Private sector

Continued improvements in business environment, but more needed to reduce costs of doing business, promote responsible and value-adding investment and improve access to finance, especially for SMEs.

Key commitments

Africa: African governments have made policy declarations and statements to improve the environment for business, although few specific targets have been set. Private sector growth was identified as a priority in the 2001 NEPAD founding statement in 2001 and reiterated in 2010 in the AU “African Private Sector Forum Declaration”. These declarations have encouraged private financial flows and partnerships among governments, the private sector and civil society, and approved codes and standards for achieving good economic and corporate governance. Successive commitments have sought to create suitable conditions to develop the private sector, and to promote public-private partnerships (PPPs), notably in transport and energy infrastructure (see also Infrastructure).

Development partners: Development partners have made commitments to: (a) support African efforts to remove the obstacles to investment and reduce the cost of doing business; (b) help mitigate risks faced by investors; (c) improve synergies between ODA and other sources of development finance and promote PPPs; and (d) to promote responsible investment. The G-20 identified private investment and job creation as a key pillar of the Seoul Multi-Year Action Plan on Development, commissioned work on maximising the value added of private investment, promoting responsible investment, and supporting SMEs and have committed to continue this in 2012. The G-8 and Africa called on companies to improve their corporate and social responsibility at the 2011 Deauville summit.

What has been done to deliver on these commitments?

Africa: Starting from a low base, Africa has continued to improve its regulatory environment. The pace of reform is increasing: according to the World Bank’s 2012 Doing Business Report, a record 36 of 46 sub-Saharan African governments (78%) improved the regulatory environment for business in 2010/11, compared to an average of 56% in the six previous years. Only Eastern Europe and Central Asia had a higher proportion of countries implementing new regulations. Twelve of the 30 countries implementing regulatory reforms making it easier to do business in 3 or more of the 10 monitored indicators in 2010/2011 were African. Four countries in sub-Saharan Africa are among the top 10 reformers over the last 5 years.

Reforms have particularly focused on making it easier to start a business and improving trade across borders. Several countries have revised their labour codes, making it easier to employ workers. Reforms in commercial laws and property rights vary considerably, with institutional weaknesses more evident and acute in countries with Civil Code traditions. Sub-Saharan Africa still falls short, however, in a number of regulatory reforms, such as dealing with licenses and protecting investors.

The African Development Bank (AfDB) has supported reforms encouraging strategic investments in private-sector projects and PPPs for infrastructure development. Between 2008 and 2010, 18 African countries received AfDB support to improve the legal and regulatory environment for business.

Development partners:  Preliminary indicators have been developed by international organisations to measure economic value-added and job creation and will be field tested in 2012. Continued efforts were made to promote responsible investment through the revision and strengthening of the OECD Guidelines on Multinational Enterprises. Other relevant initiatives include the NEPAD/OECD Africa Investment Initiative and the OECD Policy Framework for Investment. Development assistance for business support, banking and finance fell in 2010 from over US$2 billion to US$1.3 billion. However IFC’s investments in sub-Saharan Africa exceeded $2 billion in 2011 for the second year running, supporting private sector growth in 31 countries. This volume includes credit and risk guarantee mechanisms to promote domestic and foreign direct investments. The World Bank, UNECA and the Public-Private Infrastructure Advisory Fund have also undertaken a number of PPP capacity-building initiatives.

What results have been achieved?

Continued reforms, combined with political and macroeconomic stability and sustained growth have improved Africa’s business environment. Of 33 sub-indicators defined by the World Bank to measure the ease of doing business, 29 improved in Africa between 2005 and 2010; for 15 indicators the gap between sub-Saharan African results and global averages was less than 20%. For some sub-indicators, such as the average times needed to obtain a construction permit, pay taxes and enforce contracts, sub-Saharan Africa reached performance levels comparable to most other regions. Reforms have helped bring about significant increases in domestic and foreign direct investment (see topic Foreign direct investment) contributing to overall economic growth.

But there is still need to improve the business environment, to maximise the economic value-added of private investment and diversify African industries (see Trade and diversification). Only 9 African countries are among the World Bank’s top 100 doing business rankings. African countries are not improving their business environment relative to their competitors. For 17 out of 33 sub-indicators rates of reform continue to be outpaced by other regions.

Within Africa there is still a wide degree of variation, between sub-regions, between countries within sub-regions, and between specific indicators within countries. Harmonising around best practice within sub-regions would dramatically lift the overall standard of the business environment, as well as contribute to regional integration (see Box 4 in appendices).
Business funding is improving through new licensed private credit bureaus, a wider range of assets used as collateral and a strengthened legal framework for secured transactions. However, the banking industry is still very concentrated, financing costs remain high and access to credit is a primary inhibitor to doing business in Africa. Small and Medium Entreprises (SMEs), which account for up to 90% of all businesses in sub-Saharan markets, are particularly vulnerable to restrictions on credit access.
Capital markets have grown from 8 to 22 stock exchanges between 2002 and 2011, and market capitalisation of the 5 leading stock exchanges tripled between 2005 and 2010. Yet the small size and lack of liquidity of these markets remains a problem and investor protection, including corporate disclosure and legal protection, is weak. More generally, African financial systems often suffer from insufficient collateral and credit information systems and have inadequate supervisory capacity and prudential approaches.

What are the future priority actions?

Africa:

•Accelerate improvements in the business environment by harmonising around best business practice;
• Accelerate improvements in access to finance, particularly for small-sized firms and informal businesses;
•Promote private sector participation and partnerships in strategic sectors such as energy and transport and public services, particularly through effective implementation of PPPs (see also Infrastructure). 

Development partners
• Take forward work to measure the economic value-added and job creation generated by private investment;
• Increase support for lower-level capacity building to tackle constraints to financial, human and technological development;
• Support efforts to improve access to finance, particularly for SMEs.