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AfricaJuly 31 2005

Homemade help is Africa’s best hope

While some believe the G8 summit in Scotland was a missed opportunity,James Eedes reports that solutions originating in Africa promise to have themost lasting and meaningful impact.
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Throughout the coverage of last month’s global Live8 concerts, a glamorous assortment of rock stars and celebrities went before the camera to rant at the injustice of it all. Why not just forgive the debt or increase aid or make trade rules fairer? Occasionally, a more cerebral pundit was hauled in to state the obvious (but all too often overlooked) reality that it not as simple as that, which is why those who know better had a muted response to the G8 deal to double aid by 2010 and write off the debts of the poorest 14 African countries. As predicted by The Banker last month, the outcome was little more than dressing up past agreements (to write off the debts) and some creative accounting to boost aid commitments.

Admittedly, it is an achievement that Africa came away with anything. The London bomb attacks in the middle of the summit diverted attention away from the continent’s problems. But, to his credit, UK prime minister Tony Blair – the chief proponent of a breakthrough deal for Africa – was able to fly back to London, rally his cabinet in the capital and get back to the G8 meeting in time to tighten the screws on his counterparts.

Off the agenda

But Africa is now off the agenda, at least until the Hong Kong meeting of the World Trade Organization in December, when the question of fair trade can again be broached. The problem is that Africa is unlikely to dominate the agenda of any key international meeting or summit again quite like it did at the G8. With popular support for helping Africa having built to a crescendo, it may too be difficult to drum up civic pressure on governments of the industrialised world to act.

So has a once-in-a-lifetime opportunity, as some billed the UK-chaired G8 summit, been missed? The hope invested in the event was probably misplaced to begin with. More exciting and potentially significant initiatives are alive and taking shape, both in and outside of Africa, taking advantage of improving economic conditions. Moreover, they are being co-designed and driven by Africans – and there are mercifully few ageing rock stars in sight.

South Africa’s finance minister Trevor Manuel summed up the mood: “If I was a rock star, perhaps starving children are a strong image to make your case with, but I think it is more important – indeed, it is a stronger case – to present Africa as a continent of hope and opportunity.”

This year, growth across the continent is expected to average more than 5%, fiscal deficits have been narrowed and inflation is slowing into single digits. There is growing buy-in to the need for good governance, even if actions lag behind the sentiment, and there is now widespread acceptance that the private sector is the engine of sustainable long-term growth.

International coalition

Business Action for Africa, formed in response to the Blair-initiated Commission for Africa, is a coalition of mostly international businesses committed to ending poverty. At its pre-G8 conference, senior figures from multinational corporations, such as Anglo American, Shell, Standard Chartered and Vodafone, all got up to talk about the viable and profitable opportunities across the continent.

Everyone knows there are numerous difficult challenges to overcome. But there is also growing innovation and sophistication in the approach to these problems, which is the positive consequence of the intense focus on Africa this year.

One such initiative is the Investment Climate Facility (ICF). This is a proposed $550m facility to be used over seven years to improve conditions for investment in Africa. Countries eligible for assistance are restricted to those that have signed up to the African Peer Review Mechanism (APRM), a review process that subjects countries to external scrutiny to determine their adherence to good governance. So far 24 African countries have signed up to the APRM.

A little more than half a billion dollars spread across 24 countries over seven years barely amounts to much, particularly in the context of aid assistance that is promised to rise to $50bn by 2010. But the ICF is different. It will be administered by a board of trustees, of which the greatest number will be from the private sector. Moreover, the private sector is being asked to stump up $50m from its own pocket, a move designed to engender a more constructive engagement from private business. The hope is that a private sector mentality will ensure greater efficiency, effectiveness and return on investment.

Healthy pragmatism

There is a healthy dose of pragmatism. “The ICF is looking for quick wins with a big impact,” says Hugh Scott, a senior adviser at the UK Department for International Development. As such, the facility will not be doling out cash to all-comers but will apply the kind of rigour to selecting projects that is often lacking in traditional aid disbursement.

“We’re not investing in actual physical projects, which are costly. We want to improve the soft infrastructure, the environment that either helps or hinders the private sector. We can do this on a number of levels, either by improving the profile of a market through better public relations, providing technical assistance in key areas like capital market development or funding business groups that can lobby better on behalf of the private sector,” says Mr Scott.

The UK government is enthusiastically supportive of the ICF and has undertaken to lean on donors to inject funds into the facility. Ultimately, however, it is African governments’ commitment to good governance that will determine the investment climate. In this, too, there has been progress.

The APRM is getting up to speed, having completed reviews of Ghana and Rwanda. Critics contend that the process is too slow (only two countries have undergone review since early 2004) and there is little or no censure for wayward regimes. Indeed, Africa’s worst regimes have not even signed up for review. But the APRM, say its proponents, is not an end in itself; rather it is intended to produce a blue print for good governance that is accepted and endorsed by Africans. With the principles established, it is easier for governments to exert diplomatic pressure on errant leaders and states.

Significantly, there are tentative signs of a willingness from African leaders to intervene in the affairs of other African countries. Nigeria’s president Olusegun Obasanjo led efforts in Togo and has now turned his attention to Zimbabwe, the single greatest symbol of all that is wrong with Africa.

Through the New Economic Plan for Africa’s Development (Nepad), Africans are also making more efforts to look for ways to fund the continent’s massive infrastructure backlog. One idea is the establishment of a pan-African infrastructure development fund, using a portion of the continent’s pension funds to finance priority infrastructure projects. An initial study by Nepad in 14 countries determined that there was $127bn in pooled pension savings, less than 20% of Africa’s GDP. To put that in perspective, economists estimate that to achieve the Millennium Development Goals by 2015, Africa needs to invest the equivalent of 5% of its GDP every year until then.

In South Africa, the Public Investment Commission, which administers the government’s pension funds, is in talks to set up the pan-African fund. The fund would be used to leverage additional funds from the private sector and the proceeds would be invested in major projects like electricity, railways, roads and harbours. Wiseman Nkuhlu, who heads the Nepad secretariat, says: “The plan is to invest in commercially viable projects and will go a long way towards reducing the continent’s dependency on foreign aid.”

Financing vehicle

Another creative scheme is a new financing vehicle launched by the FairFund Foundation. It is designed to mobilise private sector capital for investment in large-scale public sector projects in Africa. Corporates obtain a standby letter of credit (SLC) from their bank, for a minimum amount of ?10m. FairFund in turn borrows an amount equal to the SLC from a correspondent bank, in agreement with the corporate that is, in effect, standing surety for the loan, and invests the proceeds in a special purpose vehicle.

The motive for the corporate participation is essentially corporate social responsibility but the benefit is twofold. First, it can benefit in the upside of the project (up to an effective 15% return on investment) and second, because the SLC is a contingent liability, it is not reflected on the corporate’s balance sheet. Collectively, these separate initiatives offer potential for the way forward. Though some exist only on paper, the important distinction from any previous efforts is that these are largely owned by Africans.

A study from US think-tank The Brookings Institution scotched a claim from US president George W Bush that the US had tripled assistance to sub-Saharan Africa in the past four years, determining that the increase was just 67%. That is symptomatic of the fact that grand promises to help Africa are often more rhetoric than reality – which is why solutions designed on the continent offer a brighter prospect for success.

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