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Published On: Mon, Jun 18th, 2018

Addressing the challenges of African businesses

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By Chimezie Uzoigwe

Businesses are important for wealth creation and development of any society because they undertake huge risks to innovate, create and market value bringing prosperity to themselves and society. The impact of businesses is not just limited to creativity and wealth creation, they foster interactions in communities and ensure the survival of people tied to the business activities. Many believe that business entrepreneurship is Africa’s best bet to attain economic and social development. Leading entrepreneur, Mr. Tony Elumelu, who professes the Africapitalism philosophy believes that “entrepreneurs will play a central role in bringing together private wealth and public need and that the transformative impact of economic growth unleashed by a fully empowered, socially conscious entrepreneurial class will dwarf the results achieved by the previous aid-driven approach to Africa’s development.”
Businesses are contributing immensely to Africa’s development. The African Development Bank estimates that Africa’s private sector accounts for over four-fifths of total production, two-thirds of total investment, and three-fourths of total credit to the continental economy, and employs 90 percent of the employed working age population. Given this position, the optimal performance of African businesses is important as it becomes clearer that the aspiration for a transformed Africa can only be achieved through effective partnership between the public and private sectors.
Africa is attractive for business. Six African countries – Ethiopia, Congo DRC, Ivory Coast, Mozambique, Tanzania and Rwanda are among the thirteen fastest growing economies in the World, according to the World Bank. Africa’s demographics also promise a huge dividend for business. The continent’s one billion, mainly youthful consumers are an increasingly compelling market as consumer spending per capita already matches that of India and China and is expected to reach $1.4 trillion in 2020. Mckinsey, in a June 2010 article, had noted that the rate of return on foreign investment in Africa dwarfs that of any other developing region. Thus, Africa has continued to draw attention not only from businesses abroad, but also from existing players in the continent.
Despite Africa’s attractiveness for business, there are still many challenges facing businesses in the continent. Doing business in Africa remains largely difficult. Sub-Saharan Africa had a regional average score of 56.28 points out of 100 and a regional rank of 114 out of 189 ranked economies in the 2016 World Bank’s Ease of Doing Business Index. There are still challenges, with respect to the environment, for business, policy, corruption, access to resources, political and economic stability and uncertainties, which hurt business competitiveness.
While many businesses have fallen on the way, the thriving ones have grown to be resilient to these challenges. But this still comes at a huge cost – a loss in business and social prosperity that could have been attained if businesses do not have to invest in adaptation strategies.
Nigeria is a good case study of how business potentials are unnecessarily undermined by state ineffectiveness. With a youthful population, a growing middle class and a huge consumer base, Nigeria’s business environment is naturally favourable for businesses to excel. But government’s overwhelming presence in some aspects of the economy (doing what she should not be doing) and underwhelming presence in other aspects of the economy (failing where she is needed) is hurting the ability of entrepreneurs to utilise these favourable natural conditions to create wealth. Largely due to state ineffectiveness, entrepreneurs in Nigeria continue to face difficult challenges in the following areas:
Finance is key to running any successful enterprise. Lack of access to finance is perhaps the biggest challenge for intending entrepreneurs and a constraint to growth for existing enterprises. Banks generally prefer to invest in government bonds and treasury bills and to lend to influential and billionaire businessmen, most of whom invest majorly in somewhat ‘sterile’ activities like oil importation, rather than lend to SMEs. Thus, government’s overwhelming presence in the economy partly crowds out financing for private enterprises from the banks. Although there are many government intervention schemes for enterprise financing, these schemes are not unified, are poorly co-ordinated and implemented and thus, do not achieve set objectives. For example, many MSME operators have continued to lament the hurdles they face in accessing the Central Bank of Nigeria’s 220 billion MSMEs development fund and funds from the Bank of Industry (BOI).
The enabling environment for business in Nigeria is poor. Insecurity is still a major threat to businesses. For example, the Boko Haram insurgency has crippled economic activities in the North-Eastern part of the country. A new wave of militant insurgency in the Niger-Delta has led to the destruction of major oil and gas pipelines and facilities, and caused production shut-in. The implication of this for the national economy can best be imagined. Nigeria also continues to suffer from a severe infrastructural deficit. From poor transportation networks to epileptic power supply, the story is the same. While most businesses operate by generating their own power at huge costs, the situation is usually worsened due to frequent scarcity of petroleum products and the attendant long queues in gas stations. Only a few months ago, many businesses could not run because there was no public power supply, and the state oil company, the Nigerian National Petroleum Company (NNPC) which superintends over a corrupt oil subsidy regime was unable to meet the demand for petroleum products as private oil marketers were unable to access foreign exchange to import the products.
One of the key challenges facing entrepreneurs in Nigeria at present is unfavourable government policies. For example, the ideological posturing of the government on the issue of devaluation and the rationing of foreign exchange by the Central Bank of Nigeria (CBN) for about sixteen (16) months denied many entrepreneurs access to foreign exchange to purchase critical goods that serve as inputs in their operations. Nigeria’s land tenure system is also a key constraint to business success. Getting a governor’s consent for a land an entrepreneur intends to acquire takes many months and years in some states. Even the process of registering a business is very tedious.
The high level of bribery and corruption and a culture of patronage increases the cost of doing business in Nigeria and reduces efficiency in business operations. For example, the foreign exchange crisis which is harming businesses would have been better managed if the country saved and grew its foreign reserves amidst high oil prices instead of mismanaging the oil windfall. Multiple taxation is also harming entrepreneurs, making many to seek to invest in tax havens. In Nigeria, once you set up shop for business, you are confronted with taxes, rents, rates and levies to be paid to different levels of authorities.
Nothing kills businesses more than uncertainty but in Nigeria, entrepreneurs face many uncertainties. It took the newly elected President Muhammadu Buhari up to six months to constitute his cabinet. It took a lot of unnecessary drama to get the 2016 budget passed. Thus, the Nigerian stock market that surged and led the gains among world equity markets on the back of the president’s electoral victory almost collapsed due to the uncertainty created by the halt in governance for almost six months. At present, the government’s policy direction remains unclear as many final business and investment decisions are put on hold.
Doing business in Africa is difficult largely because Africa’s leadership has not succeeded on the whole in using the tools of governance and policy to complement the ‘natural’ factors that make Africa attractive for business. Although, modest gains have been achieved through some outstanding reforms in a few countries, the challenges facing businesses remain enormous. Africa’s businesses hold the promise of significant further growth opportunities if these challenges are addressed. With a bolder, stronger and smarter leadership, these challenges can be tackled and the full potentials of businesses unleashed.
As a leader, I would use smart governance and policy tools to address the challenges facing African businesses in the following areas:
The enabling environment for business in Africa is poor. Insecurity occasioned by conflicts is a major threat to businesses. In Nigeria for example, the Boko Haram and the Niger-Delta crises are hurting businesses and the general economy. A commitment to peace and consensus building would be a major priority. Huge investments in infrastructure, especially in power, transport and broadband would be undertaken to enable businesses succeed.
Financing is key to business success, yet banks prefer lending to governments than businesses in Africa, making the public sector crowd out the private sector in terms of financing. To solve this problem, I would pursue a borrowing policy that has a balanced mix of foreign and domestic borrowing so as to create enough room for businesses to attract financing from the domestic financial markets at favourable rates.
Government policies can make and unmake businesses. In Nigeria, the government’s reluctance to allow a market-determined naira exchange rate for an extended period and the rationing of foreign exchange denied many businesses access to foreign exchange and hurt their performance. I would pursue public policies that are market-friendly and be consistent with my policies while showing flexibility when it is needed. I would also undertake a reform of the land tenure system to make land more useful for business in Africa.
Corruption increases the cost of doing business and yet remains pervasive in Africa. I would fight corruption, especially through building strong institutions that can check corruption before it happens. Multiple taxation would be eliminated by unifying the tax system and adopting technology tools like e-collection to make compliance easier. Tax incentives would also be an important tool I would use to drive business growth.
To support businesses, I would commit to democratic tenets that ensure political stability. Macroeconomic stability would be aggressively pursued to create an investment-friendly climate. My leadership would be clear with its policy direction from the outset so as not to create uncertainties that hamper investment decisions. I would invest in ideas, technological innovation and entrepreneurship and move the economy away from commodity dependence so that businesses and the economy can be shielded from the impact of commodity bubbles. Building and strengthening institutions that support businesses is important as well as building an effective public sector that knows its place (does not do businesses most suited for the private sector) but supports businesses to perform optimally. I would pursue regional co-operation to address common business challenges and promote intra-African trade. I would forge global partnerships with the rest of the World that favour African businesses. I would also be willing to learn and replicate success examples of transformational leadership especially the Lee Kuan Yew Singapore’s story and the East Asian miracle and change the story of doing business in Africa for good.
Businesses can help build the Africa of the future. What is needed is a smarter leadership that can work together with all stakeholders to address the challenges facing businesses and put Africa on the path to transformation.
Chimezie Uzoigwe writes from the University of Benin, and can be reached through Chimezie.uzoigwe@gmail.com

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