Financing Africa’s Industrial Development

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My colleague Nealon DeVore and I are in Lusaka attending the 10th AGOA Forum. Yesterday I participated on two panel discussions: the first was a private sector session on Financing Africa Industrial Development and the second was a civil society session titled The Next Generation. Nealon has already blogged about my participation on the Next Generation Panel, so my focus in this blog is on the first panel to which I happened to be drafted just shortly before it started.

This session was oversubscribed with a lot of private sector people attending, particularly from the Small and Medium Enterprise (SME) sector. It was moderated by Justin Chinyanta, Chairman and CEO of Loita Capital Partners International in Johannesburg, a pan-African investment banking firm focused on Africa. Justin is also a former VP at Citibank’s and HSBC’s Africa regional offices. The other panel member was Lloyd Chingambo, who is CEO of Lloyds Financial and Chair of the Africa Carbon Credit Exchange. Lloyds Financial specializes in asset management, project finance, carbon finance, development of innovative investment instruments and debt restructuring.

The key issues that came out of this session were that most African SMEs have a very rudimentary understanding of business and commerce, illustrated by the failure to keep basic financial books, the tendency to run the business as a family affair, the co-mingling of company funds with family funds and the lack of proper corporate governance and oversight, among other challenges. Most questions from the audience revolved around the difficulty of sourcing startup capital and the lack of information about business incubation and advisory services. The irony, as pointed out by Lloyd, being that when people don’t feel well they seek the opinion of a doctor, when they have a legal problem they engage a lawyer but when they want to start a business, there is a misplaced perception that they can do it themselves and this is what leads to a high rate of failure.

I took a macro view to financing industrial development, in which I highlighted the key constraints as being the infrastructure gap that results in prohibitive costs of doing business and makes it difficult for African business to be competitive on a global scale. Specifically, poor roads, constant power cuts and inadequate water supply all of which have a negative impact on industrial development and hinder the ability to maximize the benefits of an initiative like AGOA. I also pointed out the important role of regional integration for economies of scale as being necessary to transform the economic structures of the continent. Also key, as I reminded the audience, is the underutilized potential of Africa’s natural resources in financing development . Hence, it is so important that citizens demand transparency with regard to the magnitude of revenues from natural resources as well as accountability in the use of such revenues.

This point led to a lot of exciting discussion from the audience about royalties being unfairly inadequate and generally secret. A former Ghanaian Minister of Commerce, Alan Kyerematen, highlighted the need for African governments to have the courage to borrow on the international bond market using the resources under the ground as collateral–which Ghana has done.

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