Think and act for entrepreneurship in Africa

On May 22, 2023, an exciting day of debate was organized by the Architecture Chair in International Development Finance and the Impact Chair of the FERDI. The event brought together some twenty African and international researchers, investors, entrepreneurs, and heads of development institutions. What can we learn from this work?

The current debate on the architecture of international financing is bringing the role of the private sector and private financing in development back to the spotlight.

Whichever approach is taken, if we are to meet the challenges of the coming decades, the rate of investment needs to increase. This is particularly the case in poor and fragile countries, which are the focus of everyone’s attention for two reasons: on the one hand, their demographic growth, with its implications for education, health, regional amenities, mobility and the response to social challenges; and on the other, climate change, with in particular the challenge of adaptation. Of course, public investment will be essential. So will public development aid. But private investment must also grow, and so must private financing.

There are at least three different subjects.

First, it is necessary for governments of poor and fragile countries to obtain more financing from banks and markets, in a sound and responsible manner. The current period is witnessing a growing risk of over-indebtedness, particularly in Africa. Returning to this issue is essential. The establishment of a common, global debt coordination mechanism is the central issue, as is the strengthening of the IMF’s surveillance capacity. The G20 “common framework” is the first step in this politically complex process.

To meet the challenges of the coming decades, the rate of investment needs to increase.

Furthermore, more direct foreign investment in these countries is required. The needs in terms of infrastructure are a priority: the domestic private sector, both productive and financial, is rarely on a par with the complexity and size of operations, even if it can make progress. The main challenge lies within the countries themselves: we need better national policies and more projects. That’s why the most appropriate recommendations involve ways of improving the first category, by making them more welcoming to private investors, and strengthening the capacities of administrations in the second category. Development institutions could become more proactive in assisting project development. International investors also need to be reassured about sovereign risk, by improving access to guarantee instruments (such as MIGA, the Multilateral Investment Guarantee Agency) and enabling public private sector financing institutions (DFIs) to be faster, more efficient partners.

Finally, strengthening the entrepreneurial emergence and growth of SMEs in these poor and fragile countries must be a top priority. Whatever support and guarantees might be offered to large international companies or institutional investors, these countries are too small and too complex to be of any interest to them other than marginally. So, in contrast to infrastructure, we must position ourselves at the level of the local private sector. This sector is incomplete, fragile and very small.

It is possible to strengthen the entrepreneurial dynamic in poor countries. Twenty years of experience and pilot projects have produced some convincing results, in a context where the will to embrace entrepreneurship is huge. There’s no shortage of projects here!

Today’s agenda is one of scaling up.

So today’s agenda is one of scaling up. First and foremost, we need to support start-ups by strengthening our acceleration, incubation and pre-investment structures. Next, in as many countries as possible, private funds or private investment companies should be set up to provide long-term capital and capacity-building for small businesses in the process of being structured. Finally, regional funds are needed to finance the expansion and capital strengthening of companies that are becoming too large to be financed at national level, but cannot yet access, for example, commercial investment funds. At every level, technological and managerial capacity-building is essential.

There are, however, two important points about the agenda that are too often underestimated.

National savings are still too low to finance this capital investment effort. Moreover, as we have already said, international savings cannot really be mobilized easily in their direction. We therefore need public funding, both national and international, to reinforce domestic private investment. This is why the mobilization of the DFIs, as well as public aid agencies, is essential.

Also, even if private companies that are financed are highly profitable, and bring considerable societal value, investors operating in this field can rarely achieve levels of return corresponding to market expectations. Indeed, it’s difficult to value small African companies, for example, at levels equivalent to those of their European peers. Investments in these small companies are also affected by high management costs, tax burdens and foreign exchange losses, not to mention a claims experience which, while not very high, does take its toll on earnings. Public investors must therefore accept low financial returns, which are justified by the very high fiscal and social returns. If they want to attract private investors, they must also agree to provide guarantees or other return-enhancing elements.

It’s an agenda with a budgetary cost.

It’s an agenda with a budgetary cost. But this cost, as various studies have shown, is modest in relation to GDP and the societal gains generated. The DFIs, for instance, must have the capacity to support this effort. Until now, this has not been their mandate. It must become one, and their business model must enable them to support it. It’s up to their public shareholders – the governments of the OECD and China – to act in this way. Aid agencies also need to accept the idea of committing public funds to the productive sector. For some of them, this is a major ideological and sometimes know-how barrier to overcome. We need to invest in the conceptual framework and the economic and impact justification to reassure and convince them.

There are very few large and medium-sized companies in Africa. Most of the major African companies of 2050 are not yet born. Accelerating their birth, reducing their losses during their growth period, making their expansion faster, safer and more environmentally and socially sustainable: this is the major development agenda for poor and vulnerable countries over the next thirty years.

It will create the mass of jobs needed to absorb the huge demographic wave ahead of us, which is both a challenge and an opportunity. This is how we will create the financial markets of tomorrow, and how major international investors will turn to these countries, which are still poor, and tomorrow, even less fragile, if this agenda succeeds.

International society needs to gain in coherence

A final word. International society needs to gain in coherence. If big business and the world’s financial markets are to connect with developing countries, the right hand of OECD countries that wants to help them must act in the same direction as their left hand, which governs the financial markets. However, the accumulation of rules on anti-money laundering, anti-terrorism, banking risk management, ethics and the environment is beginning to raise questions. As positive and unquestionable as they may be in their inspiration, they lead to a level of compliance risk that today turns too many leading international companies away from developing countries, and particularly the poorest ones. It is essential to return to a more coherent approach and find the right modalities and compromises between the desire to make financial markets healthier and more stable, on the one hand, and to promote investment in the world’s most fragile zones, on the other.

This article is inspired by the working paper: → → Millions for billions: Accelerating African entrepreneurial emergence for accelerated, sustainable and job-rich growth, a publication by Jean-Michel Severino, part of the work of FERDI’s International Architecture of Development Financing Chair, and which argues for the need to strongly accelerate public involvement in favor of entrepreneurial emergence in poor and fragile countries.