The Cost of Doing Business in Africa Evidence from the Investment Climate Survey Data Vijaya Ramachandran* *This presentation is based on research jointly carried out with Alan Gelb, Benn Eifert, and Manju Kedia Shah, based on investment climate surveys carried out by the Regional Program on Enterprise Development, Africa Private Sector Group, The World Bank. The views expressed in this presentation are those of the authors, and not necessarily of the institutions they are affiliated with.

Investment Climate Surveys This presentation is based on research using the World Bank’s Investment Climate Database. Since 2001, private enterprises in South Africa, Senegal, Mali, Madagascar, Mauritius, Nigeria, Mozambique, Uganda, Kenya, Tanzania, Zambia, Ethiopia, and Eritrea have been surveyed; a sub-sample of these countries is used for this presentation. Information is collected on cost of production, access to credit, labor, and the business environment (including infrastructure, government regulations, and crime and corruption), for about 400 firms in each country.

The focus of today’s presentation… In this presentation, I will look at some key aspects of the investment climate, including access to infrastructure and government regulations. I will argue that “factory-floor” productivity in Africa is not that low compared with China, but when investment climate variables are factored into costs, Africa’s productivity falls to very low levels. I will also argue that small and indigenous firms face greater constraints, which need to be addressed via targeted interventions.

Firm surveys tell us that electricity is both expensive and unreliable in much of Africa

And small firms are less likely to own generators

Phone linesElectricity connection Water connection The waiting time for utility connections is very long in Africa compared to China…. (median value in days, in the past 2 years) Kenya Tanzania Uganda Zambia China

Infrastructure-related expenditures are a large proportion of total “indirect costs”

The time to clear goods at port is several days in many countries in Africa

And the burden of regulation is high, particularly for senior management

The amount of money spent on dealing with crime, getting things done, and securing contracts adds to Africa’s costs… Unofficial Payments and Informal Payments

Access to finance is limited and collateral requirements are very high..

Small firms have far less access to credit than large firms…

And the percentage of indigenous firms receiving trade credit is lower than that of other firms KenyaZambiaTanzaniaZimbabwe (90s) Percentage of firms receiving Trade Credit IndigenousOther

Furthermore, indigenous firms lack informal information networks; they have to build their reputation with suppliers through repeated transactions to obtain trade credit… KenyaZambiaTanzaniaZimbabwe (90s) Average Years of Relationship with Suppliers- Indigenous Firms Ind. firms using cashInd. firms using credit

What are the consequences of these investment climate characteristics for the African private sector? Let us look at the impact on the productivity of firms, measuring Africa in comparative perspective…

The domestic private sector is characterized by small firms… Average Firm Size (# of Workers) by Ownership KenyaNigeriaSenegalTanzaniaUganda Domestic Foreign

The overall cost structure of firms shows that indirect costs are much higher in Africa

As a result, “net productivity” is much lower than “factory floor productivity” due to the high costs of doing business. Basic Factory Floor Productivity vs. “Net” Total Factor Productivity

What are some of the key interventions that are necessary to raise productivity in Africa? Scaling up infrastructure, to lower energy and transport costs, will benefit ALL firms. Of particular interest is the INGA hydropower scheme, led by Eskom and other utility companies. Advantage of low-cost labor often offset by poor power supply, resulting in investors going elsewhere—we need more generating capacity.

Improving Access to Finance Targeted interventions towards helping small and medium sized firms get access to loans (e.g. the World Bank/IFC Small and Medium Enterprise Project or the very innovative kiva.org) Increasing access to finance by creating credit bureaus or other mechanisms by which firms can be properly evaluated.

And education matters…university-educated indigenous entrepreneurs own larger firms

Education Matters… The International Finance Corporation has launched the Global Business School Network-- a public-private partnership to strengthen and expand managerial education in Africa and elsewhere ( Institutions such as WPI can play a role in training entrepreneurs We have also found that relevant training, provided by the firm, increases productivity

Conclusion The importance and centrality of the private sector must be continuously stressed by the various parties involved in African development. We need unwavering government commitment, active private sector participation, and engagement by researchers, donors, and civil society. For more information, please visit