With right partners, investors in EAC hit profit targets

Friday February 21 2020

Heads of State of East African Community member countries.

Heads of State of East African Community member countries at the 17th Ordinary EAC Summit in Arusha, Tanzania, in 2016. Unlocking the full potential of our economies will be a reality only if all these groups of partners and stakeholders come to the table to collaborate more effectively. PHOTO | FILE | NATION MEDIA GROUP 

DIANA MULILI
By DIANA MULILI
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East African economies have sought industrialisation for the last 50 years. Although there has been some progress, full realisation of that objective remains elusive. What has been achieved instead is an efficient services sector across Kenya, Uganda, Tanzania and Rwanda that by 2018 accounted for 47 per cent of the region’s Gross Domestic Product.

East Africa is yet to tap into the huge manufacturing opportunity that would see increased production of goods for export, increased foreign exchange earnings, and boost value addition to our agricultural commodities for import substitution and for export. Manufacturing also presents the opportunity to create the millions of jobs needed across the region.

Accounting for about 12 per cent of GDP in 2018, it is considerably below the average target set by the East African Community partner states of 25 per cent of GDP by 2032. The sector grew at a minimal four per cent average growth rate between 2015 and 2018. As at 2019, it employed only three per cent of the active labour force in comparison to agriculture and trade that accounted for 64 per cent and 13 per cent respectively.

This is a paradox because governments in the region have expended huge efforts to promote private sector investments in manufacturing. We have seen our countries rise through the ranks in the World Bank’s ease of doing business rankings.

To resolve the paradox, we must fully appreciate the key motivator of private sector growth. It is net profit.

No private sector player will sustain a failing, loss-making business. A thriving private sector player scales up their business, as profit grows, expands their business model into one based on creating shared value, for example Safaricom.

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This is especially so when there is also considerable domestic investment involved.

At the heart of private sector profit is productivity. If the business is not optimising its production capacity, then the return on investment is low.

The current reality is that the majority of our private sector players are barely hitting their profit targets, as evidenced by the growing number of profit warnings issued by listed companies.

Granular analysis of the private sector ecosystem reveals systemic constraints that immensely frustrate investors, both domestic and foreign. While these constraints vary in magnitude from industry to industry, they broadly fall into the categories of: cost of inputs; labour skills and productivity; limited access to capital; market penetration; logistics; graft and industry-specific policies that don’t facilitate efficient business models.

Our private sector analysis indicates that increasing and maintaining private sector investments is not as simple as improving the ease of doing business and opening our doors to new investors. There must be a deliberate attempt to break down the industrialisation agenda and resolve challenges after we land the investor.

We must have full knowledge and visibility of the business models that will work especially in the prioritised sectors in our national development plans.

However, to undertake such an analysis and build business models and sector-specific policy regimes is costly.

Our East African Community governments lack the financial resources and technical capacity to fully execute such a granular, investor-centric model needed to achieve industrialisation. This is where having the right partners in private sector and the development sectors comes in.

However, our governments are commended for continuing to work with both foreign and domestic investors in well-coordinated associations such as the Kenya Association of Manufacturers, the Kenya Private Sector Alliance and the Uganda Manufacturers Association.  These are critical partnerships.

Equally, a lot more can be achieved in the region working with development agencies that consist of bilateral aid, private sector foundations and increasingly, family philanthropies whose objective is to catalyse job creation through building private sector competitiveness. With fund sizes valued at double-digit billions of dollars, these organisations are becoming more localised as they pursue culturally nuanced development models that work alongside government and private sector priorities.

When implemented right, these partnerships can facilitate technical assistance, provide patient capital and fund innovative solutions needed to address the systemic constraints the private sector faces in East Africa.

For example, Safaricom’s mobile money service, M-Pesa, was the result of a Department for International Development (UKaid) established Financial Deepening Challenge Fund that awarded Vodafone a conditional but flexible grant of nearly £1 million ($1.3 million at current exchange rate) to develop a product that would leverage mobile phone technology to deliver financial services in East Africa. Vodafone then went on to partner with Safaricom on this project and M-Pesa was born.

However, our governments are not drawing on committed donor funds, which include grants, despite increasing budget deficits funded through borrowing.

Case in point is Kenya, where according to the National Treasury, the country has Sh1.1 trillion ($10 billion) of available but unused donor funding. This amount is almost twice the current financial year’s fiscal deficit of Sh657 billion ($6.57 billion).

Unlocking the full potential of our economies will be a reality only if all these groups of partners and stakeholders come to the table to collaborate more effectively.

To do this requires having an ambitious long-term shared vision that is consistently implemented to seize the regional (African Continental Free Trade Area) and global economic opportunities our countries have. Efforts of all must be better coordinated for this to be achieved.

Diana Mulili is the interim chief executive officer of Msingi East Africa, a not-for-profit agency that catalyses industries’ growth.

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