[BLOG] Changing climate for investment in Africa
A concerted effort to merge the twin approaches of aid and trade is essential if the continent is to harness its economic potential
Beneath the snowy peak of Kilimanjaro, on the Tanzanian-Kenyan border, construction work is in full swing. This little patch of Africa is the designated site of a new one-stop border post, a centre being developed by Trade Mark East Africa, a non-governmental organisation committed to reducing cross-border transport costs across the continent.
When completed later this year, the project, which is being supported by the Tanzanian government, is expected to reduce clearing times for passengers, lessen the costs of cross-border movements and minimise opportunities for fraud and corruption.
The project is one of a number of initiatives currently underway that seek to improve Africa’s business climate.
Investment and growth are becoming key watchwords for Africa. For decades, the continent has been synonymous with poverty and instability, but it has recently emerged on the global consciousness as a potential site for investment.
The latest African Economic Outlook presented at the OECD-backed International Economic Forum on Africa found that GDP across the continent is expected to accelerate to 4.8 per cent in 2013.
Despite the wide disparities in wealth that still persist, on a macro-economic basis Africa is growing, underpinned by the continent’s enormous wealth of natural resources and agri-commodities.
The move towards economic expansion and investment is mirrored by a fundamental shift in political ideology. While many African countries, post-independence, were founded on the principles of socialism, many have warmed to capitalism, turning to investment and commercialism as a potential route out of poverty.
Where China was one of the first countries to identify the investment potential of Africa, controversially penetrating the continent over the last decade, others, including Irish investors, have followed suit.
Fund managers from London to Hong Kong are keen to buy in to the African story, eager to identify the next big emergent market, particularly as the developed world continues to offer diminished returns.
But despite the economic potential, barriers to investment and private sector activity remain.
Corruption is just one of the factors that impinge on the economic potential of Africa. The Investment Climate Facility (IFC) is one of a number of NGOs working to improve the economic environment of east Africa. An arm of the World Bank, the organisation, which is supported by Irish Aid, offers investment and advisory support to private sector projects in the developing world.
As Carolyn Ndawula, programme manager of ICF in Uganda explains, its focus in Uganda is on regulatory reform as a way of contributing to economic growth.
"Our view is on how we can help business to operate better, improve delivery and minimise the cost of operations, working with the government of Uganda," she explains as we meet in her Kampala office.
Its most recent project focused on the area of business licences, one of the major barriers to private sector activity in the country.
Simplifying the process
A review carried out by IFC and the Ugandan government, found that businesses were required to comply with a total of 790 business licenses, representing an annual cost of $280 million, equating to 3.5 per cent of GDP.
The review recommended the elimination of 56 business licenses and the simplification of more than 730. So far 27 have been abolished.
"While the number of business licenses remains high, this is a big step towards simplifying the business registration process in Uganda," says Ndawula.
Leveraging the potential of the internet is also a key focus of the organisation. It has recently established an e-licensing portal, where business owners can find out what licenses they need to obtain, and where to obtain them.
"The long-term aim is to develop this service into a transactional portal, where businesses can file for applications from different agencies in one place, thereby reducing the cost and time of compliance," explains Ndawula.
"The move towards greater internet use helps to minimise human contact in the administration process, increase transparency around the business licensing and registration processes, thereby minimising opportunities for corruption."
Issa Sekitto, chairman of Kampala City Traders Association, says the high cost of doing business is a major barrier to growth. Annual trading licence fees and business taxes are some of the highest costs facing business, while his association is constantly lobbying the government about the high cost of rents, he explains.
But while some of these issues may seem familiar to Irish small business owners, Uganda also faces more fundamental problems.
"Adding value to our produce and accessing export markets are two of the big challenges for Ugandan businesses," explains Sekitto, who himself started exporting honey to the UAE.
While the Ugandan Exports Promotion Board is working to improve the export focus of the Ugandan private sector, the trade deficit has been a consistent problem - imports still exceed exports. This is despite Uganda’s phenomenal natural resources, particularly in the field of agriculture.
Farming remains the backbone of Africa’s economy - accounting for around 70 per cent of employment and about 30 per cent of gross domestic product in sub-Saharan Africa.
But while it produces a major portion of the world’s commodities, agricultural production in the continent remains at a subsistence level. Farm holdings are small, with little focus on exports.
Even the agricultural products that are shipped out of Africa - fruit, vegetables, cocoa, spices - are moved as bulk commodities, with most of the value-adding activity, such as processing and packaging, taking place elsewhere. Coffee and chocolate are two examples. While Africa produces most of the world’s cocoa, little manufacturing or processing takes place locally.
While preferential trade terms for some regions, particularly the highly-protected EU market which is sustained by the Common Agricultural Policy, leaves African countries at a competitive disadvantage, internally, there is widespread belief that Africa needs to up its game if it can successfully exploit its huge export potential. Production standards in particular are weak, with many products failing to meet the standardised needs of international retailers.
Traidlinks is one Irish NGO focused on helping Ugandan farmers meet this export challenge. An agency with a strong commercial focus, it works on the ground with farmers and local producers, helping them access local, regional and international markets and scale up agricultural production to an export level.
The agency is working with listed exploration group Tullow Oil, which has a major interest in the Hoima region of western Uganda. Together they have completed an enterprise centre in the area, which aims to leverage the local economic benefits of the oil industry.
The hope is that farmers will supply the expected influx of oil workers with food products. Once the project is completed, it is envisaged that local production will be scaled up so locally-produced products can be exported.
Crucial to this is ensuring that local products are produced to western standards, including processing and packaging, which will help them access new markets.
Working with the local farmer groups, such as the Hoima District Farmers Association, produce is now sent to the Hoima enterprise centre, where it is washed, packaged and presented.
As Traidlinks managing director Paddy Maguinness explains, the aim is to utilise the emerging oil and gas sector in Uganda as a catalyst for economic growth.
"The advent of the industry opens up huge opportunities for local producers to scale-up and develop secondary and international markets. We strongly believe that the answer to Africa’s problems lies in the development of trade and enterprise."
Another key strategy in east Africa’s drive towards enterprise and exports is the East African Economic Community, whose origins stretch back to the 1960s.
Though the federation has faltered at various points over the last 50 years, today it encompasses a cluster of east African countries - Kenya, Tanzania, Uganda, Rwanda and Burundi - which hope to increase trade and investment through regional co-operation and integration.
Modelled loosely on the European Economic Community, it aims to promote the free movement of stocks, by reducing national trade barriers and implementing preferential tariffs.
While further economic integration between the countries has stalled somewhat, trade between the countries in the region is seen by many as the first step on the export ladder for east African entrepreneurs.
But as Africa’s economy continues to grow on a macro level over the next decade, the key challenge will be to harness this economic growth for the benefit of the local population as well as international investors.
The prospect of international corporations coming in to Africa and generating wealth from the continent’s natural resources is an emotive issue. But for most African people, some kind of partnership between the public and private sector is inevitable and regarded as the only practical way of developing the African economy.
Many in the development sector also believe that fostering trade, as well as delivering aid, is essential in the fight against poverty.
Irish aid agency Concern, for example, is working on the issue of land rights for local farmers in Tanzania, perceived to be a cornerstone of agricultural and economically sustainable production, alongside its more traditional aid work in the spheres of education, health and poverty reduction.
There is also a broader shift in Ireland’s development strategy towards a greater emphasis on trade and investment as well as aid, reflected in the renaming of the Department of Foreign Affairs as the Department of Foreign Affairs and Trade.
But while international investors may be gravitating towards Africa, major challenges remain beneath the strong GDP figures. Dismal infrastructure, such as roads, is severely hampering Africa’s ability to export, corruption is pervasive and millions of Africans are still living below the poverty line.
Ultimately, a concerted effort to merge the twin approaches of aid and trade is essential if Africa is to harness its economic potential.
Suzanne Lynch travelled to East Africa with the support of the Simon Cumbers Media Fund
Growing the business: Sweet success for Cheers fruit juice
Julian Omalla is a Ugandan businesswoman who has successfully developed a thriving fruit juice business with annual turnover of about $4 million and a workforce of 500.
Headquartered in a suburb of Ugandas capital, Kampala, Ms Omalla started out in business in 1996 with a $100 investment.
After initially starting in the field of logistics and taxi service, an early experience with fraud prompted her to look at an alternative enterprise and she turned to fruit juice manufacturing.
Initially importing the pulp from South Africa, Israel and France, she established the Cheers fruit juice brand. She now operates three different farms, where fruits such as mango and orange are planted, and has 36 trucks on the road.
Over the years Ms Omalla has received various enterprise grants from state agencies, including the Business Uganda Development Scheme.
Most recently, Ms Omallas company, Delight, has announced the development of a 5,000-acre site in northern Uganda, an area of the country that has recently emerged from years of war.
The site, which is being supported by a number of state agencies, will include a major processing plant as well as extensive farmland. Up to 1,000 jobs are expected to be created.
According to Ms Omalla, the main challenges for business in Uganda are corruption.
The firm aims to start exporting processed fresh fruits to southern Sudan, the Democratic Republic of Congo, Rwanda, Burundi and Tanzania.
It also hopes to cultivate the indigenous crop, cassava, in a bid to target the nearby Nile Breweries plant which plans to make alcohol from the produce in 2013.
Breaking barriers: Pan-African agency promotes trade
The Investment Climate Facility is one of a number of non-profit agencies which have sprung up in Africa with a specific mandate for promoting trade, investment and private sector activity.
Supported by Irish Aid, the pan-African body was founded in 2007 with the aim of tackling perceived barriers to investment. It works in partnership with governments and private sector bodies on specific projects which aim to improve the business climate in Africa.
Among its areas of focus are:
Business Registration and Licensing
Registering and licensing a business in Africa can be an administrative and logistical nightmare. The Investment Climate Facility has succeeded in implementing a number of improvements in this area. In Rwanda, the time it takes to register a business has been reduced from 16 days to two. The business registration process now involves two procedures rather than nine, while the cost has also been reduced from $433 to $25.
Businesses in Tanzania are obliged to pay domestic taxes every month, in person, resulting in long queues. The facility is working on introducing an online system for paying taxes which will significantly improve time spent on administration by businesses.
In partnership with the Tanzania Revenue Authority, the Investment Climate Facility is working on modernising customs administration in the busy east African port of Dar es Salaam, the capital of Tanzania, to reduce the time needed to clear customs, which can take up to two weeks.
Suzanne Lynch is a journalist with the Irish Times, specialising in financial reporting. Prior to this she worked as a business reporter with RTE radio and worked on various programmes including Morning Ireland and Drivetime.
A journalist with wide-ranging interests, she has also written for the London Independent on education issues, with a particular interest in the interplay between academia and industry. She has also been involved in policy work for the Labour Party and Fine Gael in the past.
Suzanne graduated from Cambridge University in 2005 with a doctorate in English literature.
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