What’s Wrong With The African Business Environment?

By Vijaya Ramachandran*

No amount of aid can substitute for a thriving private sector, in Africa or anywhere else in the world.

A productive business environment encourages growth, learning, investment, and competition on a global scale, whereas an environment of high costs and risks discourages would-be entrepreneurs from establishing a business, investing in it, and increasing its productivity.

How does Africa’s business environment measure up?

Not very well. Across Africa, a majority of businesses surveyed cite inadequate power supply as a major or severe constraint. Outages are not just frequent but unpredictable and long, sometimes stretching through the entire work day.

Businesses in many countries suffer outages on more than half the working days in the year. Comparable data for China show that the burden of power outages for businesses there is far smaller.

Perhaps no country in Africa is affected more than Nigeria. Almost 40 percent of electricity there is privately provided by generators, and businesses report that outages occur almost every day.

Almost all businesses own generators to compensate for the extraordinarily unreliable supply from the Power Holding Company of Nigeria. At the same time, fuel is sometimes hard to find in this oil-exporting country, and maintenance of generator equipment imposes further costs on business owners.

The low-income economies of sub-Saharan Africa also lag far behind every other region in the world in terms of paved-road mileage and modern freight- and passenger-transport systems. Inadequate infrastructure restricts businesses to fragmented regional markets or to opportunities with profits large enough to cover high transportation costs.

The ill effects of bad infrastructure are difficult to reverse because transport bottlenecks are typically long-term—bad roads and limited transnational linkages have kept markets and businesses highly segmented for decades.

But Africa also has the opportunity to leapfrog over traditional solutions and transition rapidly to renewable energy using best-practice models for infrastructure delivery and maintenance.

African reserves of renewable resources — solar, wind, hydro, and biofuels — are the highest in the world and greatly exceed current levels of energy consumption. Small-scale power installations, such as micro-hydro schemes or rooftop solar panels, are well suited to a continent where traditional grid-based electricity will likely never be cheap, reliable, or far-reaching.

Africa’s solutions are regional, not national. A network of roads connecting all sub-Saharan capitals and other cities with populations over 500,000 is estimated to expand overland trade by $250bn over fifteen years. Best-practice models of maintenance and the rise of a technocratic class of public servants in many African countries increase the feasibility of these types of solutions.

And what can be done to improve entrepreneurial capacity? One essential component of policy is investments in higher education. Outside South Africa, African business schools are generally much in need of skills enhancement and curriculum development.

Initiatives such as the Global Business School Network, which seeks to build the capacity of African business schools by bringing them together with leading business schools in industrial countries, are helping to fill the gap.

Another option to encourage domestic investors is to make more broadly available some of the programs that have been used to encourage foreign investment. Partial risk guarantees from the World Bank and the International Development Association have been used to facilitate private investment in large infrastructure projects.

Partial risk guarantees could also be broadened to include “service guarantees,” which could be made available to domestic and foreign investors on an equal basis.

Under such an approach, countries implementing reforms in key areas such as power, customs, licensing, and so on, would commit themselves to service standards. Businesses could purchase insurance against service failures, perhaps not on an individual basis but on the basis of overall performance.

These contracts would be underwritten by risk-guarantee programs, possibly funded by donor countries through programs of the international financial institutions. Persistent failure to provide business services to accepted standards would then activate the guarantee.

This would do more than just compensate businesses for lost revenues; it would make business service standards a high priority for policymakers.

*Vijaya Ramachandran is a senior fellow at the Center for Global Development and the author of Africa’s Private Sector: What’s Wrong with the Business Environment and What to Do About It (Center for Global Development, 2009).

Image credit: Greg Westfall/ Flickr