Developing the private sector as a key enabler of sustainable industrialization

by Rakesh Nangia, Evaluator General, African Development Bank

“Industrialize Africa” is an integral element of the African Development Bank’s ambitious strategy to transform the continent. It involves economies transitioning from low- to high-productivity sectors; from agriculture to agro-industries; from raw mineral resources to high-value semi-processed and/or processed exports. 

The Bank plans to help double the

continent’s industrial GDP by 2025 by investing US $3.5 billion per year over the next 10 years through six flagship industrialization programs: Fostering successful industrial policies; Catalyzing funding in infrastructure and industry projects; Supporting the growth of liquid and effective capital markets; Promoting enterprise development; Promoting strategic partnerships; and Developing efficient industry clusters.

In view of the strategic role of the Bank in promoting private sector growth in Africa, the Independent Development Evaluation (IDEV) has over the past two years invested time and resources to uncover lessons and put forward recommendations for effective private-sector development on the continent.

In collaboration with the Norwegian Agency for Development Cooperation (Norad) evaluation department, IDEV organized a series of knowledge events under the overarching theme “Private Sector Development in Africa: What works, What does not and why?” The first event was held in Oslo, Norway, on October 24, 2016; the second in Nairobi, Kenya, from April 3 to 4, 2017; and the third in Pretoria, South Africa, from October 30 to 31, 2017. The peer-to-peer knowledge exchanges were based on the findings of our joint report Towards Private Sector-Led Growth: Lessons of Experience (link is external), which synthesizes the wealth of evaluative evidence from 33 recent evaluations carried out by both bilateral and multilateral institutions. These evaluations assessed various segments of public-sector support for the development of the private sector, including microfinance, private equity, public private partnerships, and small and medium enterprises.

The meeting brought together a diverse range of stakeholders both within and outside the continent, including government officials, private-sector leaders, civil society, multilateral and bilateral development agencies, academics, think tanks and the media.

From the exchanges, IDEV was able to glean practical and replicable solutions to address policy and institutional constraints to private-sector development. They include:

Addressing policy and institutional constraints to private-sector growth in Africa

• The private sector needs a clear legal and regulatory framework to thrive. Important issues to address include security of property rights, access to credit, export-quota policies/constraints, tariff and non-tariff barriers, tax regimes, and requirements related to licenses, permits, authorizations and inspections.
• Mechanisms to promote structured dialogue and knowledge-sharing between government entities and the private sector should be institutionalized. This involves engagement of the private sector during the early stages of project development and pursuit of public-private partnerships, which offer promising avenues to improve collaboration.

 Financing private-sector development

• One of the key difficulties facing private-sector development in Africa is access to medium- and long-term finance on affordable terms. This challenge can be addressed through foreign direct investment, (improved access to) local and regional financial and capital markets, and improved infrastructure. To enhance domestic resource mobilization efforts, Africa needs to build stronger financial institutions, improve regulatory frameworks, and strengthen transparency and accountability systems in the financial and banking sectors.

Supporting small and medium enterprises as nodes of growth

• To leverage the potential of micro, small and medium enterprises as an important source of innovation and job creation, governments need to make more efforts to create a conducive environment which addresses the specific constraints of micro, small and medium enterprises (MSMEs). These include lack of access to markets and lack of access to finance.
• Lines of credit to commercial banks for on-lending to MSMEs have not achieved their objectives; therefore, other ways to incentivise the banking sector to ensure adequate finance is provided should be explored. To further support MSMEs, innovative tools and instruments, systematic knowledge transfer and flexible tax regimes could usefully be considered.

How governments, development partners and private sector actors can work together to create shared value

• Leadership (political will), implementation capacity and institutional frameworks are essential for creating and advancing meaningful shared value. But paramount is the trust between the public and the private sector, which can be built through structured and open communication, inclusive dialogue, participation and accountability, and through collaborative efforts to understand each other.

• Development partners can play a role to bring together between the public and private sector by acting as a broker/convener who understands both parties well and helps them to understand each other.

These lessons show that what Africa needs is a comprehensive strategy and not a gap-filling substitute. This is key to private sector development. Regulatory reforms constitute a good start, but they are not sufficient. Catalytic effects should be at the core of our project design, with particular attention paid to the sustainability of these operations.

As the continent’s premier financial institution, the African Development Bank is well positioned to make a significant difference in private-sector development, with operations and programs that put the spotlight on creating enabling business environment for shared growth and industrial sustainability in our regional member countries.