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Eckhard Hinzen from the Centre for the Development of Industry (CDI) outlines progress in the industrialisation of sub-Saharan Africa

For more than a decade now industrialisation focusing on the promotion of private sector initiative and the encouragement of foreign investment has been given a high rank in economic development policy by the authorities in most African countries. Yet, none of these have materialised with any significant impact in most of sub-Saharan Africa. Consequently, an atmosphere of general disappointment and even discouragement with African industrialisation is spreading, increasing some doubts whether adopted policies and programmes are worth being pursued. This is certainly not a constructive environment and calls for a revision of assumptions, expectations and the means employed, in order to set more realistic and attainable prospects.

After independence, governments usually took a strong stand in regulating the economy and involved themselves in setting up and controlling a great number of state-owned enterprises. Preference was given to large and often capital-intensive enterprises either in production of basic consumer goods for the domestic markets or primary production, and processing of export commodities. The role of private industry was relatively neglected or left without clear incentives to operate in the import substitution small and medium-sized enterprises (SME) sector. A sceptical, sometimes hostile, attitude prevailed towards foreign investment which was usually controlled and regulated by restrictive concessions and investment laws.

In the early 1980s it had to be recognised that these policies were rather unsuccessful and could hardly be sustained. Growing budget deficits, high foreign debt and reduced flows of foreign credit imposed a revision of previous orientations. Structural adjustment policies were designed and gradually pursued. They basically implied:

  • a general reduction of State control of economies;
  • liberalisation of internal markets and opening to international competition;
  • market adjustment of currency exchange mechanisms;
  • deliberate opening to foreign investment;
  • privatisation of State-owned enterprises and promotion of private enterprise in general.
  • disappointing results

However, what are the factual results to date? Basically, all the global performance data show a rather bleak picture for sub- Saharan Africa in recent years, especially in comparison to other developing regions. Real annual GDP growth barely reached 1.5 per cent and growth of manufacturing industry has not significantly improved. Hence the GDP contribution of manufacturing industry remains below 15 per cent in most countries. Sub-Saharan Africa's share of total export volume stagnates and is the lowest of all developing regions. Exports continue to contain mostly primary commodities and only some ten per cent of manufactured products. Compared with other regions, Africa continues with the lowest rate of private investment (some eight per cent of GDP in 1993), even declining over the last few years. Whereas Latin America and East Asia attract together about 80 per cent of net foreign direct investment to developing regions, the African share fluctuates between one and two per cent. Constraints and opportunities The major constraints for advanced industrialisation in Africa can be briefly recalled:

Restricted size of domestic markets

This is of prime importance for foreign investment which predominantly seeks access and expansion into new markets. But also for local investors, it is a serious obstacle as certain technologies and industrial units need a substantial market size to achieve economies of scale. Regional market integration, often advocated as a desirable solution, has not made significant progress for various, apparently quite persistent reasons (of which economic nationalism is one - and not only in Africa).

Comparatively high factor cost

Besides labour cost and productivity, which are not a decisive advantage in Africa in comparison to other developing regions, the shortage of skilled manpower with industrial experience, as well as infrastructural environment and logistics and generally a lack of integration (inter-sectoral linkage) are restricting factors.

Scarcity of foreign exchange

The general shortage of foreign exchange and the exchange rate fluctuations create major obstacles and uncertainties, especially for local market-oriented industries which typically depend strongly on imported inputs. This also seriously restricts investment finance which often has to be contracted, and repaid, in foreign currency.

Lack of financial resources

Equity capital resources of African entrepreneurs are generally quite limited, and medium to long-term bank loans are constrained by low savings ratios and restrictive conditions of the banking sector.

Limited number of industrial entrepreneurs

Most entrepreneurs in African countries are found in the artisanal and small industry sector, whereas the small number of potential investors with the financial strength for medium to large enterprise comes from a trading and service background. The latter are usually led by a short-term profit motive and lack to some extent the relevant management experience for industrial enterprise.

As these constraints are not easily changeable or negotiable, and thus are likely to remain as parameters for quite some time, one must realistically ask: what type of industry and investment can be reasonably envisaged, which industries could work efficiently and profitably under these circumstances, and, eventually, could mobilise general economic progress? And further, where and to what extent is local and foreign investment likely to be attracted?

In order to clarify this perspective, it appears useful to review the broad categories of existing industry with their likely trends and potentials versus the requirements and strategies usually pursued by local and foreign entrepreneurs, as well as their financial and managerial needs. For the purpose of this analysis and with some abstraction from differences between countries, one can distinguish two broad categories of industrial enterprises by their size of investment:

Large-scale enterprises with investments above some ECU 5 million

If we call this category large, this of course is in relation to the context in most African countries: what is 'large' there, might well be considered medium or small-sized from an industrialised country stand-point - and that is part of the dilemma. Typically, in this category, one finds mining and mineral exploitation companies, agricultural commodity production and primary processing enterprises, mostly geared towards export markets; furthermore, some industries predominantly in food, beverages, textile and construction materials branches producing for local or sometimes regional markets.

The number of enterprises in this range is not more than a few dozens in most countries and only a few new investment opportunities are appearing or could be envisaged. This is rather a domain where many existing companies are state-owned and are seeking privatisation, or where some of the private-owned companies require rehabilitation and restructuring in order to face competitive market conditions.

With some exceptions there is a general tendency of multinational investors to get less involved in standard commodity production; and further processing of primary mineral and agricultural products is maintained closer to the markets in industrialised countries rather than being shifted to primary producing countries. Hence, for the traditional resource-based industries with export orientation, there will be some scope for quantitative expansion, but rather little real prospect for local further processing and linkage with domestic economies.

Large, local market-oriented enterprises will continue to be constrained by limited domestic purchasing power, lack of international competitiveness and a serious shortage of foreign exchange, the latter so much more when they require high import contents. There is usually little scope for a multiplication and diversification in this domain, as often one single enterprise unit covers the entire domestic demand (like petroleum refineries, cement factories, cereal mills, breweries, textile mills). If they present some attraction to private, also foreign, investment, this still is often conditioned by protection allowing quasimonopolistic market positions.

Large enterprise projects, by their investment size, resource potential and market position, provided they have scope for commercial viability, find relatively easy access to direct foreign finance. Yet, altogether, as stated, large enterprises will probably remain modest in number and cannot be the base for a dynamic industrialisation with diversification and local integration.

Small and medium-sized enterprise (SMEs)

The great majority of manufacturing enterprises is in this category. It is basically composed of import substitution activities mostly for local consumer goods, some production and processing of local inputs for export (eg, non-traditional agro-products like vegetables and flowers, wood-based products, processed fish) and some labour-intensive manufacturing, typically under free-zone status. There are only a few enterprises producing intermediate or investment goods for the local market (like metal and construction material industries).

As recently evidenced in several African countries (eg, in Ghana, Zimbabwe and Uganda), considerable growth potential exists and some investment can be mobilised for SMEs. Non-traditional exports provide good opportunities, especially as they earn foreign exchange. Free-zone industries have some potential in selected countries, as already known from Mauritius and indicated by more recent trends, eg, in Madagascar and Cape Verde. But the core potential for SMEs remains probably in domestic markets, which involves the challenge for selective import substitution, where it can be efficient, and for the processing of local materials, with appropriate technologies and unit sizes for the basic local demand.

Nevertheless, the potential growth and investment for SMEs remains strongly conditioned by two factors: investment finance and managerial/technical capacity. Whereas for larger projects these essential constraints can be relieved by the involvement of foreign joint-venture partners along with direct DFI financing, for SME investments this is usually not the case (with some exception in free-zone industries). Simply the investment size of SMEs, which is mostly in the order below ECU 1 million, is sub-optimal or marginal for foreign investors and institutional financiers.

This explains why there is little foreign investment interest and that the joint-venture mechanism with private foreign equity capital can hardly be expected to become the driving force for African SME development. The lack of convergence among local and external commercial interests has to be recognised by African entrepreneurs, and by the international co-operation agencies as well, who will have to seek alternative and supplementary means and mechanisms which better respond to persistent needs. Private SMEs, under these circumstances, in addition to a liberal legal and institutional framework, require external co-operation and some degree of direct public support. The challenge is how to mobilise and organise these effficiently and in close conformity with the leading private enterprise principles.

Perspectives for international co-operation

Many of the leading multilateral and bilateral development institutions have adopted policies and are providing programmes, mechanisms and resources to assist the development of industry in Africa, to facilitate private foreign investment as well as various forms of enterprise partnership. The World Bank Group has been particularly active in this domain by creating over the last ten years specialised facilities like the Foreign Investment Advisory Service (FIAS), the African Project Development Facility (APDF), the African Management Services Company and the Africa Enterprise Fund (AEF) through which the International Finance Corporation provides direct investment funding to medium-sized companies. The European Union put strong emphasis on private enterprise and investment in the fourth Lomé Convention and besides institutional assistance towards a better legislative and administrative environment, offers a comprehensive range of financial and technical support to enterprises. The number of projects implemented by the European Commission, especially geared to small-scale industry by way of technical assistance, credit lines and guarantee funds, has grown significantly.

Financial resources managed by the EIB, especially risk capital provided from the European Development Fund, were strongly increased and a significant portion has been devoted to investment in the private sector. Some new mechanisms were introduced to make the use of risk capita more flexible and suitable for direct financing of larger projects and indirect financing of SMEs via local credit institutions. The Centre for the Development of Industry (CDI) has been strengthened for its tasks to promote EU-ACP enterprise partnerships and to support the creation or improvement of SMEs. It is noteworthy that CDI can offer its range of practical services directly to individual investors and existing enterprises.

Hence it appears that, although private foreign investors for Africa are scarce, there is no scarcity of external means and mechanisms to assist African enterprise. Yet there is probably a need to better adapt the means to prevailing conditions, to orientate them with clearer priorities towards effective growth potentials and to co-ordinate them for higher efficiency.

Development co-operation, when it comes to private industry, generally remains to some extent concentrated on giving support for a suitable environment, with assistance for the legal and institutional framework and with investments in physical infrastructure. But, as said before, this is certainly important but not sufficient to actually mobilise private enterprise. Looking at support mechanisms directly addressing enterprises, one finds that many are in fact quite geared to larger enterprises. This is particularly the case with the direct financing provided by the multilateral and bilateral DFIs, but also with various facilities for foreign investment promotion, as foreign investment usually requires larger project sizes. However, if it is true, as argued before, that the scope for large enterprises is fairly limited, the facilities focused on these cannot make a major impact. A clear indication to this is given by the small number of enterprises which actually obtain external direct financing. The four major DFIs (IFC, EIB, CDC, DEG) together financed directly only some thirty larger industrial projects in sub-Saharan Africa in 1993 and two thirds of these investments were for expansion or rehabilitation of already existing firms. Similarly, the promotion agencies seeking foreign companies to invest in Africa have only modest success, as experienced in various promotional campaigns and international investors meetings. Needs of African SMEs We have to recall that the typical African SME needs:

  1. On the financial side first of all a contribution to its equity capital, ie, risk capital, and suitable medium to long-term loans which can be secured on the firm's assets; and
  2. closely accessible and affordable management and technical assistance with an efficient transfer of know-how.

Some initiatives in this direction have recently been launched and they certainly merit attention and reinforcement. To address especially the SMEs equity capital requirements, a growing number of venture or equity capital funds are being established in African countries and they could well become a preferred mechanism as they combine several advantages, namely:

  • they can provide much-needed equity capital to local SMEs, especially in the smaller range;
  • they are established under private company statute, little exposed to state influence, and with clear economic objectives monitored by their shareholders;
  • they can be administered by light management structures, with a small number of professional staff working under private sector principles;
  • they can, by rigorous project appraisal and by monitoring of the co-financed SMEs, facilitate the access to term loans from DFIs and local banks.

As they are new mechanisms and operating under high risk in most African countries, these venture funds will usually not be able to attract their funding from private local or foreign financiers. Typically at the start they strongly rely on resources from institutional investors with a trust fund element. It is encouraging that the EIB, together with other DFIs (like CDC, DEG, Proparco and IFC) has started investing in some venture funds with EDF risk capital, as it is through such mechanisms that risk capital can make a most appropriate and mobilising impact for SME development.

The other important complement, management and technical assistance to SMEs, ideally should be arranged in close relation to the venture fund mechanisms and through local structures which are modelled as close as possible to private enterprise principles to avoid political interference and to ensure high efficiency.

Hence, new concepts for management and technical service facilities are being proposed and currently tested at pilot stage by the EU Commission, the CDI and some bilateral agencies. The main features of such facilities should be:

  • that they are established with an appropriate, autonomous statute in the host countries (eg, as private company, association or foundation);
  • their members or shareholders are local banks and finance institutions, industrial associations and interest groups representing the private sector, and possibly foreign development institutions;
  • they are managed by a small team of international and local consultants;
  • they offer their services to SMEs on a contract basis and charge their clients at affordable rates.

In this combined structure, providing risk capital and management assistance to African SMEs, each of the pertinent European Union institutions could make its appropriate contribution: the EIB could invest with risk capital in the venture funds, the EU commission could co-ordinate and provide the technical assistance funding for the advisory companies, and the CDI could take an active role in appraising and structuring such schemes in selected countries, act as the executing agency for the advisory companies and support them with the relevant linkage to European industry, markets and expertise.

From an organisational point of view, with this approach, the European institutions might take the lead in setting up appropriate decentralised structures for the promotion of small and medium-sized industry in Africa. Many dispersed and parallel programmes of Member States' institutions could then be better co-ordinated or integrated, with enormous gains in cost-efficiency and in the proper sense of the 'subsidiarity principle'.


The views expressed by the author do not necessarily represent the official opinions of CDI. This article was first printed in Development and Cooperation, published by the Deutsche Stiftung fur internationale Entwicklung (DSE).

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©Kensington Publications 1997