Ebenezer Mensah Ashley’s thoughts: Factors affecting private business development in Africa

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Entrepreneurship, and for that matter, private sector development, has been identified as an effective way of enhancing economic development and growth on the African continent. The private sector is widely acclaimed as the “engine” for economic growth in Africa. It affirms accelerated adaption to capitalist-driven development initiatives among economies on the continent.

In order to walk the foregoing popular economic cliché, governments of various countries on the continent have thought it necessary to encourage citizens, both home and abroad, to take advantage of the investment opportunities available in their respective countries to make valuable contributions to national development and growth while accelerating the pedestal on foreign direct investments (FDIs) by other nationals.

Challenges

In spite of this clarion call, the development of businesses in Africa is saddled with a number of challenges. For instance, policies of governments in many African countries, including Eritrea, Somalia, Libya, South Sudan, Angola, and others, are not private sector friendly. Ever-changing government regulations, use of multiple currencies as witnessed in Zimbabwe in recent years, and protectionist policies render the costs of import high and business opportunities unattractive in some parts of the continent. These unfortunate developments affect the respective countries’ position in the annual Ease of Doing Business rankings instituted by the World Bank Group, and affect foreign investors’ decision to opt for the implied countries as alternative investment destinations to their original economies.

However, it is worth-emphasising the foregoing measures, that is, protectionist policies are intended to provide the requisite protection for fledgeling local manufacturing companies against predatory competitions from their Western and Asian counterparts whose pace of development in the manufacturing sub-sector is unheralded across the globe. Protectionist policies provide the requisite “respite” and “shelter” for investors in nascent companies and industries in developing and emerging economies in the global regions, including Africa.

The absence of scientific market research data makes the assessment of the retail environment, consumer behaviour, and consumer needs pretty difficult. In addition to the preceding factors, businesses in Africa are fraught with technology and communication challenges. With the exception of Mauritius with highly sophisticated technological systems, the other economies in Africa are still grappling with improved and effective technology and communication systems delivery.

This affects the extent of business development and growth in the implied economies. Collection of scientific data for analysis is compounded by the diversity of African markets and consumers. It is important, however, to acknowledge the giant strides made by Ghana, Kenya, and others towards digitization of their respective economies. In Ghana, processing of many documents including business registration and passport applications could be completed online. This has truncated the number of weeks required for processing of applications, to a few days.

The foregoing notwithstanding, improved technology, especially, Internet connectivity and penetration remain a major challenge to the continent. For instance, in 2018, average Internet connectivity in Africa was estimated at 39.6%. This was significantly shy of the global average (62.7%); and within Africa, a significant connectivity lag and disparity were observed during the period – Internet connectivity in Burundi remained at 5.3% while Internet coverage in Kenya was estimated at 89.8%. In 2016, Africa consumed only 1% of all the international Internet bandwidth that was produced globally (Global Business Outlook.Com, 2019).

Even among the middle class in Africa, traditional and informal retail trade dominates the business landscape. About 90% of buying and selling activities in Africa occur among informal retailers such as small and independent stalls, kiosks, and non-organised open-air markets as witnessed in some parts of Accra, Lagos, Abidjan, Lomé, Ouagadougou, Dar es Salaam; and in many parts of other cities in Africa.

In most parts of Africa, development of formal retail commerce such as malls, shopping centres and other organised or defined retail outlets is at its embryotic stage. The limited malls and shopping centres available are mostly concentrated in selected urban areas in Africa. In Ghana, one could readily cite malls, strategically located in some parts of Accra and Kumasi, with shopping centres located in the various regions.

Currently, Africa is witnessing growth in urbanisation. The Organisation for Economic Co-operation and Development (OECD) (2020) noted the projection of Africa to record the fastest urban growth rate across the globe by 2050. Cities in Africa are projected to accommodate additional 950 million people during the period. Small- and medium-sized towns would witness the fastest growth during the period. However, some development experts are of the opinion the growth in urbanisation in Africa is uncontrolled and informal. Underdeveloped infrastructure makes goods and services delivery to most parts of African economies difficult; unreliable road networks and transportation systems affect businesses’ ability to meet deadlines set by clients while political instability adversely impacts foreign direct investments and business continuity.

Inadequate electricity supply has been identified as a major threat to the survival of businesses on the continent. Massive investment in electricity generation capacity and transmission infrastructure remains economically parsimonious in many African countries. Over the past few years, the erratic power supply has affected the activities of businesses in Ghana and Nigeria in particular, and in many other parts of Africa in general. In 2015 alone, about 13,000 businesses in Ghana were negatively affected by the erratic power supply. These business casualties included employee lay-offs and liquidation by some small- and medium-scale businesses. In Nigeria, an average of about 26 power outages is recorded in a month characterised by severe power challenges. Small- and medium-sized businesses which decide to continue with production and service provision are compelled to do so at additional costs to manufacturing and service delivery; these businesses are compelled to purchase alternative power in the forms of generation plants at higher costs. Evidently, power or electricity generation remains a major challenge to Africa. Available statistics revealed that over 600 million people lack access to electricity; and in areas where connectivity is prevalent, supply tends to be erratic. Africa’s total population is estimated at 1.34 billion people. This is about 10.6 times the estimated population of Japan (126.5 million people) (Worldometers, 2020). However, Africa’s total electricity generation capacity is less than half the power capacity of Japan.

A sub-regional analysis of the electricity crisis revealed imbalanced supply and access. As of 2018, the average rate of electricity access in North Africa was 97%. This was more than quadruple the average rate of access in East Africa (23%); and more than double the respective average access rates in West Africa (47%) and Southern Africa (43%). Central Africa had an access rate of 25% during the period. The foregoing implies the average electricity access rate in Africa during the period was 47% ((97% + 47% + 43% + 25% + 23%) ÷ 5 = 235% ÷ 5 = 47%). This was less than half the respective access rates in China (100%) and Brazil (97%); and more than half the access rate in India (82%). Although the average access rate in East Africa (23%) during the period under review was low, Kenya had an access rate of 73%, with a target of 95% access rate by 2020. The 73% access rate was a significant jump from an earlier access rate of 25% in 2012. Some analysts opined realisation of the 2020 target would usher Kenya onto the list of global economies with the greatest power success narratives. The access rate in Tanzania during the period was estimated at 32% in spite of the numerous resources at her disposal, including sources of non-renewable fuel such as gas; and renewables such as wind, geothermal and hydro (Africa Oil and Power.Com, 2018).

Available statistics from the World Bank (as cited in ESI-Africa, 2015) noted the electrification access rate in Ghana as of 2012 was 64.1%. This was 21.3% short of the access rate in South Africa (85.4%) during the period. However, due to increased investment in electricity generation capacity and transmission infrastructure, the access rate in Ghana in 2015 was estimated at over 80%, one of the highest power penetration rates, together with South Africa on the continent. The immediate socio-economic benefits of the massive investment in power generation was not felt in the Ghanaian economy during the period; the years 2014 through 2016 were characterised by frequent power outages and power rationing in many parts of the country, which culminated in the use of the local terminology, Dumsor. In 2015, the then Ghana’s Energy Minister, Dr. Kwabena Donkor, assured the nation and the whole world of the country’s preparedness to end power rationing by 2016. His assurance was based on massive investment in energy infrastructure, including the purchase of power barges.

Currently, Ghana has a total installed electricity generation capacity of about 4,700 megawatts, implying she generates about 2,000 megawatts in excess of her total consumption capacity of 2,700 megawatts. The data revealed Ghana’s electricity access rate increased by about 15% between 2012 and 2015 (ESI-Africa, 2015). Ghana’s target is to ensure universal access to the electricity supply by 2020 (USAID, 2020). The access rate in Nigeria in 2015 was 60% (World Bank as cited in Sustainable Energy for All, 2020). Through the implementation of the Sustainable Energy for All Country Action together with other action plans, Nigeria emerged with the following targets: increase electricity access rate to 75% by 2020; and increase access rate to 90% by 2030 (Sustainable Energy for All, 2020). In some cases, the installed generation capacity of electricity in African countries is at variance with the actual electricity generation capacity available for distribution and consumption. Some identified factors responsible for this variance include outmoded or worn-out infrastructure, inadequate supply of fuel, and changes in hydrological conditions, among others (USAID, 2020). Evidently, these constraints affect the rate of access to electricity supplies in many parts of Africa; they affect stable power generation and adequate supply to businesses. This in turn affects the businesses’ ability to ensure consistency and eventual increase in production and productivity.

Bureaucratic business registration and contract execution processes have been a bane to the success of businesses on the African continent. For example, in the Democratic Republic of Congo (DR Congo), it takes about one hundred and fifty-five (155) days to complete a business registration process. In Ghana, a business certificate applicant is often assured of receiving the certificate in two weeks after the final submission of application forms. However, it takes several months for the business certificate to be finally issued to the applicant. Nonetheless, the introduction of online applications in the country in recent periods seems to be reversing the unfortunate trend. In Angola, the successful execution of a contract involves forty-seven (47) procedures and thousand (1,000) days (World Bank Group, 2017).

Unreliable water supply affects the productive capacity of firms that rely on water for production and manufacturing. The pollution of water bodies in Ghana through illegal mining activities has dire cost implications for the treatment and production of potable water to the people by the Ghana Water Company Limited. Foreign-investor participation in business development in African economies is negatively impacted by these unfortunate economic setbacks.

Another major bottleneck is high policy rates quoted by African central banks. Although they are intended to tame inflation among other significant economic considerations and measures, high policy rates affect the lending rate quoted by financial institutions (microfinance institutions, rural and community banks, savings and loans companies, investment banks, and universal banks) to businesses. The Monetary Policy Committee (MPC) of the Bank of Ghana currently maintains the policy rate at 14.5%. This implies Ghana has the 15th highest policy rate in the world; and the 7th highest in Africa. The current policy rate in Zimbabwe is 35%. This is the 3rd highest in the world; and the highest in Africa. Other African economies with relatively high-interest rates include Liberia (25%), Congo (18.5%), Sudan (16.5%), Angola (15.5%), and Sierra Leone (15%). Conversely, some African countries with comparatively low policy rates include Malawi (13.5%), Nigeria (12.5%), Guinea (11.5%), Mozambique (10.25%), Gambia and South Sudan (10%), Madagascar (9.5%), Egypt (9.25%), Zambia (8%), and Rwanda (4.5%). The respective policy rates in Kenya, Ethiopia and Uganda is 7%. The current policy rate in Cape Verde is 1%. This is the least in Africa, and one of the lowest in the world. The policy rate in Cape Verde (1%) is 4% shy of the respective policy rates in Mauritania (5%) and Tanzania (5%), and 2.5% lower than the prevailing policy rates in South Africa (3.5%) and Lesotho (3.5%). All the French-speaking countries in West Africa and Guinea Bissau have a policy rate of 4%, which is 0.25% lower than the current rate in Botswana (4.25%); and 0.75% more than the policy rate in the Central African countries (3.25%). Libya and Seychelles maintain a policy rate of 3% (Tradingeconomics.com, 2020).

The average lending rate in Ghana has dropped from 33% to about 23%. Despite the significant drop, some analysts and investors consider the current average lending rate to be high and unattractive to businesses in the country. High non-performing loans (NPLs) affect African banks’ resolve to increase lending to businesses. Similarly, unstructured operations and poor records keeping hinder businesses from accessing loans at the banks. In spite of the low policy rate, the political unrest in Libya has negative implications for the country’s position in the annual ease of doing business rankings by the World Bank Group; and the country’s ability to attract foreign direct investments, if the latter remains a priority on her economic development and growth agenda.

Unfortunately, some manufacturing businesses on the African continent are unable to produce to meet international standards, specifications, and quality. This affects their ability to penetrate and enter the European and Asian markets. It sometimes affects cross-border trade on the continent.  Businesses on the continent are negatively impacted by the absence of adequate professional skills and brain drain. Extensive use of family ties, nepotism, cronyism, and lack of succession plan affect the perpetuity of businesses in Africa. Admittedly, the educational systems in most parts of Africa, as handed by the colonial masters, are theoretically-driven, and not practically-oriented. This affects the various institutions’ ability to train graduates with the requisite skill and dexterity for the job markets. Ghana’s decision to host the African Continental Free Trade Area (AfCFTA) Secretariat has intensified calls on the authorities to review the existing system of education, and to tailor its contents to meet the contemporary needs of the African and global job markets, so the country could benefit fairly from hosting of the AfCFTA Secretariat and implementation of the AfCFTA Agreement.

The recent COVID-19 outbreak has increased uncertainties in domestic and global financial markets; and has, in turn, increased the reluctance of some financial institutions to stimulate lending, especially at fairly reduced rates across Africa. However, initiatives of individual African countries to ensure economic stimulation through quantitative easing (for example, reduction in policy rate from 16% to 14.5%; reduction in reserve ratio from 10% to 8%; and reduction in capital adequacy ratio from 13% to 11.5% in Ghana), implementation of expansionary fiscal policies (massive investments in roads and other infrastructure by many African governments including Ghana, Nigeria, Kenya, Ethiopia, Djibouti, Egypt, Zambia, and others), and increasing money supply through the provision of financial stimulus to large, medium- and small-size businesses are yielding positive dividends. In Ghana, the President Nana Akufo-Addo-led administration has taken steps through the central bank to ensure funds of depositors of the liquidated three hundred and forty-seven (347) microfinance institutions, twenty-three (23) savings and loans companies, and fifty (50) fund management companies are paid in full. The total number of individual claims is in excess of one million. The estimated cost of the total financial bailout from this exercise to the nation is GH¢6.49 billion. The decision to effect payments at this time is quite strategic; it would increase money supply to over one million people to ensure economic stimulation while transitioning the country from the global liquidity trap occasioned by the COVID-19 pandemic to the road of economic recovery and growth. The amount may form part of a total financial bailout of GH¢21.7 billion to the financial sub-sector of the Ghanaian economy in recent periods.

Ease of Doing Business Rankings

The enumerated challenges in the preceding section tend to affect the continent’s attraction to foreign direct investment (FDI), and performance of African countries in the annual ease of doing business rankings. Data released by the World Bank Group for 2020 revealed no African country formed part of the top-twelve (12) economies in the world during the period. However, it is a significant improvement over the release for 2017 which indicated no African country formed part of the top-forty-eight (48) economies across the globe. Mauritius was the highest-ranked African country at 49th position in the global rankings; and 1st in Africa in 2017. Through the dint of hard work, Mauritius is ranked 13th globally and 1st in Africa this year. Other countries with tremendous improvements in their respective rankings include Rwanda (38th in the world, and 2nd in Africa), Morocco (53rd in the world, and 3rd in Africa), and Kenya (56th in the world, and 4th in Africa). The respective rankings of these countries in 2017 were Rwanda (56th in the world, and 2nd in Africa), Morocco (68th in the world, and 3rd in Africa), and Kenya (92nd in the world, and 7th in Africa). Comparatively, Kenya outpaced Botswana, South Africa and Tunisia in the 2020 African rankings. The respective African rankings of Botswana, South Africa and Tunisia in 2017 were 4th, 5th, and 6th.

Presently, Nigeria, the most populous nation on the continent with an estimated population of 209.13 million people (Countrymetrs.info, 2020), is ranked 131st in the world and 21st in Africa. The country’s respective global and African rankings in 2017 were 169th and 41st. Thus, the current rankings may be described as evidence of rewards from efforts at improving on existing structures related to business formation and operations in the country. Other African countries whose comparative performance equally accelerated during the period include Togo (currently ranked 97th in the world, and 9th in Africa), Cote d’Ivoire (110th in the world, and 13th in Africa), and Djibouti (112th in the world, and 14th in Africa). The respective performance of these countries is worth-commending in that, in 2017, Togo ranked 154th in the world and 28th Africa. The respective rankings of Cote d’Ivoire and Djibouti in 2017 were 142nd and 21st; and 171st and 42nd. The rankings suggest Togo is currently the best place to do business in West Africa, followed by Cote d’Ivoire and Ghana respectively. In 2017 through 2019, Ghana remained the best place to do business in the West African sub-region. Some countries whose performance in the rankings decelerated during the period include Ghana (ranked 118th in the world, and 17th in Africa), Mali (148th in the world, and 27th in Africa), and Cape Verde (137th in the world, and 23rd in Africa). Ghana and Cape Verde’s current respective rankings are shy of their respective rankings (108th in the world, and 11th in Africa; 129th in the world, and 16th in Africa) for 2017 (World Bank Group, 2017).

The protracted socio-political tensions in Mali which have trickled to Burkina Faso and Niger have impacted adversely on the former’s performance in the ease of doing business rankings. Recall, in 2017, Burkina Faso was ranked 146th globally and 23rd in Africa. These rankings were superior to the country’s respective rankings in the current year: 151st in the world, and 29th in Africa. Countries such as South Sudan, Libya, Eritrea and Somalia did not witness significant changes in their respective global and African rankings. In the world rankings, South Sudan moved one significant place from 186th in 2017 to 185th in 2020 but maintained her 51st position in Africa during the period. The respective global and African rankings for Libya, Eritrea and Somalia in 2020 are 186th and 52nd, 189th and 53rd, and 190th and 54th (World Bank Group, 2020). The respective African rankings of these countries remained unchanged between 2017 and 2020. We observe prolonged civil conflicts in certain parts of Africa have stalled economic development and growth by “starving” foreign direct investments (FDIs), which “feed” essentially on stable political atmosphere and friendly business environment.

Recommendations

In view of the myriad of challenges saddled with businesses in Africa, the following recommendations are made. First, African leaders must strive to provide improved road networks and transportation systems by constructing new roads, expanding existing ones; and constructing overpasses at strategic intersections. This would decrease employee work-travel hours, and increase labour productivity. Recent massive infrastructural developments in Ethiopia, Kenya, Rwanda, Nigeria, South Africa, and Ghana, among other economies, seem to be addressing the challenge. Exigencies of the United Nations (UN) Sustainable Development Goals (SDGs) for 2030 and implementation of the AfCFTA Agreement render massive investments in infrastructure in African economies inevitable at this time.

Second, import-restriction measures must be tightened to provide protection for nascent businesses on the African continent. It is hoped the implementation of AfCFTA in earnest would help address the foregoing challenge by increasing inter-country and intra-African trade. Third, unnecessary administrative bottlenecks in the business registration and contract execution processes must be reviewed and where necessary, eliminated to make the continent an attractive investment destination to foreign investors while improving on member countries’ respective positions in the World Bank Group’s global ease of doing business rankings.

Fourth, efforts by the government of Ghana to nib the activities of illegal small-scale miners in the bud are a step in the right direction. The efforts are likely to bolster local- and foreign investor confidence in the Ghanaian economy and minimise the adverse effects of illegal mining on our water bodies. Other African countries with similar challenges could adapt and improve on Ghana’s model to address their respective challenges. Fifth, given a steady decline in inflation rate in Africa in spite of recent hikes occasioned by COVID-19, it behoves the governments, through their respective central banks, to periodically review the policy rates downward to enhance businesses’ chances of accessing loans at reasonable interest rates from lending institutions. Various governments’ efforts aimed at ensuring economic development and growth through financial inclusion and stability would be an exercise in futility if the efforts are not backed by the corresponding decrease in average lending rates in the financial markets. It is, therefore, imperative for the central banks in Africa to prevail on the various banks and specialised deposit-taking institutions operating within their respective jurisdictions to review their lending rates downward to reflect the recent decrease in governments’ policy rates.

Sixth, standards authorities in the various African economies must step-up their efforts; they must ensure strict adherence and compliance to standards regulations by businesses to boost intra-African trade, and enhance the latter’s competitiveness in the global market. A “good job” by standard authorities would help eliminate the high incidence of rejection of products from Africa in the European and other global markets. Seventh, the Ministries of Education, Trade and Industry, and Business Development must liaise with various tertiary institutions to ensure the contents of academic curricula are tailored to meet the needs and demands of businesses and industries. More students should be encouraged to enroll in technical and vocational education and training programmes to reduce the deficiencies in the supply of professionals with technical and vocational skills.

Eighth, the contribution of the digital economy to the respective gross domestic products (GDPs) of some African countries in recent years is in excess of 5%. It is firmly believed the contribution could inch to 12% or more if the countries are able to scale-up their investments in digital technologies. Increased investment in digital technology could churn out significant socio-economic outcomes and benefits; it would increase job opportunities, orient the implied economies towards the digital revolution; increase regional and global competitiveness, witness remarkable economic expansion; and increase economic growth rates beyond annual targets. Given its enormous economic benefits, digital technology is strongly recommended to all countries on the African continent.

Ninth, the absence of an effective business succession plan remains a major constraint to many firms not only in Africa but also across the globe. In the United States of America (USA), over 90% of businesses are owned by families. However, only 30% of these businesses have succession plans; only a little over 30% of these businesses are successfully transferred to the second generation. Incidentally, the rate of businesses that transitions to the third generation is less than 12% (Vlcpa.com, 2016). Access to reliable statistics on the number of businesses that is family-owned in Africa may be a daunting task. This notwithstanding, every business, whether individually- or family- or group-owned through sole proprietorships, partnerships and companies requires an effective business plan to define the future of the entity positively. Imperatively, business owners must strive to separate their firms from social relations; they must groom dependent or dependents to effectively succeed them in old age, in times of infirmity or upon their demise to assure the principle of “Going Concern” in business operations and management.

Finally, throughout the narrative, we observe challenges confronting successful development of businesses in Africa could be categorised into five broad themes. These include social, political, economic, legal, and technological (SPELT) challenges. Discussions in the preceding section affirmed the enormity of some of these challenges and the extent to which they serve as constraints to accelerated development and growth among member countries on the continent. To reverse the trend positively, it is firmly believed collective efforts aimed at addressing these challenges through various enactments of the African Union (AU) such as the implementation of the AfCFTA Agreement could strategically position the continent among the comity of regions across the globe. To reiterate and reaffirm, this is the opportune time for various African governments to provide the needed leadership impetus to mitigate the SPELT challenges, so the continent could assume her enviable role through steady economic development and growth; and strong annual contributions to global GDP.

The writer is a Chartered Economist/Business Consultant

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