Memorandum submitted by Valentine Chitalu,
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.
— 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.
— 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.
— 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.
— 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?
— 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.
— 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.
— 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 eg 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 eg 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.
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.
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:
— 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.
— 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.
— 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?
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.
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.
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.
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.
February 2006
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