There are a lot of debates about how governments can support the private sector and, in turn, help their economy. There’s another school of thought that public interest in a free market is actually detrimental to the economy. Special economic zones (SEZs) and public-private partnerships (PPPs) in Africa have been used by a number of countries to promote trade between the private sector and governments. Investors who would typically benefit from such projects are also eager to take advantage of the rare opportunity for profit. To understand the potential of these projects and whether they will be effective, it is important to understand the different ways in which such projects can take shape in a variety of African countries.
Understanding the different approaches for implementing PPPs, which are based on a ubiquitous “leap of faith” argument, is important for any government to identify the right approach and design appropriate policies to manage reasonably complex PPPs. In general, PPPs entail the formation of partnerships between a public sector entity, such as the government or municipality on one hand, and private industry on the other, and are usually used as tools for addressing development gaps.
Special economic zones (SEZs) are defined as areas that have high standards of import and export regimes to foster trade between these areas as well as with other countries. It is important that officials effectively incorporate insights from local knowledge into decision-making processes in order to develop strategies that can be both efficient and sustainable over time.
However, although SEZs offer numerous benefits to both local and national economies, their implementation in developing countries has been problematic due to an often hostile political environment. Critics of the idea point out the many regulatory impediments that have posed problems for the successful implementation of these zones.
Since economic reforms in Africa began in the late 1980s, a number of African countries have moved toward market-oriented policies that are conducive to private investment. In addition, many of these countries have also implemented various liberalisation and privatisation policies with the aim of strengthening their financial systems and improving business conditions. Such policies have enabled substantial foreign direct investments that take advantage of market opportunities presented by African economies. The expectation that liberalisation and privatisation would result in increased foreign direct investment (FDI) was based on the assumption that these reforms would provide more opportunities for the efficient allocation of resources, increased availability of capital, improved incentives for domestic and foreign entrepreneurs, greater access to markets, and enhanced competition.
Investment opportunities in Africa are driven by several factors, including the discovery and exploitation of natural resources – mineral ores, petroleum, agricultural products, large domestic markets with relatively high growth rates, growing middle-income groups with increasing purchasing power as well as a low-cost labour force. Despite the availability of attractive investment climates, many countries have failed to attract FDI.
The reasons that have been offered by those who believe that African countries are inherently unfavourable investment destinations include political instability and the risk of social unrest. Others have suggested that African governments need to make significant changes in their policies, including enforcing property rights, establishing clear policies for the management of public-private partnerships, making business contracts more transparent, and enforcing stronger laws against corruption.
The apparent failure of some African countries to attract FDI appears to be related more to political than economic factors. This is frequently the case in countries affected by conflict or civil war, where political uncertainty has discouraged investors. Civil war alone is not sufficient to explain the lack of economic development in Africa, however. Countries that have suffered civil war, such as Angola and Ethiopia, have been able to attract significant FDI even during times of conflict. The difference lies more in the ability of investors to overcome government hostility than in the nature and extent of the conflicts themselves. Despite its extraordinarily high level of volatility and risk, Nigeria attracts large amounts of FDI due largely to its relatively large market size and favourable investment climate.
African governments have been slow in realising the economic benefits of private investment and have often neglected to include investors in the decision-making process. This is despite the fact that many African governments have created legal frameworks that make investments relatively secure. What they have failed to do is develop and enforce regulations that assist investors to reap their full potential, especially on the local level. One reason for this could be the frequent changes in legislation and policy, which can make long-term strategies impossible to implement. Another factor is the perception that foreign investment is only beneficial to a select few who are connected with government elites, rather than being seen as having a positive effect on all citizens as well as supporting and creating jobs for them.
Even if African governments were to create an investment-friendly environment, many of the investors that are needed to drive economic development in Africa simply do not exist. In the past, foreign investors have been largely responsible for development projects in Africa. Today, however, most investment capital is generated by local entrepreneurs and governments. Because they already have a level of familiarity with the political system as well as its problems and opportunities, they are often more willing than foreign investors to endure its political risks.
While there has been little success at attracting FDI in general on a continent-wide basis, there are numerous examples where individual countries have attracted these investments. For instance, Ghana’s dominant position in Africa and its continued economic progress have correlated with increased foreign investment. Ghana’s economic growth is mainly due to the government’s policies. These include diversifying its economy by encouraging the private sector to grow and develop the public sector. The comprehensive development of infrastructure in Ghana has helped speed up the country’s growth and made it attractive for investment.
Ghana’s example
Ghana has been praised in several official reports as an example of sustained economic and political success. One reason why so many governments have selected Ghana as a development project location is that it is perceived to have a stable political system and relatively low taxes, especially for industries – such as mining and manufacturing. Its free-market economy was established early upon its independence from the United Kingdom in 1957, and remains the most developed economy in Africa. Despite this, its democracy has had difficulty reaching a consensus on key issues, including an appropriate level of foreign assistance to support its development effort.
Ghana’s economy is primarily driven by agriculture and manufacturing. Its manufacturing sector includes electronics – communications equipment such as mobile phones, textiles – clothing, chemicals – pharmaceuticals, construction materials, food processing, rubber and leather goods industries. Its agricultural production is focused on cocoa, gold, timber and other products.
Ghana’s political stability is another reason why countries, such as China and Singapore, have consistently chosen Ghana as the preferred investment location. They appreciate the country’s stability, which makes it an attractive location for foreign investors and a stable labour force. The president has committed to creating an environment that encourages and develops entrepreneurship and has established incentives for business start-ups. Ghana also offers a number of benefits to investors in the form of high-quality infrastructure and the support of local government officials.
The government’s strategy for growth and development is focused on increased trade within the country as well as with foreign partners. In order to achieve this, it has made significant strides toward making itself a centre of excellence in African trade and commerce. One of the ways it has done this is by improving its transportation infrastructure. For example, it has invested in building airports throughout the country, creating road and rail links to major cities and ports. This kind of investment in transportation infrastructure is important for promoting growth because it increases accessibility for both local and foreign investors alike. It is also working to create an even playing field for all businesses by focusing on such issues as corruption and bureaucracy.
Entrepreneurship and innovation in Africa
Although entrepreneurship is one of the key elements of development, it has been largely ignored in many African countries. As a result, there are few successful entrepreneurs in Africa. Even in countries with large numbers of people living below the poverty line, entrepreneurship takes a backseat to the traditional family farm as the primary economic activity. Because African countries often face political instability, making it difficult for entrepreneurs to pursue their business ventures, those that do come forward often risk their lives and livelihoods by providing services for free.
In recent years, however, some countries have begun to implement programmes aimed at encouraging and educating the population about entrepreneurship through such activities as creating access to funds and funding new business ideas. In countries such as Ghana, the African Union and the United Nations Development Programme (UNDP) have also spearheaded the development of a number of projects that focus on creating an environment in which new business ideas can flourish. This is one of the ways in which African leaders hope to reduce poverty and dependence on foreign assistance.
Although the main export goods and services that the country can offer are its farming goods and services, Ghana has a number of other exports, such as gold, cocoa and timber. To some extent, it does not have natural resources that many other African countries have a higher proportion of access to or use more efficiently, but it is still able to provide a range of commodity-based exports — particularly those that meet international standards.
SEZs and PPPs are being increasingly used in Africa to promote trade and address development gaps. However, their implementation has been problematic in developing countries due to regulatory impediments and a hostile political environment. Despite the availability of attractive investment climates, many countries have failed to attract FDI due to political instability, the risk of social unrest, and the lack of investor involvement in the decision-making process. To address these problems, Ghana has sought to create a more stable environment through the creation of a number of special economic zones (SEZs). Brownfield, the Meridian Industrial Park and the Dawa Industrial Zone – a greenfield with immense potential to attract investment for future development – are leading examples of its efforts to create a more investor-friendly environment.
These industrial parks have been created in an attempt to counterbalance some of these concerns by offering low corporate and income taxes, as well as providing a series of incentives. The Meridian Industrial Park has been one of the most successful in attracting foreign investment and has proved popular with both domestic and international investors. It has provided a level of stability not experienced by other areas in Ghana because of its geographical location and the presence of a depot, thereby removing the need for companies to import materials.
In sum, African governments need to make significant changes in their policies, including enforcing property rights, establishing clear policies for the management of PPPs, making business contracts more transparent, and enforcing stronger laws against corruption to create an investment-friendly environment and sustain economic development.
The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.
