The investment climate in Africa:

• 34 Sub-Saharan Africa suffers from low domestic and foreign investment, high capital
  flight and low remittance flows, relative to other developing countries. At 18 per cent,
  Africa’s investment-to-GDP ratio is below the average of 24 per cent for all developing
  countries and the lowest of any developing region48. Only six to seven per cent of foreign
  direct investment (FDI) and around five per cent of remittances flowing to developing
  countries go to sub-Saharan Africa49. It is estimated that around 40 per cent of private
  wealth is held outside Africa compared to three per cent for South Asia50.
  
• 35 Africa has been an unattractive continent for investment both by Africans themselves
  and by outsiders. The challenge is to generate an environment where Africans want to
  invest in their own farms, businesses, countries and continent, and which attracts greater
  flows of foreign investment.
  
• 36 There has been a growing recognition of the importance of what is referred to as the
  ‘investment climate’ – and of what domestic governments, developed countries, the business community and civil society can do to enhance it. As in most developing countries, the bulk of investment in Africa is domestic: around 80 per cent against 20 per
  cent for foreign investment51. This means the focus must be on the domestic investment
  climate. But getting the investment climate right for domestic firms will also bring more
  foreign investment and remittances.
  
• 37 A commitment was made in the G8 Africa Action Plan52, agreed at the 2002 G8
  Summit in Kananaskis and reinforced at the 2004 G8 Summit in Sea Island, to supporting investment climate improvement – in recognition of its importance to growth. And this is the focus of the 2005 World Development Report, ‘A Better Investment Climate For All’53. The report finds that enhancing the investment climate can accelerate economic growth significantly. It notes that getting the investment climate right for agriculture and in rural areas is of particular importance for many of the poorest people.
  
  38 The benefits of an enhanced investment climate can be far-reaching: in Uganda, which underwent widespread investment climate reforms, GDP grew by around seven per
  cent per year during 1993-200254, reducing the share of the population living below the
  poverty line from 56 per cent in 1992 to 35 per cent in 200055. In Tanzania, an improvement in the investment climate is behind the country’s fastest growth in 15
  years56. In Mozambique, investment climate improvements resulted in a doubling of
  private investment as a share of GDP between 1998 and 200257. A study of 10 countries,
  including seven in sub-Saharan Africa – Ghana, Kenya, Malawi, South Africa, Tanzania,
  Uganda and Zambia – linked increased growth of 2.4 to 4.8 percentage points to
  improved property rights, commercial justice and deregulation58.
  
• 39 This picture is reflected in other regions. A study on India concluded that “if each... state could attain the best practice in India in terms of regulation and infrastructure, the
  economy should grow about two percentage points faster, and 3.2 percentage points in
  poor climate states”59. In China, improving property rights, starting with agriculture 25 years ago, helped lift 400 million people out of poverty60. In Ukraine and elsewhere, investment climate reforms have resulted in an increase in jobs between 15 and 35 per cent61.
  
• 40 But many barriers to investment remain in Africa, increasing the risks and costs of
  doing business. Issues relating to governance, including the transparency, accountability
  and effectiveness of governments, feature highly in surveys of investors62. And they were
  also identified as priorities by the Commission for Africa Business Contact Group, a group
  of investors with extensive experience of investing in Africa63. Policy unpredictability and
  macroeconomic instability are among the highest concerns64. Improving policy predictability can increase investment by up to 30 per cent65.
  
• 41 Other important factors relating to governance that are identified in studies and
  surveys include the quality and accountability of public financial management systems, the predictability and transparency of taxation66, the nature of business regulation, the level of corruption, and an effective and fair judiciary67. Robust competition laws and policies, with strong institutions to enforce them, are vital to improving productivity and to promoting innovation and better prices68. Political instability, conflict and crime are also key issues for investors69. As discussed below, these factors are exacerbated in post-conflict countries, making it difficult to attract the private investment needed. Governance is discussed further in Chapter 4, while peace and security are the subjects of Chapter 5.
  
• 42 Weak governance has also translated into poor service delivery, with weaknesses in
  health, education and infrastructure pinpointed as key issues in our business consultations. Given the significance of the infrastructure gap in Africa, and the scale of the challenge this represents, it is looked at separately in section 7.3.2. Proposals to strengthen health and education systems are set out in Chapter 6.
  
• 43 Weak governance matters from another perspective. In many high-growth countries – China, India, South Korea, Taiwan, Singapore and, in Africa, Botswana and Mauritius – the state has played an important and active role: in attracting investment; encouraging restructuring, diversification and technological dynamism; boosting productivity, competitiveness and exports; and securing long-term growth. While all have promoted effective property rights, contract enforcement and sound macroeconomic policy, these different countries have adopted very context-specific approaches. In all cases the state has played an important role70, with a focus on unleashing private entrepreneurship.
  
• 44 In the case of Mauritius, an exported-oriented strategy – based on an Export Processing Zone – was combined very successfully with a high level of trade protection for domestic industry until the mid-1980s. Botswana, similarly, combined a ‘market. friendly’ environment with substantial state activities in certain areas71. An important lesson from these cases is that the quality of government action matters, and therefore so too does its capacity. Past policies that undermined the capacity of governments must be avoided. Governments, and donors, must adopt a creative and flexible approach to promoting long-term growth, with the precise mix of policies reflecting the country-context.
• 
  45 Many barriers to investment in Africa are exaggerated due to ‘Afro-pessimism’. Africa
  often appears to be seen as one large risky country72, with little understanding of its diversity – driven by negative media coverage and a lack of country-specific knowledge among investors. But the perceived investment climate is as important as the actual one and so addressing negative perceptions is an important part of encouraging investment.
• 
  46 Small enterprises suffer most from a poor investment climate73. Access to credit and
  other financial services is important to growth and investment, yet few small businesses
  or individuals are able to get the access they need. This partly reflects a lack of access to
  property rights for the majority of poor people: formal legal title to homes and land are
  often required as collateral to obtain commercial credit74. More generally, effectively
  enforced property rights are important for reducing investment costs and risks75. Only one per cent of the land in sub-Saharan Africa has been officially registered with title deeds and most of this is for high-income groups76. An example of the failure to register land is that provided by Dar es Salaam, which received over 200,000 applications for plots between 1990 and 2001 of which only about 8,000 plots were allocated officially. The
  situation is aggravated by the fact that in many African countries there is no financing
  mechanism for housing.
  
• 47 Recommendation: African governments must unleash the strong entrepreneurial spirit of Africa’s people. To promote this, donor governments and the private sector should co-ordinate their efforts behind the proposed Investment Climate Facility (ICF) of the African Union’s NEPAD programme. This requires US$550 million from donors and the private sector over seven years to identify and overcome the obstacles to doing business.
  
• 48 It is clearly the responsibility of African governments to prioritise and take action to
  enhance the investment climate. Through AU/NEPAD, particularly in the context of the APRM, an African-led process is underway to identify priorities and share best practice from across the region. The ICF is an initiative supported by and in support of AU/NEPAD involving joint action by business and government working together to identify and act on key obstacles. The ICF will provide technical assistance to governments to improve the investment climate in support of AU/NEPAD’s aim of ‘making Africa an even better place to do business’.
  
• 49 The ICF is complementary to existing efforts in Africa, has African ownership and is
  able to address many barriers to investment in a dynamic way. It has the flexibility needed to reflect the country and sectoral diversity across the region, and is private sector-led. This independent, pro-active and responsive grant facility will combine resources from the private sector with the donor community: an amount of US$550 million is required over seven years. The major share of resources will need to come from donors, but it is intended that the private sector’s share should be significant. Resources should be built up over time subject to review77. Donors should stand ready to co-ordinate their efforts behind identified actions, and many have already expressed an interest in funding the facility. Support for the ICF was recommended by the Business Contact Group and welcomed throughout our private sector consultations78.
  
• 50 It is estimated that the facility will fund over 300 projects, mainly in the 24 African
  countries signed up to the APRM. It will act on issues highlighted by the APRM, the World. Bank’s Investment Climate Assessments and Doing Business Reports, and other processes. It will also be informed by analysis coming out of the proposed Africa Enterprise Challenge Fund (section 7.4.1) and Growing Sustainable Business initiative (section 7.4.3).
• 
  51 The ICF will focus on: putting in place appropriate policies, legislation and regulations;
  ensuring more effective business friendly administration and implementation of policies;
  enhancing competition policy; facilitating improvement of support and services to the private sector; increasing dialogue between the private sector and government on investment climate reform, including on infrastructure priorities, by strengthening the private sector voice through mechanisms such as chambers of commerce, employer federations and investment councils79. The ICF will also address issues such as corporate governance, crime, security, corruption, HIV and AIDS and malaria, particularly emphasising the private sector response to these.
  
• 52 It will also support financial market strengthening and the promotion of integrated regional capital markets, including encouraging the standardisation of financial regulation and shared regulatory capacities across countries; increased access to credit information; and simplifying systems for remittance transfers. The role of credit bureaux in boosting credit supply by providing small enterprises with a financial track record was also highlighted during our consultations80. As part of efforts to promote enhanced access to credit and financial services the ICF will invest in better information on the demand for financial services and gaps in provision. This would help to identify new market opportunities for financial institutions, and help governments to tackle policy related barriers to widening access to formal financial services. The ICF could support, for example, the extension of Finscope81 surveys of access and usage throughout Africa in order to address this gap.
• 
  53 The ICF will undertake major programmes to tackle issues regarding property rights, taking registries more efficient and providing legislative drafting and legal expertise to government, acknowledging the governments’ role in driving and owning these changes.
• 
  54 Importantly, the ICF will address negative perceptions by giving significant publicity to investment success stories, including through media campaigns to publicise African success stories. It could also complement work on sovereign ratings82 (for example, initiatives by UNDP with Standard and Poor83, and by the US State Department with Fitch84), including by supporting countries that are in the “preparation phase” for a sovereign rating.
  
• 55 These projects will take place over seven years and, based on the effect investment climate improvements have had in the past, will support poverty reduction and increased jobs, private investment and economic growth.
  
• 56 As noted above, the risks and costs of doing business are particularly high in postconflict countries. And yet there is a critical need to re-establish growth quickly in these countries to ensure they do not regress into conflict. Private investment is key to this, and political risk insurance (PRI) provided by the Multilateral Investment Guarantee Agency (MIGA) – a part of the World Bank Group that provides insurance to private investors – can help. As its Convention presently stands, MIGA, can only provide PRI to foreign investors. Yet, in a post-conflict situation, domestic investors will normally be of particular importance. While other factors dominate, notably commercial risk, domestic investors could have a special interest in protection from expropriation risk, to which they are especially exposed. The aim would be to design a Post-Conflict Guarantee Facility to provide cover to domestic, as well as foreign, investors for political risks.
• 
  57 Recommendation: Developed countries should support a fund of the Multilateral Investment Guarantee Agency to insure foreign and domestic investors in postconflict countries in Africa. Support should also be extended to domestic investors across sub-Saharan Africa.
• 
  58 MIGA would leverage an amount of US$80 million of donor contribution to create a fund of US$500 million covering the World Bank’s list of 16 conflict-affected African countries85 and with the ability to include countries that may go into conflict in the future. Official Export Credit Agencies, private insurers and MIGA would contribute to insurance along side the fund. About 60 projects of between US$5 million to US$15 million would be insured, thus enabling 60 new investments that otherwise would not have taken place. The investment projects would be carefully selected so as to have the highest developmental impact. Of course, it should be noted that providing insurance for investments is only part of a much wider effort needed to increase investment flows, including through the changes to the investment climate outlined earlier.
  
• 59 A need for such services exists in other African countries as well. Over the longer term, MIGA should work towards extending its focus beyond foreign investors to include domestic investors throughout its operations to cover all (non-conflict) African countries.