1

ENTREPRENEURIAL DEVELOPMENT AND THE INFRASTRUCTURE QUESTION IN AFRICA

MS EVELYN N. OPUTU MANAGING DIRECTOR

BANK OF INDUSTRY LIMITED, NIGERIA

TRENDS IN GLOBAL FINANCE AND INFRASTRUCTURE 2008:EMERGING OPPORTUNITIES IN AFRICA CONFERENCE,

LONDON

JUNE 23 2008

2

INTRODUCTION

Sustainable development of the African continent can only be achieved through continual economic growth and better integration into the international trade system. Enhancing entrepreneurial activity in Africa is therefore a key element in the agenda for poverty reduction in the continent

Recent rapid growth in African economies has, however, exposed the largely inadequate and antiquated infrastructure in the region and the decay is hindering the creation and development of vital MSMEs in growing sectors. This could derail the momentum of growth

Conventional thinking is that deepening and broadening the African entrepreneurial base requires an enabling State to provide modern social and physical infrastructure. But do governments in Africa have the financial and executive capacity to match the pace and content of the continent’s revving entrepreneurial engine in their bid to provide and maintain needed infrastructure?

3

Current situation audit

Success story of African private enterprise, in infrastructure as typified by success of the mobile phone industry in the telecommunications sector and ESCOM of South Africa in the power sector

Success in telecommunications required relatively modest investments compared with vast revenues being generated. Telecommunications infrastructure has been built on an “incremental” basis and with “subsidies” from consumers

4

Current Situation Audit (coned)

With telecommunications, the evidence is that governments legislated intelligently in many countries enabling entrepreneurs in the sector to receive large capital investments and reap economies of scale. Compare with water and sanitation, power, rail transport, and roads still considered government responsibility in most of Africa

There is preponderance of poor records of big projects. A major challenge therefore, is in identifying scalable models for delivering infrastructure projects that work

5

Current Situation Audit (contd)

There is significant cumulative incremental investment by private capital in telecommunications, education, power, transportation and to a lesser extent water and the environment. Mobile phone companies for example provide own power for cell sites

With the best of intention, Government’s capacity

to provide holistic solutions addressing the broad infrastructural needs of the economy is impaired by a combination of financial, executive and management constraints

6

Challenges for entrepreneurial Development

Common agreement that the expansion of infrastructure, especially roads and rail would catalyze Africa’s advance toward the attainment of the MDGs through expanded and better market access and integration

Jeffery Sachs in Escaping The African Poverty Trap argues that increased investment in infrastructure builds an important highway out of African poverty. Estimates of the amount of additional investment required is in the region of $20billion per annum to support rural, urban, national and regional infrastructural development

7

Increasing urbanization is reinforcing and is being reinforced by the rapid expansion of the informal sector. Together, both highlight the inadequacy of the infrastructural framework for development

Poor social infrastructure limits the motivation of the ordinary people whose energies must be mobilised for the huge development effort required

Challenges for Entrepreneurial development

8

Challenges (contd)

Energy is central to the goals of entrepreneurial development – but Africa with immense range of potential energy sources (petroleum, natural gas, coal, hydro, wind and solar) has the least energy capacity in the world

Africa needs to develop its productive capability to take advantage of the opportunities of increased market access. Investment in infrastructure is key as is access to affordable technology, an enabling domestic environment for private investment and innovation and human resource development

9

The Way Forward

African governments facing tough budget constraints should envision the use of private finance initiative as a “miraculous” way to continue building costly infrastructural systems with the financing and the risks carried by the private sector. Public-Private Partnership

Purpose is not to transfer responsibility to private hands, but to diversify funding sources away from the public debt and share risks appropriately among all relevant parties i.e., the government, corporates (service providers and equipment manufacturers) and financial institutions – each assuming the types of risk for which they are comparatively best suited

10

The Way Forward (cont’d)

This approach facilitates proper allocation of both scarce resources and specialized expertise as well as ensures better value for money on each unit of available investment on infrastructure.

Such investments will not only create new jobs but the spill-over will empower young people to become business people that are financially self-sufficient and capable of employing others. Will also unlock potentials in agri-business, manufacturing, services and the knowledge economy.

11

The Way Forward (contd)

A word of caution on PPP though especially in the power sector. Countries need to understand the objectives of private sector involvement before seeking to foster it. For example, better system reliability and efficiency as an objective may clash with say, minimize retail power tariff. Likewise investors and their bankers need to understand how they can integrate their development and financing efforts with these objectives.

Over-riding objective should be benefit to the consumer in the near- and long-term. The implication of this is that the interest of other stakeholders in the restructuring process such as ministry officials, current employees and unions and contractors are important transition issues but not the main focus of the process

12

The Way Forward (contd)

Countries should have a clear understanding of how they want the restructure of the infrastructure agency to proceed both in the near-term and in the long-term and why. To paraphrase Lewis Carroll in Alice in Wonderland, it is much easier to get there if you know where you are going.

Besides PPP, we could build opportunities on the back of existing investments in infrastructure projects. In Nigeria, for example, power used by telecom companies for powering cell sites is self-provisioned. These could become more cost effective if the companies tap the economies of scale, buy bigger power plants and sell down excess capacity to rural farmers to power irrigation pumps and the large number of small entrepreneurs within the vicinity of the cell site

13

The Way Forward (contd)

In addition, in the interim, create industrial clusters to profit from common services. As part of a process for providing enabling environment, local authorities could establish facilities and public goods to encourage industrialization through subsidies, infrastructure investments and tax incentives. Within clusters, successful entrepreneurs should invest in businesses that are upstream suppliers or downstream buyers of their core products to profit from the benefits of cluster building.

African entrepreneurs must put more emphasis on what they can do themselves through better organisation of effort

14

Conclusion

Africa needs entrepreneurial education and training. A shift in mindset from employment in government and corporates to self- employment can contribute to reducing unemployment and poverty. This entails nurturing entrepreneurs from beginning of the education process. Starting a business has to be considered a valid option and not a last resort.

This calls for simultaneously creating national economic conditions needed to fulfil internationally agreed development goals as a first step to ensuring that the 21st Century is the century of development for all. An enthusiastic entrepreneurial class together with modern physical and social infrastructure are a necessary condition to strengthening Africa’s competitiveness.

15

Conclusion

My brief notes here are not intended to imply infrastructural determinism as the basis of our advancement. African development is not only a function of infrastructure. Infrastructure must be complemented by easier access to capital, a knowledgeable class of entrepreneurs, a reasonable degree of stability and predictability in the political and economic environment as well as institutional architecture that guarantees contract enforcement and security of life and property.

I thank you for you Kind attention