The European Private Sector to Steer Development in Africa

European Development Days AgendaWhether to give priority to the economic development of the private sector or to focus the attention, i.e. the international assistance, on the development of the public sector in developing countries has always been one of the dilemmas of the development agenda. There is a growing consensus that priority should be given to the private sector but at the same time attention should be devoted to the development of the capacity of the public sector to regulate and enforce corruption-free policies. Yet, a proper development strategy needs both pillars – public and private investment – to be strengthened and enhanced.

The involvement of European and American private sector is increasing and businesses from the developed world come out with more and more funds and project for development.

On the occasion of a debate on Public-Private Partnerships (PPPs) for development organized by the Young Professionals in Foreign Policy (YPFP Brussels) and hosted by the US Mission to the EU, Ms Jennifer Adams, Head of the Donors Engagement Office at USAID has underlined that US development assistance was predominantly based on public investments; for decades over 70% of US assistance was provided by the public sector. Nowadays, more than 80% of US development flows comes from the private sector.

Roberto Ridolfi, Director for Sustainable Growth and Development at DG Development and Cooperation – EuropeAid (DG DEVCO), stresses the relevance of the European private sector for the development of Africa. He said, and I quote: “the European private sector can and should be conducive to development”. Director Ridolfi has an extensive expertise with PPPs developed at DG REGIO and first-hand exposure to development matters thanks to the appointments as EU Ambassador at Fiji first and later on in Uganda.

The lesson I took home is the following: PPPs are a very good instrument to complement government spending with private investment in order to realize very-much-needed infrastructure. However, it is a difficult engineering with high transaction costs and a consistent legislative effort, possibly not worth for a little project. He warned that concessions arising from long-term partnerships to manage public utilities should not last too long and the provision of services should go back to the market as soon as possible because “there is only one thing that is worse than public monopoly; it is a private one”, he concludes.

BLENDING EU PUBLIC AND PRIVATE INVESTMENTS
The message of the Director for Sustainable Growth and Development is clear: if the EU wants to maintain its role and influence in the development arena, it has to engage with investments, and that can be done solely with a commitment to mobilize resources and partners from the private sector.

The European Union has been promoting ‘blending’ since 2008, as a catalyzer for private financing. Blending, as an innovative financial instrument, is a tool to leverage additional private financing on the top of public one, which, alone, cannot meet most of the investment targets needed for infrastructure development. As Brunno Maradei, from the DG DEVCO, has confirmed during a workshop at the European Development Days (#EDD2013), the EU blending has been mainly targeted to public sector investments so far and only about 10% of the funds have been allotted to support Micro & SMEs in developing countries.
To monitor this ‘new’ financing tool the EU has set up a Group of Experts in 2012; however this EU Platform for Blending in External Cooperation has not issued and official report yet.

At the moment, the most thorough review of EU blending activities has been carried out by the European Network on Debt and Development (EURODAD), which is everything but enthusiastic. Maria Jose Romero, from EURODAD, presenting the report ‘A dangerous blend?’ at #EDD2013 highlights that EU blending has frequently been characterized by lack of transparency and accountability and may end up harming country ownership.

After all the discussion and proposals about private sector intervention and how that would benefit Africa, at the YPFP event, Hezron Makundi from Tanzania has raised his hand and pointed out a simple truth: we need the engagement of the private sector in developing countries as much as that of western enterprises. Mr Makundi, researcher at HIVA and PhD student at KU Leuven, is carrying out a research to determine how technical change and know-how can be transferred from Chinese and Indian private businesses doing investment in Africa to Africans-led enterprises. It may be useful to recall that foreign interventions in developing countries cannot alleviate poverty and foster development if there is no job creation at the local level and at least a share of profits – and competences  – are left in the host country.

So, Hezron, good luck with your research and please do not forget to keep us posted on how joint ventures among international and domestic partners can help the ambitious missions of eradicating poverty and promoting sustainable inclusive growth.

Action points #1:
 Address the shortcomings of current EU blending facilities.  
→ Let’s study – and promote – private-private and multistakeholder partnerships promoting skills trandress the shortcomings of current EU blending facilities.

THE CHINESE APPROACH
Trying to select among the parallel workshops at #EDD2013 is a hard task as there are many interesting panels running at the same time. I decide to attend a meeting about the role of business in making development cooperation effective because there is a speaker that intrigues me, someone from China. So I attend the workshop with the expectation of hearing a voice out of the pack and Ms Helen Hai, Chief Executive Office of China Africa Consulting did not disappoint me.

This is her very first statement: “Africa is the future manufacturing base for the world.
She has a very straight approach, deploying impressive figures. Her strategy for development? A bit of well-organized old-fashioned capitalism: industry relocation in depressed areas characterized by cheap workforce. Then the workforce gets educated, internal demand grows together with the demand for social rights and well-being.
Still, the data she deploys strike me a great deal.
She opened a shoe manufacturing in Ethiopia, 100% Chinese capital, no joint venture whatsoever, with the entire production packed and shipped to the US market: 100% exports. Why she does it in Ethiopia? Labour costs are 22% of her total costs in China, 2,2% in Ethiopia. Quite a big gain, which remains worth even if transportation costs for packaging imported from China rise from 2% to 8% of total costs. Efficiency of costs portfolio.
Second reason to relocate in Ethiopia: access to tax free raw materials; meaning 10% savings on import duties on leather for instance. So far nothing new.

What’s the deal then? 2500 jobs created in Ethiopia, for Ethiopians, in one year. A salary that is 10% above the average wage offered by other manufacturers in the horn of Africa and a 20% more in benefits than other businesses present in the area. A sound program for skills transfer based on one-to-one learning, one Chinese instructing one Ethiopian with technical know-how. And a neat strategy to educate local workers who show a ‘lack of discipline’: free food and free clothing. Increasing the loyalty of their workers is a key policy for the China Africa Consulting. Just to make sure they come back after having received their first salary, Ms Hai comments.

As she was speaking, the sticker of the European Commission glued on the back of the panel was slowly coming off from the wall. But the Ethiopian government, after an initial skepticism, is now enthusiastic, she reports.

HOW TO MAKE BUSINESS RIGHT 
Concluding, I think I have to align my vision to the much more relevant one of Winnie Byanyima, Executive Director of OXFAM International. She says: “We do welcome businesses in Africa, and we encourage them to develop their business opportunities in the continent as far as two conditions are met.” The two conditions being:

1)     paying the right share of income taxes to the host country, i.e. avoid illicit flows and recourse to tax avoidance and evasion. Currently, according to a recent report by the Swedish agency Forum Syd the African continent is losing as much as $3 billion a week in tax revenues because of tax fraud and dodging; an amount that is far more relevant than many ODA figures. Ms Byanyima further stresses that only 10% of Foreign Direct Investment (FDI) has remained in Africa since 2008, the rest flowed back to the homeland of ‘developed’ businesses.

2)     European, American and Chinese enterprises must comply and apply international standards all over their supply chain; in terms of labour regulations, safety conditions, quality standards and social rights of the workers.

Minimum requirements, someone may say. But we are sometimes unable to get them implemented in Europe; how to enforce these conditions in Africa remains a mystery. Probably, a partnership with the public sector can exactly tone down this problem and help the enforcement of the two above-mentioned conditions.

Action points #2:
Start dealing with corporate tax harmonization in Europe.
Help the mobilization of domestic resources, i.e. create strong fiscal systems in Africa.

@Rinaldi_David – david.rinaldi@coleurope.eu

3 thoughts on “The European Private Sector to Steer Development in Africa

  1. Tom Carney

    The European Private Sector to Steer Development in Africa? yes maybe with aid charities and NGOs, but the real big investments with money is pouring in from China. China is by far the biggest investor in Africa at the moment, they put European NGO money in the shade?
    Just have a look its all on the net, its all there to see?
    Leave a reply

    Reply
    1. David Rinaldi Post author

      That is exactly the point. The UE, who so far is still a leading donor, has to face the Chinese entry… They not only have big investments but they have a completely different model to run ‘developmental’ projects. That’s why the Commission is calling for European private investment… they have well understood that they need to complement public with private flows if they want to maintain an influence in the African continent an secure commercial and political ties.

      Reply

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