Memorandum submitted by Lomax
Investments Ltd
My name is Valentine Chitalu a businessman
in Zambia and Southern Africa I sit on the board of INFRACO, a
DFID initiative and have previously worked for the Commonwealth
Development Corporation (CDC). I hereby submit written evidence
as per the inquiry request.
1 What can the private sector
do to alleviate poverty?
Particularly in the agricultural sector,
there are a number of examples of how pro-poor growth has been
achieved.
o In
the cotton/sugar sector the model of growth has mainly been via
small holder contract agriculture with well established marketing
companies providing inputs, input finance, agricultural equipment,
extension services, storage facilities and markets. This type
of agriculture needs to be expanded so that more peasants are
involved in meaningful economic activity thereby lowering poverty.
o In
the agricultural services sector, investment in common infrastructure
such as central storage/silos, dams and input stores can allow
the stabilisation of grain markets (by preventing the dumping
of product at harvest time by small scale farmers), the advent
of warehouse receipts (by creating the confidence to the small
scale farmer that he/she can discount the receipts as and when
cash is needed) and the timely provision of inputs such as seeds,
chemicals and fertilizers (thereby ensuring these are supplied
on time for the agricultural season, one of the reasons small
scale agriculture has not been successful is the late delivery
of inputs at a time the farmers have already spent their money
from the last harvest). Stabilisation of the agricultural markets
is essential in alleviating poverty by preventing price increases
as a result of market imperfections.
o Governments
in Africa have many times tried to create growth through government
led economic activity. It has become increasingly clear that unless
the private sector is at the centre of development efforts, there
is unlikely to be growth. The private sector and Donors need to
dialogue continuously so as to clearly define the roles of all
players and promote private sector investment that can promote
growth.
o To
the extent that the private sector has been involved in infrastructure
particularly in areas such as telecoms, agricultural services
and low cost housing development, these investments have gone
a long way in creating opportunities that can alleviate poverty.
2. What are the constraints on
the private sector in developing countries and how can they be
addressed?
o Lack
of macro-economic stability and the uncertainty this brings whilst
fostering short-termism. Governments should be encouraged to work
more closely with IMF and World Bank whilst at the same time having
a significant focus on driving supply side responses through PSD,
PPP's and privatisations.
o Labour
and Credit laws are normally the last to be addressed in the restructuring
of developing economies. These should be put at the top of the
agenda if the private sector and the banking sector are to respond
to the economic growth challenge.
o A
significant shortage of infrastructure to enable the private sector
to truly flourish. The solutions to this are:
a) An ability needs to be created
to structure infrastructure projects e.g. INFRACO. The mandate
of INFRACO fills a specific gap in the infrastructure development
process and the provision of more resources to do more of the
same would enable a higher impact
b) An Infrastructure fund needs
to be created specifically targeted at Africa e.g. EAIF but funded
at much higher levels with more longer term finance (10—
15 years).
A shortage of local long term finance.
The solutions to this include:
a) Reform of the Insurance and Pension
Fund sectors, in particular efforts to help clear out government
debt to local pension funds.
b) The management of such fully
funded pension funds by the private sector. This would create
a vibrant fund management sector that is essential in the development
process.
c) Creation of local private equity,
venture capital and agricultural funds managed by the private
sector.
d) Recapitalisation of Local Development
banks and managing such banks through technical assistance.
e) Deepening of the financial sector
by creating incentives for banks to provide a wider array of products.
o Government
debt
Whilst there have been international
efforts to clear external debt, the local government debts continue
to be a huge problem thereby inhibiting the private sector as
they are reluctant to supply to governments. Governments print
money (via issue of Treasury Bills) to pay the debts thereby crowding
out the private sector from the banking system The Donors should
consider a package to eliminate local government debts to sustainable
levels.
o The
lack of well defined property rights
It is clear that in many
property developing countries, financial institutions have to
go to extra ordinary lengths to ensure that they can secure their
lending. This is mainly as a result of a poorly functioning and
non-decentralised Deed Registry. This is then makes it hard to
enforce security. The solutions are clear; technical assistance
to the Deed Registry and a properly functioning commercial court
to quickly resolve security enforcement (again technical assistance
would be essential here).
3. What type of donor interventions
have strong leverage in changing the business climate (in
partner countries) towards PSD and
pro-poor growth?
It is key for donors to realise that
not all programs should be run through the government system.
Capacity constraints and bureaucracy make the Donor intervention
painfully slow and subject to over politicisation.
Risk finance (CDC)
The restructuring of CDC recently completed
will achieve certain objectives and will be positive in the development
of private equity in Africa but
o There
needs to be the establishment of an Agricultural Fund to invest
in new ventures This Fund needs to have return targets that are
set low enough to ensure that the peculiarities of agriculture
are taken into account. Most Africans are involved in agriculture
and any investment in this sector has the potential to pull many
people out of poverty. Agriculture and particularly new ventures
are not a priority of CDC.
o There
is need for financing the start up of new businesses. The current
CDC model is more of a buy-out and expansions focused. There are
not enough businesses in which to effect change of control transactions
(except in South Africa). Africa needs new businesses and a venture
fund targeted at this needs to be established from some of CDC's
resources.
o The
development of local entrepreneurs and joint ventures with FDI
is key to ensuring an accelerated acceptance of the free flow
of capital - a key ingredient to African development. Again here
technical assistance to teach entrepreneurship coupled with sustained
investment promotion would be key.
Infrastructure
Donor intervention in infrastructure
development will be highly effective particularly by removing
the obstacles that prevent investment in the sector. The PIDG
initiatives are key in this regards. More importantly though is
to realise that the most important infrastructure is that which
allows markets to function as well as is supportive of general
economic growth.
Transforming traditional markets
The Agricultural markets need to be
significantly transformed in order to help the rural poor. The
key lies in donor provisions of common infrastructure facilities
such as storage, dams etc coupled with a warehouse receipt financing
mechanism. lnvestor promotion can then be targeted at industries
that add value to agricultural produce.
Mortgage Finance
It has become clear that the lack of
mortgage finance particularly for low to medium cost housing is
preventing the establishment of a middle class and means of accumulating
wealth so well established in developed countries. It is extremely
important that donors support initiatives (similar to recent initiatives
by Overseas Private Investment Corporation (OPIC)) to enable this
to happen. Both Technical Assistance (to structure a mechanism
for pension funds to lend long term) and actual seed funds from
donors would be necessary to kickstart this developmental process.
4. What aid instruments an be
used by donors to encourage PSD?
o Bureaucracy
Streamlining the licensing process would go a long way in PSD.
Would be businesses avoid the whole set up process and go informal
thereby creating other problems. Technical Assistance and the
Investment Climate Facility can help streamline these procedures.
o Complex
Tax Systems
Again this is an area that needs to be tackled if foreign direct
investment is to flow. The example of simpIe taxation as now being
implemented in Eastern Europe provides an example of the route
to go in Africa. Donors can play a helpful role in this by assisting
in this area.
o Challenge
funds
These can be used to support the localisation of supply chains
that exist in large investments made by multinational companies.
For example, muItinational investors in the mining, tourism and
agricultural sectors can be assisted with the necessary package
of incentives to help develop local suppliers for most of their
supply needs. This is a very good example of PSD.
o Public
Private Partnerships in infrastructure
Donors can assist through Technical Assistance in establishing
a legal framework that can allow a much faster implementation
of infrastructure PPPs. The building up of the activities of the
PSD would go a long way in this
This is a submission on only some of
the issues raise by Press Notice 13.
2 February 2006
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