African governments have over the past several years implemented far reaching regulatory reforms to enhance business and investment climate. Countries have abolished or significantly reduced requirements for government participation in business ventures. In oil producing countries and minerals resources rich countries, there is a noticeable shift away from mandatory joint ventures. Ghana, for example, has expanded the scope for foreign direct investment (FDI) by reducing the number of industries closed to foreign investors. And some countries are expediting investment approval procedures by developing one-stop investment centers. Investment-related issues, such as technology transfer, are now subject to less restrictive compliance criteria, and the protection of intellectual property rights has improved in some countries.
One area where these reforms are most evident is in the area of FDI which is very important given Africa’s severe lack of capital, technology and skills. Over the past two decades or so, African countries have liberalized regulatory regimes for FDI, addressing investors’ concerns, privatizing public enterprises and actively promoting investment. These reforms are yielding results. According to UNCTAD’s 2006 World Investment Report, FDI inflows into Africa rose from $17 billion in 2004 to $31 billion in 2005 – almost double. Although this is just about 3 percent of global FDI, the increase reflects growing international confidence in the policies that African countries are implementing. However, the same report notes that “attracting quality FDI – the kind that would significantly increase employment, enhance skills, and boost the competitiveness of local enterprises remains a challenge.
A key component of the microeconomic reforms undertaken by African countries has been the privatization of state-owned enterprises. This began in the late 1980s but has gathered steam across the region. Privatization is relieving governments of the burden of subsidies to state-owned enterprises, curtailing/minimizing official corruption, and patronage systems. Long dormant government enterprises have been reactivated, creating jobs, increasing product diversification and exports.
In some countries, appointments to the boards of government-owned companies often raised political and ethnic tensions as there often was a need for ethnic balancing. Inefficiency and corruption often resulted as the fallout of this balancing act. Privatization is removing governments from this arena and where they do get into arena, it is to play the role of arbitrator, not distributor of rents to ethnic elites. In many countries, this is resulting in significant reductions in ethnic tensions. Privatization is also spurring the creation of capital markets and deepening it in others when newly privatized companies are listed on the stock exchange. Revenues from the sale of state-owned enterprises is swelling government coffers, enabling governments to increase social sector investments.
Three examples illustrate the contribution of privatization to the growth of the private sector in Africa: Telecommunication, aviation, and housing.
Private provision of telecommunications services in Africa has risen quite significantly. In most African countries, telecommunication was a state monopoly. This imposed significant cost on the domestic private sector, harming its competitiveness relative to external sectors. In many countries, telephone penetration was very low and services very erratic. This sector was thus a good candidate for privatization and deregulation. At the last count, some 25 countries in sub-Saharan Africa have transferred (or are in the process of transferring) all or part of their telecommunications ownership from the state to the private sector.
The results have been phenomenal. In Morocco, for example, teledensity increased from 5% to 15% between 1998 and 2000 following the introduction of competition in the mobile telephony market. In Nigeria, there are now over 25 million telephone subscribers, an increase from less than 500,000 about nine years ago.
Another sector where the impact of privatization and deregulation has been felt, especially in West Africa, is the aviation. Aviation is crucial for economic expansion in Africa, given that most countries are landlocked. It is important for the expansion of the tourism sector and for global and regional integration. In most West African countries, national and regional airlines founded in the immediate post independence years have all collapsed. A host of factors ranging from corruption, incompetent management, to competition from the more established airlines from the industrialized world have been blamed. Today, private airline operators abound, and are integrating the continent in the area of air transport It is important to note in this regard that growth of this sector is financed mostly from domestic resources.
Housing is a major problem in all African countries, a problem that most African countries will not overcome left to their own resources. The private sector is the dominant provider of housing in all African countries. This role has increased in some countries with the liberalization of land ownership policies and removal of some foreign exchange controls. In Ethiopia, for example, real estate companies are constructing new upscale residential developments. The new investment climate, accompanied by special incentives to attract “Diaspora” savings is having a positive effect on remittances from the African Diaspora. In countries such as Ethiopia, the government has made conscious efforts to attract Diaspora through the easing of procedures for acquisition.