Changing climate for investment in Africa

A concerted effort to merge the twin approaches of aid and trade is essential if the continent is to harness its economic potential

Beneath the snowy peak of Kilimanjaro, on the Tanzanian-Kenyan border, construction work is in full swing. This little patch of Africa is the designated site of a new one-stop border post, a centre being developed by Trade Mark East Africa, a non-governmental organisation committed to reducing cross-border transport costs across the continent.

When completed later this year, the project, which is being supported by the Tanzanian government, is expected to reduce clearing times for passengers, lessen the costs of cross-border movements and minimise opportunities for fraud and corruption.

The project is one of a number of initiatives currently underway that seek to improve Africa’s business climate.

Investment and growth are becoming key watchwords for Africa. For decades, the continent has been synonymous with poverty and instability, but it has recently emerged on the global consciousness as a potential site for investment.

The latest African Economic Outlook presented at the OECD-backed International Economic Forum on Africa found that GDP across the continent is expected to accelerate to 4.8 per cent in 2013.

Despite the wide disparities in wealth that still persist, on a macro-economic basis Africa is growing, underpinned by the continent’s enormous wealth of natural resources and agri-commodities.

The move towards economic expansion and investment is mirrored by a fundamental shift in political ideology. While many African countries, post-independence, were founded on the principles of socialism, many have warmed to capitalism, turning to investment and commercialism as a potential route out of poverty.

Where China was one of the first countries to identify the investment potential of Africa, controversially penetrating the continent over the last decade, others, including Irish investors, have followed suit.

Fund managers from London to Hong Kong are keen to buy in to the African story, eager to identify the next big emergent market, particularly as the developed world continues to offer diminished returns.

But despite the economic potential, barriers to investment and private sector activity remain.

Corruption is just one of the factors that impinge on the economic potential of Africa. The IFC is one of a number of NGOs working to improve the economic environment of east Africa. An arm of the World Bank, the organisation, which is supported by Irish Aid, offers investment and advisory support to private sector projects in the developing world.*

As Carolyn Ndawula, programme manager of IFC in Uganda explains, its focus in Uganda is on regulatory reform as a way of contributing to economic growth.*

“Our view is on how we can help business to operate better, improve delivery and minimise the cost of operations, working with the government of Uganda,” she explains as we meet in her Kampala office.

Its most recent project focused on the area of business licences, one of the major barriers to private sector activity in the country.

Simplifying the process

A review carried out by IFC and the Ugandan government, found that businesses were required to comply with a total of 790 business licenses, representing an annual cost of $280 million, equating to 3.5 per cent of GDP.

The review recommended the elimination of 56 business licenses and the simplification of more than 730. So far 27 have been abolished.

“While the number of business licenses remains high, this is a big step towards simplifying the business registration process in Uganda,” says Ndawula.

Leveraging the potential of the internet is also a key focus of the organisation. It has recently established an e-licensing portal, where business owners can find out what licenses they need to obtain, and where to obtain them.

“The long-term aim is to develop this service into a transactional portal, where businesses can file for applications from different agencies in one place, thereby reducing the cost and time of compliance,” explains Ndawula.

“The move towards greater internet use helps to minimise human contact in the administration process, increase transparency around the business licensing and registration processes, thereby minimising opportunities for corruption.”

Issa Sekitto, chairman of Kampala City Traders Association, says the high cost of doing business is a major barrier to growth. Annual trading licence fees and business taxes are some of the highest costs facing business, while his association is constantly lobbying the government about the high cost of rents, he explains.