The Africa Peer
Review Mechanism and recently announced debt relief, create an environment in
which the private sector can better operate and create the growth that the African
continent needs.

With over fifty countries in Africa, nearly half, 24 have signed up to the APRM,
and 14 have had their debts already cancelled, with another 8, once they comply
with the conditions of the HIPC initiative, to receive this debt relief. These are
the countries in which the private sector is more likely to invest.

The recent efforts of the Commission for Africa report, the United Nations
Millennium Project, Business Action for Africa and the Gleneagles G8 meetings, as
well as Live8, have brought Africa to the forefront of global conscience, and
hopefully the billions more in Aid that has been pledged will reach Africa. There
are fears of the absorptive capacity of Africa to receive and effectively use the
aid; as well as the corruption that aid supposedly fuels. If the aid is used as a
productive investment in the development of Africa, and not seen as
humanitarian aid, Africa stands a very good chance of real development. Aid,
however, is in danger of replacing much needed private investment, and if
packaged inappropriately, could provide a disincentive to the private sector.

These new commitments should not detract from the reality that there has been a
rapid collapse in Africa’s share of the world trade, from 6% in 1980 to less than
2% now. Further, if Africa could grab a 3% share of the world trade, 1% more
than its current share, that would represent some $70 billion in annual income,
three or four times what it now receives in aid.

One obvious but politically difficult route is for rich countries to cut subsidies and
their indefensible levels of protectionism, estimated to be over USD 200 billion,
especially in agriculture (in particular cotton and sugar which is more
efficiently/cheaply produced in Africa) that keeps out African goods.

NEPAD has articulated well that the aid that comes must be have greater
predictability, come in longer donor cycles and have greater African ownership.
From a private sector view point, we would want that aid should be used in a way
that encourages private sector investment, which will bring commercial
sustainability to development projects.

The programme of reforms being initiated by the African Union and NEPAD, with
the support of the G8 countries, is outlined in the Commission for Africa report.
These open up opportunities for the private sector, but the private sector needs
assistance to access and use these funds effectively.

The language of aid, often gives a negative impression of Africa, its leadership
and its people. No wonder the private sector often sees aid as “charity”, and not
“investment”; and, certainly not as an opportunity for them to jointly invest, with
donors and governments, in sustainable projects. Governments see the private
sector as being a taxable resource from which Governments can raise the money
they need for their own social development agenda, rather than see the private
sector as the catalyst for growth.

The donors are more and more realising the potential of the private sector and
see them as the growth engine for Africa, but do not necessarily understand how
to enter into dialogue with the private sector – they speak different languages,
and operate differently: the private sector needs to be commercial to survive, and
the donor looks for sustainable socio-economic development. Sustainability is
common to both. Commercialising development programmes has proved to be
the answer to what seems to be vastly different agendas.

Deloitte has been working closely with the international donors and NEPAD in
ways to bring the private sector into socio- and economic development on a
commercially sustainable basis. The international donors, with Deloitte’s
assistance have designed risk and cost sharing projects that give the private
sector a commercial return, but at the same time, demonstrate real social returns
for poor people. These being: the provision of affordable products and services;
access to finance; and, developing solid, mutually beneficial business linkages
between SMEs and large scale industries.

One beneficiary of such projects was Thandi Wines who won, a month ago, the
prestigious gold Veritas award for the best Chardonnay in South Africa. A week
later it won another prestigious gold award, this time at the London International
Wine Trade Fair. Nothing strange about that, one might think. Perhaps, but what
makes this wine different is that it was produced, not by a big name in the wine
industry, but by emerging farmers and a former fork lift operator as their wine
maker!

Three years ago Patrick Craucamp transformed his life through a project
sponsored by the DFID funded Business Linkages Challenge Fund (BLCF), when
he was selected as a trainee wine maker. The project assists emerging farmers
in selling their wines internationally. Today wine from this scheme sells in London
and other European cities, on a premium of between 30 to 50 per cent.
This Deloitte believes is the power of leveraging public money through joint
ventures with the private sector. The BLCF has managed to leverage donor
funding from the DFID on average by three times in Sub Saharan Africa and in
two cases by as much as ten times. Over the last four years this fund as well as
its sister fund the Financial Deepening Challenge Fund (FDCF) have had
tremendous success in setting up joint venture with the private sector in Africa.

The Commission for Africa has recommended a further challenge fund, the Africa
Enterprise Challenge Fund (AECF), a US$ 100 million facility that will challenge
the private sector to propose innovative solutions to address mass market needs,
the future markets for the private sector who are reaching saturation point in
their existing and traditional markets.

The dialogue between the private sector and governments is often strained and
difficult. They see each other, not as partners, but more with suspicion.
Government policies should create conducive business environments in which the
private sector can invest, grow and develop. Sadly, often Government policy and
regulations inhibit private sector development. Therefore, NEPAD is working on
the Investment Climate Facility (ICF) to address the reasons Africa is not seen to
be a good place to do business. This represents the first serious look at investor
and business perceptions. Deloitte is assisting with some thought leadership, and
providing NEPAD and the international donors with some reality checks, and
bringing a private sector perspective on the facility, and what it needs to achieve,
and how it should be managed and governed.

The ICF has a singular purpose ‘to make Africa an even better place to do
business’ by removing real and perceived obstacles to domestic and foreign
investment, and by so doing promoting the continent as an investment
destination. It will facilitate improved business policies, laws and regulations, as
well as their improved administration; it will promote more effective engagement
with African heads of state and governments in improving the investment
climate; and, it will also help address other key issues that are of major concern
for business – such as corruption, security, crime and corporate governance.

This US$550 million facility will have a seven-year life span and will commence
operations in October 2005 with already pledged and committed capital of
US$110million. The facility will be managed by the private sector, using private
sector principles.

Key determinants of successful development projects are where they are owned
and managed by Africa and Africans, with African professionals leading the vision
and devising the implementation strategies. They involve the African private
sector. This not only spreads the economic benefits to Africans (as opposed to
international companies), but also ensures sustainable development.

President Benjamin Mkapa of Tanzania has said “Development cannot be
imposed. It can only be facilitated. It requires ownership, participation and
empowerment, not harangues and dictates”. Reuel Khoza, stepping down as
Chairman of Eskom, South Africa’s prime generator of electricity, heads NEPAD
Business Foundation aimed at drawing business into the plan to revitalise the
African continent. He takes Mkapa’s comments further, and has very specific
ideas on management. His recent book, “Let Africa Lead”, he details how African
business requires a new idea of African leadership. In many cases people with a
specific set of “Africanised” values have to deal with other leadership styles,
favouring the western approach. The challenge is to equip African business
leaders with a style “made in their own image and fashioned after their own value
systems”. African humanism can be applied to private sector leadership to drive
efficiencies, as demonstrated in the projects highlighted earlier.

Sir Nicholas Stern, representing the views of the Commission for Africa, placed
specific emphasis on poverty reduction through growth of the indigenous private
sector. His key message in this regard was that we should find ways to help the
private sector thrive and grow. He also lamented the fact that the media did not
have good stories to tell about what has been done to assist the private sector
and specifically the SME sector in Africa. In this regard, projects like the BLCF and
the FDCF plays an important part in creating and bringing those positive stories
under the attention of a sceptical world.

The successes of these projects were achieved on a continent where successes
are perceived to be rare and risks too high to warrant private sector investment.
A dilemma that was highlighted by The Commission for Africa and a perception
that has to change if Africa is to attract investors to fuel growth. Yet the role of
the private sector in development is consistently under valued and Africa remains
a region heavily reliant on foreign direct aid.

The private sector therefore cannot continue to be ignored as a powerful resource
in the fight against poverty. Utilising the same principles that are driving
commerce, aid can be more effectively implemented where official structures
have proven to be woefully inadequate.

A strong private sector is critical to achieving the Millennium Development Goals.
Strengthening the private sector would also contribute to state coffers by
broadening the tax base so that they can get more tax revenues for the same
marginal tax rate, thereby attracting potential investors. This will address the
abysmally poor fiscal position of African countries.




Garry Whitby is a Partner at Deloitte who specialises in the role of
the private sector in development.

Burger Muller is Deloitte’s the Regional Manager of the Business
Linkages Challenge Fund.