Profit and Development Impact: Business Partnerships for African Development

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1 Profit and Development Impact: Business Partnerships for African Development Dirk Willem te Velde; Overseas Development Institute 26 October 24 Portcullis House

2 Overview Image; debunk myths on investment/growth: Foreign Direct Investment to Africa is low Business in Africa is not profitable All of Africa is doing poorly There are too many constraints to investment and African development: they can t be overcome. Partnerships: two differing stories Local content / Human resource development Infrastructure Conclusions

3 FDI to Africa is low; this depends on measure FDI to SSA: $9.3bn in 23, 5.4% of developing countries, 1.7% of world FDI FDI Stocks % of GDP Developed countries Developing countries Africa SSA Nigeria South Africa South and East Asia Central and East Europe Latin America and Caribbean Source: UNCTAD World Investment Report It is quality, not just quantity, that matters

4 South Af r ica Angola Niger ia Equator ialguinea United Republic of Tanzania Mozambique Chad Côte d'ivoir e Uganda Congo Namibia Zambia Ghana Ethiopia Zimbabwe Swaziland Maur itius Senegal Mali Kenya Seycheles Togo Er itr ea Camer oon Madagascar Botswana Benin Gambia Lesotho Dem. Rep. of the Congo Guinea Cape Ver de Bur kina Faso Niger Rwanda Djibouti Bur undi Maur itania Guinea-Bissau Centr alaf r ican Republic Sao Tome and Pr incipe Sier r a Leone Comor os Somalia Malawi Liber ia Gabon Avg, $mn Geographical and sectoral spread of FDI 6% of inward FDI in SSA went to South Africa, Angola, Nigeria. 25% of inward FDI in Southern Africa originates in South Africa; SA is the top foreign investor in 7 SADC countries, up to 9% of total FDI. UK FDI in Africa ( 12bn in 22, 25% in primary, 1% in manufacturing) US FDI in Africa ($19bn in 22, 62% in primary, 7% in manufacturing) SA investors ($2bn) strong in natural resources, telecommunications, retail Asian investors in AGOA textiles/clothing

5 Business in Africa not profitable. It can be. Return on UK FDI (after tax etc deductions) Return on US FDI Africa Africa.1.5 World World Sources: Business Monitor MA4 Bureau of Economic Analysis South African foreign investors banks in Africa: return on equity of above 3%, sometimes 5-65% MTN (telecommunications) earnings (before tax) margin in Africa 25-3% Some developed and developing country foreign investors derive a significant proportion of profits from Africa / developing countries (incl. retail, consumer and oil)

6 This issue is that growth should be stronger than it is, that investment to GDP ratios are still low; and productivity of investment can be higher. All of Africa is doing poorly. No PPP per capita dollars Country Income, 2 GDP per capita growth rate s Source: WDI 24 Mauritius 13,932 Botswana 5.3 Equatorial Guinea Seychelles 1,241 Mauritius 3.7 Mauritius 4. Gabon 8,42 Cape Verde 3.5 Uganda 3.3 Botswana 7,55 Congo 3.3 Mozambique 3.1 South Africa 7,541 Seychelles 3.1 Eritrea 2.9 Swaziland 5,227 Gabon 2.6 Cape Verde 2.9 Namibia 4,458 Swaziland 2.3 Botswana 2.6 Cape Verde 4,27 Lesotho 2.1 Lesotho 2.2 Sub-Saharan Africa Source: IMF 2,273 Sub-Saharan Africa.8 Sub-Saharan Africa Around three quarters of African countries experienced positive GDP per capita growth over last five years

7 Constraints to investment and economic development: they can be overcome. Long-run Trade openness (trade outcomes vs trade policy) Geography (landlockeness, tropical climate, etc.) Institutions (rule of law, democracy, etc,) Short-to-medium term: including appropriate and good quality skills and infrastructure; natural resources; good public private interaction; governance and adequate sectoral policies; external shocks : Commodity prices, drought, AIDS, conflict; Sound fiscal and monetary policies; Market size and growth. Countries have overcome long and short-run obstacles to private investment and growth: Uganda has overcome geographical constraints (more can be done). Botswana overcame geographical and natural resources curse through good governance. Lesotho overcame market size through attracting foreign investors benefiting from the AGOA related global value chain in textiles and clothing. Cape Verde/Mauritius through private investment in services (financial, tourism) /textiles. Kenya did emerge in the horticulture global value chain (while less successful in general investment climate). Rwanda has recovered quickly from conflict but weak private investment, Tanzania has reformed since late 198s and has attracted FDI in mining and tourism, Ghana has benefitted from structural reforms and public investment, Senegal from the CFA devaluation (most of these countries still face weak private sector investment). Negative cases: Zimbabwe s governance indicators collapsed, as did growth and investment; copper prices fluctuated as did investment in Zambia; West African Oil?

8 Business partnerships for development Different meanings: here, focus on those that involve public-private interaction Role of public and private sectors in partnerships will differ by issue, e.g. Local content and human resource development Infrastructure (e.g. roads, water, telecommunications) Focus on foreign investors (FDI is quarter of fixed investment)

9 FDI and development (1) Partnerships for local sourcing FDI may have greater developmental benefits when linkages with local economy / local investors are greater Private sector is interested to some extent in developing / mentoring suppliers (programmes in place) Public sector and local content requirements (e.g. WTO TRIMs debate, black empowerment) However lack of Linkage promotion programmes for domestic content (lack of active and adequate PSD programmes to help suppliers and which complement CSR of companies) Co-ordinated approach to human resource development by private & public sector requires dialogue amongst parties Examples scarce in Africa: Mozal investment and SMEELP, more examples of missed opportunities. (Mkandawire, 24)

10 FDI and development (2) Partnerships for African Infrastructure Survey and econometric evidence shows that infrastructure is key for attracting investment and growth; (in) direct impact on poverty. The state of African infrastructure (paved roads, access to waterpipes, ports, phone lines) is poor and the gap with most other developing countries is increasing. Aid to African infrastructure has decreased since 199s. Private sector has not moved into African infrastructure en masse (with exceptions): (currency) risks, sunk costs, low cost-recovery prospects in several infr sub-sectors, and quasi-public good. Differences exist. Options? New mechanisms (PPPs, guarantees) to push private investors - does not appear to have been very successful on large scale. Design good infrastructure projects by improving governance / investment climate surrounding project necessary but not sufficient for attracting private investment. (Regional) Public finance especially when commercial and economic rates of return differ - limited budgets / poor execution / need for governance.

11 State of African infrastructure (compared with middle income countries) Tel subscribers per Roads paved (%) Cost of local 3 min tel call, US$ Electric power consumption, Kwh per capita Source: WDI (24)

12 Aid for African infrastructure in decline Transport, Communications, Energy, Financial, Other $mn, Share in total aid

Private investment in SSA infrastructure 199-21 Little private investment in SSA infra with gaps in most sectors/countries : half of total in South Africa; 75% in five countries (SA, C I, NG, TZ,

13 Private investment in SSA infrastructure Little private investment in SSA infra with gaps in most sectors/countries : half of total in South Africa; 75% in five countries (SA, C I, NG, TZ, ZIM); 68% of total in Telecommunications; 13% in Electricity; Roads? W&S? SSA accounts for 5% of total private investment in infrastructure in developing countries over : investment.6% of GDP in SSA compared to 1.7% in LAC

14 Conclusions There are significant amounts of profitable FDI in Africa, partly because African countries have managed to overcome constraints to investment and growth. Business partnerships for development Yes, for local sourcing. Business sector in the driving seat, but aided by linkage promotion programmes (including human resource development). Scale-up? Not sufficient for all of infrastructure, at least in case of partnerships that assume ownership role for private sector. Important role for public sector ownership in certain infrastructure sub-sectors (e.g. roads, water&sanitation) where commercial and economic return differ. Considering importance of infrastructure to investment and development, what should be done?

Regional outlook Sub-Saharan Africa 24/11/2015. Share commodities in good exports. Share commodities in goods imports

Regional outlook Sub-Saharan Africa 24/11/2015. Share commodities in good exports. Share commodities in goods imports Table 1: Economic structure indicators Number of Inhabitants (m.) Size of the economy (in USD bn.) Size of the economy (% of world GDP) Share commodities in good exports Share commodities in goods imports