Enabling Entrepreneurship in Africa

Interview with Mr. Luciano Borin, Director, Private Sector Operations, African Development Bank July 12, 2004



"The linkage between meeting basic human development needs and private sector development is very direct," says Mr. Luciano Borin, Director of Private Sector Operations for the African Development Bank in this DG Expert Perspective. Mr. Borin, an Italian now living in Tunisia, has 25 years of experience in private sector development, having worked for an Italian petroleum company, the World Bank, the International Finance Corporation and now for the African Development Bank. Here Mr. Borin provides his perspective on a range of issues related to private sector development in Africa and outlines the priorities of the African Development Bank in that context.

What role does the African Development Bank play in enabling private sector development?

As far as support to private sector is concerned, the African Development Bank focuses on three primary areas. The first is to help create an enabling business environment. Without sufficiently well functioning institutions, laws and regulatory frameworks, private sector cannot develop. This is where most progress has been made in African countries over the past years, but large diversity in progress exists among countries and there is still much to be done in this area. The second major role for the African Development Bank is to catalyze investment –international and domestic –in certain sectors and in infrastructure. The Private Sector window of the African Development Bank, through its own investment activity, which does not receive any form of risk protection, catalyze foreign investment, in so doing, it faces the same risks and obstacles than other investors. This way, the Bank gets first hand feedback and expertise that can help strengthen the responsiveness of our programs/actions. The third major area of intervention is technical assistance, which needs to be delivered at various levels to be effective.

Balanced with a long-term vision, our goal is to produce results in the short term, particularly results that can bring a strong multiplier effect.

For many people, the first development issue that comes to mind when talking about Africa is the inadequate fulfillment of basic needs such as access to nutritious food, clean water, appropriate healthcare, etc. Some therefore argue that the development community should focus on meeting these needs rather than on enabling private sector development. What is your response?

Clearly, meeting these needs is crucial. However, we need to address the causes of these problems. It is more effective to address the causes of poverty than to try to alleviate the symptoms. A powerful way to reduce poverty is to strengthen productive sectors thus creating durable jobs and tax revenues for the government. The problem with initiatives addressing education and health issues in Africa is – how can social improvements be made sustainable? Who will pay the bills (for instance to sustain education in rural areas or modernize health systems, etc.)? The answer cannot be a continued dependency on donors’ contribution. Resources from local productive sectors should be used to support investments in human development. We should look at more sustainable ways to address social issues, and the private sector is the answer to that. For instance, large industrial activities can generate tax revenues that the government can utilize to develop human capital. The linkage between private sector development and meeting basic human needs in Africa is very direct.

You mentioned that we have to finance large industrial operations. What about small and medium enterprises (SMEs)?

Reliance on large industrial development can be very useful, particularly for post-war countries or least developed economies (take for instance the impact of the MOZAL project in Mozambique.) That being said, SMEs are the backbone of most economies, and in Africa specifically, SMEs account for more than 95 percent of informal and formal productive activities. Therefore, no private sector development strategy can neglect support to SMEs.

What are the most important barriers to SME development in Africa?

Most issues that SMEs in Africa face are not so specific to Africa. Issues of access to financing, equity inadequacy at start, shortage of skills, etc are common constraints to SMEs development all over the world. In Africa, however, some issues weigh heavily such as the absence of a sufficiently conducive and enabling environment. You should also know that while many African countries are already equipped with appropriate and very modern legislative codes, there is still a disparity between the rules and how they are applied. For example, a lot of work has been carried out to harmonize intra-regional trade in West Africa, and eliminate internal barriers to intra-regional trade. However, if you try to transport merchandise from one country to another in the region, you will still face formal and informal constraints. Another major problem is that many markets are too fragmented. Most of the African economies are very small. As barriers to trade are falling down and African companies have to compete with international operators, economies of scale are needed to compete, and regional integration in terms of local markets and productive capacity is therefore important.

Finally, there is a need for increased business skills at all levels. For instance, SMEs need to acquire the capability of properly assessing market opportunities. Right now many African SMEs simply imitate others without making their own assessment about existing and prospective market opportunities. There is also a need for upgrading management skills (AfDB, for instance, is supporting a specific institution, the Africa Management Service Company, which extends management services to SMEs). While the international markets are synchronizing and getting structured, there is not enough associative capacity in Africa, and this is one of the areas of intervention we are working on now. Chambers of commerce and other associations should focus not only on advocacy, but also on providing services to their members and facilitating linkages to outside markets. It is also important to realize that institutions supporting the private sector, such as chambers of commerce, export promotion, investment promotion, etc. can rarely be financially self-sustainable. They need to be supported at least partly by government and through donor funding in the long-term.

You have implicitly said that there are many actors who each have a different set of responsibilities in the quest to make Africa’s private sector more competitive. Could you please clarify what you see as the role of governments, the intermediaries the enterprises themselves?

The main role of government is to set a conducive enabling environment for business. Its role should not be overemphasized or embrace activities that should fall within the private operators’ responsibility. For instance, entrepreneurs themselves should take the lead in creating networks with their partners. African entrepreneurs need to put more emphasis on what they can do themselves through appropriate organization of efforts. Certain developments have to come from the business base itself.

Many have raised issues about the international trade regime being unfair to African companies. Is it?

The trade scenario is still not favorable to African enterprises. In certain areas, take the case of European agriculture subsidies or cotton subsidies in the United States, the chances for African producers to compete are slim. Some recent openings, such as the African Growth and Opportunity Act require industrial structures which are not yet fully developed in Africa today. African industry, as it is structured today, has little vertical integration. For example, Africa produces high quality cotton. The continent also has good exporters of textiles and garments. However, the region has little capacity to produce textile intermediate products such as yarn. There is an urgent need for investment to improve vertical integration. This is an issue that has not been adequately addressed so far.

One area that we are entering into is the support of trade financing. This is because when products are ready for export, the current situation does not facilitate efficient trade flow between African producers and international clients. We are therefore considering instruments – (guarantee schemes for local banks, etc.) that will mitigate the transactional risks that external banks are reluctant to bear.

Is there anything else you would like to express to the international community that will be reading this interview?

Yes. Some of AFDB’s key strategic directions to catalyze technical assistance and investment will be 1) assistance to the financial sector. There is a substantial need for long term sources of funding; 2) infrastructure development built on models of public-private partnership; And 3) SMEs. We will seek to help SMEs by strengthening local financial institutions to better serve SMEs needs, as well as by targeting directly SMEs by niches. One of these niches is the franchise program that we have started in South Africa, and that we plan to extend to three to five additional countries in the short term. This program is aimed at reducing the mortality rate of small businesses in Africa. Several ingredients will be put in place to make that happen such as equity, guarantees, mentoring programs, etc. We have also started a program specifically to target women heads of enterprises.

Why do you think the franchising model will decrease the mortality rate of small enterprises?

The key is the relationship between the franchisor and the SME franchisee. It mitigates the difficulties that I as franchisee would have to face if I started a business on my own. In a franchise model, there is rapid transfer of technology, pre-set business standards and know-how that improve business sucess from the start.

What about the program targeting women managers specifically. Some may ask why this is necessary. Do not women entrepreneurs face the same obstacles as male entrepreneurs?

In Africa, women face additional constraints, over and above those that every small business faces. These constraints include women’s social responsibilities and also cultural issues. For example, legal and cultural environments in some countries act as obstacles to women business initiatives. Also, usually women entrepreneurs have access to less capital than men. While women are potentially inclined to business, they face major constraints, particularly at start, which must be tackled.

In this context, the issue of entrepreneurship is also very important. Entrepreneurship needs to be nurtured from very early in the process. We would like to introduce in school curricula entrepreneurship programs targeting boys and girls and expose them to the ideas and principles of setting up a business. We should assist them when they leave school through business incubators facilities, etc. Entrepreneurship exists and can clearly be further developed in Africa, but it has to be enhanced through structured approaches.



To learn more about this author, visit Development Gateway Foundation's Website.

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