Sub-Saharan Arica has launched a new wave of “special economic zones” (SEZs), with more and more countries establishing or planning to establish SEZs or industrial parks. However, can Africa overcome the past stigma and make the zone programs truly successful?
This was one of the hot topics during the China-Africa “Investing in Africa Forum,” held in Addis Ababa, Ethiopia, from June 30 to July 1, organized by the World Bank Group with the government of Ethiopia, the government of China, the China Development Bank and UNIDO.
Why did the the African zones fail, in the past, to attract many investors? My answer was they were not truly “special” in terms of business environment and infrastructure provisions, and many constraints were not significantly improved inside the zones. This analysis was supported by another panelist, His Excellency Dr. Arkebe Oqubay, Senior Advisor to the Prime Minister of Ethiopia. According to Dr. Oqubay, past zones in Africa were “missing the ‘basics’ such as power, water and one-stop services, and were not aligned with national development strategy.”
That viewpoint was shared by almost all the other panelists, which included senior African and Chinese officials and international experts at the SEZ session, which was characterized with candid discussions and greatly benefited from the background paper prepared by Douglas Zeng of the World Bank Group’s Trade and Competitiveness Global Practice.
Sub-Saharan Arica has launched a new wave of “special economic zones” (SEZs), with more and more countries establishing or planning to establish SEZs or industrial parks. However, can Africa overcome the past stigma and make the zone programs truly successful?
I recently spent three days in Hargeisa, Somaliland. An eye-opening experience, as much as one that strengthens my conviction that World Bank Group is doing the right thing by engaging in this fragile country.
Somaliland is business unusual. Imagine among others, sitting in a mandatory security brief and specifying your blood type straight off the plane, going to meetings in armored cars, wearing the hijab – a veil worn by Muslim women in the presence of adult males – scheduling meetings around prayers and the time of Iftar, the evening meal when Muslims end their daily fast during Ramadan.
The business environment in Somaliland is characterized by a fragile state, poor public service delivery, a weak legal and regulatory regime, inefficient and costly trade logistics, and a fragmented private sector with limited structured engagement with the government. Although the private sector accounts for more than 90 percent of GDP (an anomaly in Africa), it has poor access to finance and lacks an organized voice.
Meeting with the President of the Republic of Somaliland.
During my mission, I met with key Ministers, entrepreneurs and development partners and discussed the challenges and opportunities linked to the ongoing economic development agenda, notably the development of infrastructure and the energy sector. The exchanges highlighted how the World Bank Group's program in Somaliland is laying a foundation to create job opportunities and to accelerate the pace of economic development by fostering business reforms and SME engagement. In this light, the set-up of a high-level taskforce – reporting directly to the President – to implement Doing Business reforms compiled in a Doing Business memo, is a milestone and a strong sign of client buy-in. That is always crucial for the World Bank Group's programs to reach their objectives.
Last, I participated in the presentation of the pilot Reform Champion Program, which aims to develop the capacity of government officials and some representatives of the private sector to implement key reforms that will address constraints to economic growth and development. The project is expected to help trained reform champions implement at least five reforms to improve government-to-business services by July 2016.
Sub-Saharan Africa’s (SSA) impressive growth over the past decade or so has been matched by its equally impressive showing on the World Bank Group's "Doing Business" index. In 2012, one-third of the world’s top reformers on the index were from the continent, and every year its countries feature in the top 10 most active reformers. In 2014, five of the top 10 were from SSA.
Doing Business tracks progress in reforms that support a firm through its life-cycle, from start-up, through to raising capital, to potential closure. Through a mix of wide geographic coverage and rankings that generate a lot of public attention (not all of it wholly positive), the report has been a powerful motivator of investment climate reform, with the data serving as a useful means to measure progress made.
Doing Business as a start
While a large appeal of Doing Business as a measure of a country’s business environment is that it focuses on tangible business activities to which the private sector and policymakers can directly relate, its indicators are limited in scope. They are therefore intended to be used mainly as a litmus test of the state of a country’s investment climate. Therefore, while Doing Business's accessibility and global profile can be very useful in generating momentum for private sector reform, it ought to mainly serve as a starting point for a country to then engage in both broader reaching and deeper investment climate change. (This approach to the use of Doing Business has largely underpinned investment climate reform efforts in SSA by the Bank Group’s Trade and Competitiveness Global Practice.)
So, if Doing Business is a starting point and is used as such, is there evidence to support the assumption that it triggers wider and deeper private sector reform? Or is movement on Doing Businesses a starting point and, unintentionally, an ending point too?
Linkages to wider competitiveness reform data
One of the most comprehensive measures of the state of different countries’ business environments is the World Economic Forum’s (WEF) Global Competitiveness Index (GCI), a data set of over 110 variables that looks at the current state of, and tracks changes in, competitiveness across the world. The data set is structured under 12 pillars that cover measures from institutional development to technology and innovation.
Using GCI as a good measure of competitiveness, and interpreting changes in it as a reflection of a country’s effectiveness in engaging in wider competitiveness reform, we can look at the relationship between GCI and Doing Business and, significantly, the extent of movement on the two indices.
A high-level review of the relationship between changes in GCI and Doing Business for different regions between 2007 and 2013 shows SSA to have performed comparatively well on both indices, performing similarly to countries of Eastern and Central Europe and surpassing the world average. However, looking beyond averages to GCI’s specific pillars, SSA’s performance has been variable, advancing as a region in some areas more than others. Figure 1, below, shows GCI pillars where SSA has improved the most and the least, highlighting the top and bottom three.
Figure 1: Variations within competitiveness
(SSA score on GCI, total and select pillars)
Of particular interest is Pillar 6, Goods Market Efficiency, because many of the areas that this pillar tracks are also areas where the Bank Group has focused its investment climate reform interventions, from business entry and competition, to taxes, trade and investment. (Two of the 16 indicators in this pillar actually comprise Doing Business data – the number of procedures and days required to start a business.)
Pillar 6 is one of the top three GCI pillars that have the greatest upward pull on SSA’s overall performance on GCI, countering the areas where SSA has slipped in its scores.
Reducing risk is the only way for community joint-ventures to get serious with commercial banks. Without commercial finance, this niche tourism sector might never deliver on its potential. Photo: World Wildlife Fund
Over the last 20 years, joint-ventures between local communities and the private sector have grown up as a feature of the sustainable tourism development agenda. Typically, the community provides the land, the heritage or the wildlife asset base while the private sector brings the capital, management know-how and business networks. When they work well, these partnerships contribute substantially to local economic and social development, as well as providing professional, unique and authentic tourism experiences for visitors.
Lena Florry is an Area Manager for Wilderness Safaris, the private-sector partner in a community joint venture (CJV) lodge in Namibia. ”What we have here at Damaraland really changes our lives,” she says. “Previously, in our village, I was herding goats. Now we have good jobs and a much better life.” Crucially, Lena is also a member of the local community and takes personal pleasure in sharing the model’s success story with the camp’s US$500-a-night paying guests.
Typical benefits include income for communities through lease or contract agreements, employment and supply-chain opportunities, skills and knowledge transfer from the private sector, and usually a kind of joint “tourism asset protection” like wildlife preservation or heritage protection. In Namibia, for example, community conservation generated about US$7 million in returns for local communities in 2013, and the elephant population doubled in 20 years.
While much emphasis has been placed on the development impacts of this model, the actual health of the businesses has often been overlooked. As long as the ventures continue to deliver a development dividend – such as contributions to a community fund, or increased biodiversity – all is believed well. For the venture’s supporters, it may then come as a surprise when applications for commercial finance are rejected.
“We would like to finance the sector,” says Christo Viljoen at First National Bank (FNB) Namibia. “But our biggest challenge is to determine the financial viability of the community joint-ventures. We find the risks involved are not properly addressed in the business plans.”
Banks report that risks typically have to do with corporate governance, low-quality financial data, collateral, the level of experience of the sponsor, and a host of structural problems in the CJV business – not least, the balance between the development dividend versus the profitability of the business. All these factors help to undermine a firm’s viability. A business that cannot demonstrate financial viability – and, thus, show how it will pay back a loan – cannot be financed.
This presents a very real problem. Without the means to make necessary investments in the business (such as refurbishment or expansion), the quality of the tourism product deteriorates, occupancies and rates decline, and funds for the community and for wildlife protection drop.
In an effort to help the various stakeholders increase the financial viability of CJVs, reduce risk and increase loans, the World Bank Group and the World Wildlife Fund released “nine tips” at the recent tourism trade show ITB Berlin 2015. Dr. Hannah Messerli of the World Bank’s Trade and Competitiveness Global Practice said, “We believe that destinations that address these issues are more likely to provide comfort to the banks in lending.”
An initial boom for Kenya – which experienced 44% growth per year up to 2005 – was followed by stagnation, exposing dangerous weaknesses in the sector’s pattern of growth. Too much of it was based on the largesse of U.S. policymakers, as opposed to the competitiveness of Kenya’s economy and the firms within it.
Where do some of the ruptures in Kenya’s textile and apparel competitive framework occur? Our survey of the sector revealed some interesting data on the challenges faced in both the investment climate and at the firm level: the two dimensions – the public/macro and private/micro – that together form the building blocks of sector competitiveness.
Power is clearly an issue across Sub-Saharan Africa – where investors quip that investing in Africa is a “bring your own infrastructure” invitation. Kenya is no exception to that pattern. The government is actively addressing this issue, and the cost of power is coming down from levels of about 22 cents per kilowatt hour. However, it will take a while to come down to the level that China new enjoys, of between 5 and 7 cents per kwh. This is a problem for both textile and apparel firms, but textile firms feel the impact most acutely: Power accounts for about 25 percent of their operating costs. Part of the issue is that some firms in the sector are running on machines that are as much as 38 years old, so they consume a great deal of electricity by comparison to more up-to-date equipment.
Wages are higher in Kenya than in many competing countries. The ratio of the minimum wage to value added per worker is .92 in Kenya, compared to .53 in Lesotho and .36 in Bangladesh. “A race to the bottom” on wages is not a competition that Kenya wants to enter, yet the issue of productivity remains a major issue In a world where “fast fashion” buyers like Inditex of Spain, which has an army of more than 300 designers in its headquarters, are capable of delivering a new design to its thousands of stores in under two weeks, supplier productivity is all-important. Kenyan firms sometimes grapple with changeover times of just two weeks.
This all boils down to product-level cost competitiveness issues. Consider a pair of women’s jeans, comparing Kenya to Cambodia. The two countries have about the same cost for fabric – but, beyond that factor, Cambodia begins notching up cost advantages along each step of the production process: Its costs are 16 cents less on trim, 5 cents on cut and make, 15 cents on local transport, and so on. So by the time the two countries’ products arrive in the United States, the Kenyan pair of jeans is almost 50 cents more expensive than the Cambodian pair. It is only able to compete in the marketplace because of the $1.21 tariff on the Cambodian good.
Source: Kenya's National AGOA Strategy blog: http://agoastrategy.blogspot.com/
This article was originally published in SXSWorld Magazine
Hardly a day goes by without an African tech startup being featured in the mainstream media. CNN regularly updates its special report on the topic; The Guardian covers local debates surrounding emerging ecosystems; The Financial Times tracks Africa’s mobile revolution; Forbes has extended its “Top 10” series to include African female tech founders; Vanity Fair pins its hopes of “continental lift” on entrepreneurs. Blogs, opinion pieces and social media cover the sector in even more granular detail. Judging by VC4Africa’s 2015 report on venture finance, perspectives on African incubation and funding models, and the entrepreneurship program announced by Nigeria’s investor and philanthropist Toni Elumelu, it would seem that the African tech sector is among today's most dynamic industries.
Amid the buzz, many investors are asking: “Is the hype warranted?”
According to VC4Africa, an online community of very-early-stage startups and investors, investments through the platform more than doubled in 2014, rising from $12 million to $26.9 million, while the average investment grew from $130,000 to more than $200,000. Their research shows that 49 percent of ventures start generating revenue in their first year and that 44 percent are successful in securing external investment. More than 75 percent of these are in the technology sector, with agriculture, health, finance and energy startups also represented.
Further along the growth path, a smaller number of startups have recently netted over $300 million from a very diverse set of investors, according to CBInsights.
Recent Investments in African Tech Startups
Adapted from: https://www.cbinsights.com/blog/african-tech-startups
At least eight companies have acquired growth capital in Kenya in 2014, along others in Nigeria, Egypt, Ghana, Tanzania and South Africa and elsewhere.
New early-stage funds and angel networks in or focused on Africa are also on the rise. Among others, three models stand out: London-based NewGenAngels a collaboration between African and European networks (GAIN, EBAN and AAN); Kenya’s Savannah Fund, a partnership between Erik Hersman (iHub, Ushahidi and BRCK founder), i/o Ventures, 500startups and Draper Associates L.P.; and RENEW, linking American and African investors and startups.
Many early stage investors are still learning from their own experiences and adjusting their strategies accordingly. For instance, while most are bullish on Kenya’s tech scene, 88mph, an African seed fund has put further investments in Kenya on hold, while pursuing opportunities in Nigeria’s booming tech sector.
African entrepreneurship ecosystems have also benefited from a large number of technology incubators, accelerators and coworking spaces, connected through networks such as AfriLabs and backed by private sources, such as MEST in Ghana, and public-interest projects, such as infoDev’s mLabs and mHubs.
According to VC4Africa, the increase of capital is driven by three key trends: growing interest in startups from the African diaspora, the rise of local angel investors, and an increase in cross-border investments.
All of these instigate a positive change beyond investment returns; they set in motion a chain of opportunities in emerging and frontier economies. As Stella Kariuki, founder of Zege Technologies, once told me: “I want to be the change I want to see. [. . .] We build solutions that could be global but also solve African challenges practically.” Many of the startups serve consumers at the Base of the Pyramid -- the three billion people globally who live on less than US$2.50 per day, a market that is still largely underserved when it comes to basic services such as energy, education, health and banking.
It seems clear that investors and startups in Africa are getting to know each other better and are making more and better matches possible. This is an important step in reducing "the missing middle”: the absence of financing beyond the earliest stages of a company’s growth. As enterprises enter national or regional markets, their capital requirements increase exponentially. Without private and public sources of investment, these requirements stifle all but the independently wealthy entrepreneurs and those with established business networks. A diverse resource base for early-stage firms democratizes the opportunity for growth-oriented entrepreneurs and increases the overall potential of the local creative class.
So is now a good time to invest in African technology startups? The answer is yes, as long as investment decisions are made with care, patience, and in partnership with local investment communities.
Maja Andjelkovic co-leads the Digital Entrepreneurship Program at infoDev, a global program in the World Bank Group that supports growth-oriented entrepreneurship in emerging and frontier markets in the tech, climate and agribusiness sectors. Maja is interested in the potential of entrepreneurship to contribute to economic, environmental and social development. She has spent over 13 years connecting these fields, including as product manager in a web startup. She is a PhD student at The University of Oxford’s Internet Institute.
infoDev / the World Bank Group is organizing two sessions at Startup Village at SXSW Interactive 2015; one on the dilemmas and questions surrounding investing in tech startups in emerging markets, and the other on scaling up and accelerating technology innovation in Africa.
Angel investors interested in forming or growing their own local networks can benefit from practical advice and templates in a guide for angel investor groups published by the World Bank’s infoDev program and the Kauffman Foundation.
Sean Ding, Angela Bekkers and Jeremy Bauman contributed to the article.
Jean-Marie Gaborit has been operating his beautiful wetland lodge in the Delta de Saloum in Senegal for 12 years, but he says things have never been so quiet. The European winter months are usually the high season for popular West African destinations, with the beaches, hotels and restaurants packed full of sunshine-seeking tourists. "It’s this Ebola" he sighs, and then adds "even though there is none here."
It’s the same story in the Gambia, and effects are even felt further afield in Kenya, Tanzania and Botswana. The Hotels Association in Tanzania (with over 200 members) says that business is down 30 to 40 percent on the year and advanced bookings, mostly for 2015, are 50 percent lower. In South Africa, some 6000 kilometers from the nearest Ebola outbreak, arrivals are down this period by as much as 30 percent. In some cases, airlines (such as Korean Air) have stopped running – even to non-affected countries like Kenya. Across the board, Share values of international tour operators have fallen, hotels have closed, and thousands of tourism-industry workers have been made redundant.
The Accommodation Manager at the Baobab Hotel in Saly, Senegal admits he has laid off 160 staff in the last few months: "When we are full, we have a ratio of one employee for one room. We have 280 rooms and right now 100 of them are occupied. I have 20 extra staff that I can’t afford, but their contracts mean that I can’t let them go." About 80 percent of those staff members are from the local area, and they directly support seven to 10 dependents. For countries that rely on tourism for a large part of their GDP and foreign-exchange contributions, the loss of revenue is significant. In the Gambia, for example, where tourism accounts for 13 percent to 15 percent of GDP, the target of 7.5 percent economic growth for 2015 will be missed.
Misinformation lies at the heart of the problem. Although many foreign governments have declared Senegal and the Gambia to be Ebola-free, spreading this message to tourists has proved incredibly difficult. Noisier news reports of death tolls, medical-staff shortages and NGO-promoted appeals in affected countries have drowned out other voices. Moreover, those reports play to international prejudices. With the overwhelming foreign perception of Africa as one country, the problem has no boundaries.
The World Bank Group will be supporting the Government of Senegal in implementing a communications strategy with an emphasis on briefings for key tour operators and the provision of hard data. Best practice shows that such management is more effective if it is planned ahead, and if it includes the preparation of a task force involving decision-makers from both the private and public sector – including a public-relations team, a recovery marketing team, an information-coordination team and a fundraising team. Moving into crisis recovery, a series of medium-term resilience measures – such as incentives, matching grants, training and sustained promotion – may be appropriate.
Social media has played its part in trying to combat misunderstandings, with Twitter and grassroots campaigns pushing material such as this infographic, but there needs to be a much-better-coordinated response.
Crisis communications consultant Jeff Chatterton has been working with a number of African Tour Operators since the outbreak of the virus. He cites hard information and empathy as two of the most important tools to deploy at this stage of the crisis. According to Chatterton, prospective tourists who are hesitating over an African booking need to feel that their concerns are listened to, acknowledged and understood. Once this has been established, they will be more inclined to engage with fact-based information, which needs to be clear, transparent and accurate. He sees two big problems with tourism businesses: a reactive approach that is not reaching out and communicating to key audiences, and a downplaying of the problem that undermines and belittles consumer. "About the worst thing you can do is dismiss their reality as inconsequential," he says.
There is a critical role for government to play in crisis management and disaster recovery. Lessons can be learned from the outbreak of Foot and Mouth Disease in the UK in 2001. The UK’s Department for Environment, Food and Rural Affairs (DEFRA) identified the direct costs to tourism as a loss of expenditure of between £2.7 and £3.2 billion. At the national level, the tourism industry's representatives blamed the British Tourist Authority for failing to react sufficiently and effectively, without an appropriate crisis-management strategy in place before the outbreak.
For the World Bank Group and other development partners, a greater emphasis on crisis-management support at the sector level could be an important pro-active means of stepping up our engagement with client countries – before disaster strikes. With the rising threat of terrorism attacks across the world, along with their devastating impact on tourist demand, the most prepared destinations will have a competitive advantage and will be better equipped to limit the damage to the economy and to people’s livelihoods.
For now, hotels in Senegal have slashed their prices and are concentrating on supplying the small domestic market, but operating at a loss is not sustainable for long. The booking season for 2015 is almost over, with no sign of recovery – meaning that businesses such as Jean-Marie’s face at least another 12 months of empty beds.
Growing up, I always dreaded to enter my grandmother’s kitchen in the village. She used firewood to cook: There was such a dark, thick smoke in the room that I couldn’t breathe or keep my eyes open. I really don’t know how my grandmother could spend hours and hours in there, every day, for so many years. And unfortunately, my grandmother is not an isolated case. More than 90 percent of Kenya’s population uses firewood, charcoal or kerosene for their daily cooking needs.
I always dreamed that clean sources of energy would make Kenyans more independent and less exposed to the serious health risks posed by fossil fuels. In rural areas, most women like my grandmother rely on firewood; its consumption not only depletes our forests but also emits hazardous smoke that causes indoor pollution and eventually respiratory illness. In areas where firewood is scarce, women have to use cow dung as fuel, an option possibly even worse in terms of pollution. Urban areas are affected too: The poor rely mostly on charcoal, another biomass that has the same negative effects and health risks of firewood.
Cleaner fuel options have already been developed but are often too expensive or too difficult to transport across the country to be adopted by a large part of the population, especially by the 40 percent of people at the base of the pyramid.
So what can be done? How can we make clean fuels more affordable and accessible?
I first heard about bottled biogas when I visited a "green" slaughterhouse in Kiserian, Kenya. I was really impressed: My dream of a cleaner, more affordable and easily accessible fuel was right there before my eyes.
The Keekonyoike Slaughterhouse found an innovative way to produce affordable biogas and package it for distribution all around the country. Using a special bio-digester, this business can turn blood and waste from a community-based Maasai slaughterhouse into biogas for cooking. To facilitate transport, the firm stores the fuel in recycled cylinders and used tires, reducing even further the environmental impact of the operation. Just to give me a better idea of the "green" potential of his business, the manager told me that this first biogas plant is expected to cut methane emissions by more than 360,000 kilograms per year (the equivalent of almost 2,000 passenger vehicles).
Indeed, "bottled" biogas (biogas compressed into a cylinder) has huge potential in Kenya: Farmers can directly produce it, recycling the waste from their farms; can use it for their cooking needs; and, thanks to the bottling process, can sell the excess on the local market, generating income while saving the environment.
Keekonyokie is a company that began operations in 1982. It runs an abattoir that slaughters about 100 cows per day to meet the meat demand in Nairobi and its environs. In 2008, with the support from GTZ, the company constructed two 20-foot-deep biogas digesters that would help manage the abattoir waste, which was becoming a menace and a health hazard. Within a short time, the biogas being produced from the digesters was more than the company could absorb. The company managers started thinking of compressing and bottling the excess biogas, but they needed support to test the technical and commercial viability of their idea.
When infoDev’s Kenya Climate Innovation Center (KCIC) opened its doors in October 2012, Keekonyokie was one of the first companies to be admitted.
Somalia has the reputation of being a mysterious and conflict-ridden land. Who hasn’t heard of the infamous “Black Hawk down” episode, the militant group al-Shabaab or the pirates off the Somali coast?
But in the northwest corridor of war-ravaged Somalia lies Somaliland, a self-declared independent state that claims to be open for business. Really?
It’s easy to dismiss the “open for business” claim by Somaliland’s Ministry of Planning as mere fantasy or wishful thinking. Flying from Nairobi on a painfully slow UN-chartered plane, being greeted at the hotel by Kalashnikov-armed guards, or traveling to your meeting in an armored car is enough to discourage even the most adventurous entrepreneur.
At first sight, Somaliland has all the characteristics of a fragile and conflict-affected situation (FCS). However, you never want to judge a book by its cover. In Somaliland, I’d argue that the conventional narrative of fragility needs to be revisited.
The private sector has demonstrated its resilience in the face of conflict and fragility, operating at the informal level and delivering services that are traditionally the mandate of public institutions. However, in post-conflict situations, PSD can have predatory aspects, thriving on the institutional and regulatory vacuum that prevails. The private sector will need to create 90 percent of jobs worldwide to meet the international community’s antipoverty goals, so pro-poor and pro-growth strategies need to focus on strengthening the positive aspects of PSD, even while tackling its negative aspects.
- stakeholder engagement
- foreign direct investment
- investment climate
- Private Sector Development
- public private dialogue
- Conflict and Fragility
- fragile states
- fragile and conflict affected states
- business environment
- Public Sector and Governance
- Private Sector Development
- The World Region
- South Asia
- doing business