|The Courier N° 142 - Nov - Dec 1993 - Dossier: Regional Integration - Country Reports: The Gambia -Tanzania (EC Courier, 1993, 96 p.)|
A coherent industrial strategy to attract outside investors
The Centre for the Development of Industry (CDI) has the task, under the Fourth Lomonvention, of helping 'to establish and strengthen industrial enterprises in the ACP States, notably by encouraging joint initiatives by economic operators of the Community and the ACP States'. The current Director of the CDI, which is based in Brussels, is Paul Frix, who took up the post in 1990. Mr Frix studied! economics and management in Leuven and Brussels before embarking on a career in development cooperation - a career which has included service in his country's embassies in Kinshasa and Algiers, and in the Belgian Development Cooperation Administration (AGCD).
Regular readers of the Courier will be familiar with the CDl's initiatives, which are reported in the 'Industrial Opportunities' feature of the magazine. In this interview,
Paul Frix looks at some of the wider issues affecting industrial development in the ACP countries and considers, at the outset of the negotiations for the second phase of LomV, how the CDI may be adapted to meet future challenges.
· Among the various sectoral approaches to development, what part do you think is played by industrial policy ?
- I think that industrial policy is becoming increasingly vital for many ACP countries. They cannot effectively ensure development unless they are able to develop their industry in general. It is not enough to rely on commodities - and I mean by this agricultural products as well as minerals. Having said this, even as regards industrial development, the ACP countries have an interest in developing specific sectoral policies. Such policies make it possible for states to organise their available resources so as to exploit any genuine comparative advantages that they might have in particular areas. It is easier as a result to carry product processing to a more advanced stage, thereby maximising local value added. With a coherent industrial strategy, it follows that a favourable climate can be created by the countries involved, with the legislation being adapted to the needs of a given sector. On that basis, they also gain the added advantage of better coordinated international aid. Without a policy of this kind, it is the investors at the end of the day who, having been invited, then discover that there is neither a secure framework nor the kind of back-up that they need.
Then of course, there is no doubt that sectoral approaches give the CDI various advantages. They enable it to focus on activities which are mutually supportive and to increase its experience of the way particular sectors work, both technologically speaking and from the point of view of the market. Of course, the CDI uses these sectoral approaches when there is a demand for them at national, regional or international level. Our aim at the moment, in fact, is to capitalise on the experience we have obtained in certain sectors and regions and to adjust and transpose it to other parts of the ACP group. Lastly, as I said before, it obviously makes sense to coordinate international aid and make sure the various forms complement each other, on the basis of specific plans in the countries concerned. Logically, it should mean better results all round.
· Targeted, state-run industrial policies are disparaged nowadays but they have been known to produce positive results. Where do you stand on this issue?
- A deliberately targeted public sector policy can be the best thing or the worst thing in the world. In the past, we have had examples of governments going too far in wanting to replace the private sector; seeking to do what private businesses should be doing and setting up public companies that they could not manage effectively. It didn't take very long for these policies to fail, with the result that we see today - countries forced to embark on uncomfortable structural adjustment programmes. On the other hand, without specific public sector policies, it will be difficult to create a context which provides companies with sufficient promise and incentive. The crux of the matter, in fact, is to define the interrelationship between public-sector initiatives, where the task is to create the right business climate, and the private sector's role, which is to develop the actual industrial schemes.
'Investments can be guided to where there are prospects of making a profit'
· The OECD's Development Assistance Committee has just released figures showing that the developing world as a whole is receiving more private foinancing than ODA at the moment, although a closer look shows enormous variations between different regions. Private money clearly does not allow itself to be dictated to like ODA. What can the CDI do in this area ?
- As you say, investments cannot be dictated, but they can ultimately be steered and guided, where there are sufficiently good, genuine and stable prospects of making a profit. Hence the importance of offering compensatory advantages to investors in problem areas of the world, particularly in the early stages of their investigations, when they are looking out for partners for subcontracting, or seeking markets for their products. It is important of course, to act speedily in steering them towards the right partner and the right country; those genuinely offering business conditions which are at least acceptable, if not positively attractive. And, since international opportunities have become much broader and competition is far greater than it was a few years ago, this is an area where an institution like the CDI can - and often does - provide the determining factor. We can finance the first contacts, cofinance identification surveys, help negotiate a balanced partnership, seek the right sources of financing and provide technical assistance with management training when businesses open up. It is a fact that although European businesses may still be prepared to spend time looking in places like Africa, they are increasingly unwilling to invest risk capital there - hence the importance they attach to having a backup in partnership operations, without having to contend at the outset with discouraging or unnecessary financial uncertainties.
· Regarding the back-up measures you mention, the problem of investment protection is one which is far from being resolved in many countries. The EC Commission (through the Lomonvention), the World Bank and many bilateral agencies are all working on this. What is the stance of the CDI in relation to protecting investors and what can you do in practical terms ?
- Investment protection agreements are decisive in the chain of measures required to attract and safeguard investors. But though vital, they are not sufficient in themselves to trigger the foreign investment process in the countries concerned: the local framework has to be right too. However good the agreements, they never offer protection against commercial risks, which are influenced by a whole host of factors related perhaps to the country's politics or social situation, so there have to be additional guarantees.
· Africa is still one of the most cliff cult continents as far as investor protection is concerned. How can we help to create an
Farming cut flowers in Gambia
Gambia, with its fertile soil and mild winter, is well-placed to supply the European market with a wide range of specialised horticultural products. Some companies have already experimented with exporting tropical fruits while one local entrepreneur, with the help of the CDI and other international organisations, is on the way to successfully pioneering a new crop: flowers.
The entrepreneur, together with the Commonwealth Development Corporation (CDC), established Makumbaya Farms in 1991. The venture also subsequently received a loan from the African Enterprise Fund, an offshoot of the International Finance Corporation. The l5-hectare development aims to develop a chrysanthemum farm for exports to Britain, the Netherlands and other countries in Western Europe.
By the time the CDI became involved, the partners were in the final stages of negotiating a partnership arrangement with a British company. Under this agreement, the UK partner was to provide both technical and management assistance as well as a substantial marketing network throughout Europe. However, paying for the on-site British management team proved too expensive, so the company, with support from the CDC, asked the CDI to finance the production manager's stay from October l99l to October 1992.
In that time, the production manager oversaw a great deal of the farm's establishment, from organising logistics and transport to planting trials and quality control. He also began training local personnel to take his place when he left.
The farm, which now employs more than 30 people, has already begun exporting, with very promising results and expects to reach an annual turnover of more than ECU 2.4 million by 1994. The CDI is currently considering a request from the CDC to continue its support on the production management side.
African business class, coaxing them away from speculation into an enterprise culture? Does the CDI have a recipe for 'making' African business people?
- The CDI has no single recipe, although it does have part-recipes for business people. You are right in your analysis: the industrialization process in many African countries has been founded largely on exploiting a (to some extent) good position on the raw materials market, or on the fact that they are in a monetary zone which has provided a degree of protection or mutually privileged access. These things do not automatically foster an enterprise culture. But the world about us is changing fast and traditional forms of income are being eroded. The countries concerned are in a critical situation, particularly in view of the constant increase in population pressures. There are more and more people to provide with jobs and, if possible, with a better standard of living as well. Given this situation, there is absolutely no argument that outlooks have to be changed and new categories of entrepreneur have to be encouraged in new sectors and areas of activity. They must then gradually be familiarised with healthy competition, in which the best of them must be given the opportunity to boost their comparative advantages.
But creating new business people is not something that you can improvise. You cannot just wave a magic wand and expect it to happen. They have to be introduced to the idea and then given proper backing in their work and, while that is going on, be induced to develop the basic reflexes which will enable them to create and - most important of all - develop viable businesses. And this is exactly where the CDI comes in. Our job is to tune in to the business person. We are not a financial organisation. We do not provide money for investment. But we do help entrepreneurs to solve the technical problems which arise while an investment is being set up, operations are being launched or companies are being restructured.
- How can the private sector become more involved in regional cooperation? Is there a role for the CDI here?
- The real fabric of regional integration is business. Businesses operating in the same sector accordingly need to be brought together in technical fore, although they must be carefully selected at the outset so as to ensure that the meetings are as productive as possible. This sort of approach can and must be used to assist the regional integration process, although of course it is only one aspect of a whole series of measures and strategies that need to be brought into play. In the context of regional strategies - notably in Africa where the industrial fabric is particularly weak or run down - business-people should certainly be able to rely on regional groupings which enjoy enough protection to enable them at least to take medium-term investment decisions and, thereby, create a regional network of industries which complement each other. Clearly, the politicians have to encourage this by taking their own responsibilities seriously. This may well involve rising above the self-centred nationalism which encourages states, for example, to hang on at all costs to their customs import revenue, something which is often vita] to the national budget. It is not easy, either politically or psychologically, to transfer this to a supranational organisation, but it has to be done. And when these regional units are big enough, and offer sufficient protection, investment companies capable of rationalising industrial sectors throughout a given region should be set up, operating across the region rather than on the basis of individual countries.
A range of regional investment companies needs to be set up. I welcome the fact that the West African Development Bank has, for example, recently decided to embark on this road with just such a venture. But there is scope for several initiatives in this area because investment companies can benefit, both from specialisation and by engaging in healthy competition with each other, where the field of operations is sufficiently large. As for the CDI, it needs to work in parallel with such schemes, setting up regional and local service companies.
'SystematicaUy developing closer links with the financial institutions'
· The CDI, as you say, helps promote investments without having funds of its own to contribute to their financing. Isn't that a barrier to success? And, more generally, what is your strategy for current and future CD! activity?
- It is clear that industrial development in the developing countries is based on two things. The first is having the right kind of financial resources, especially risk capital. The second is having technical and managerial support that is sufficiently effective and close to the business. You have to have both and they have to be properly organised, otherwise it won't work. Having said this, the CDI has no desire to become a financial institution. What it should be doing is working more and more closely with financial institutions that have confi dence in it, and believe in the services it has to offer. That is our current strategy. So we are systematically developing closer links with the financial institutions, starting with the EIB. Their risk capital has an essential part to play, despite the fact that it is being used relatively little, or too slowly, at the moment, in particular because the business promotion and back-up schemes which would have enabled more people to go to the financial institutions with sound projects have not been methodically catered for.
The next stage, coming soon, is to create service companies which are managed by the CDI but have the main national and foreign financial institutions working for local industrial development as board-members and shareholders. These service structures will be free to make judgments and analyses independently of the bankers but they will still be an instrument in which those bankers can have confidence because they will have a great deal of say in how they are run. If the CDI submits a good project and a good promoter to a financial institution which is not familiar with either, it will not get a financing decision. The proposal will fail however high the standard of work that went into it. So, to go about it the right way, the financial institution needs to know that we do things properly.
Hence the idea of perhaps giving them the right to check and control the standard of the services they may use. This, after all, is a vital factor for credibility. These are the lines we are working along: arguing, in fact, for a double assessment of projects which should be evaluated independently by the funder - in other words, the banker putting up the money - and, with equal independence, by a business support organisation. They have different but complementary approaches and if they reach the same conclusion in the end, agreeing that the project is a good one, then the chances of seeing that good project materialise as a viable undertaking are very sound indeed.
· Are you able, by looking at examples of successful CDI-supported projects, to formulate a favourable set of conditions which can serve as a model ?
- Firstly, success rests on having a promoter who has at least a basic minimum of assets and resources. These may be technical, financial or human (in the sense of assets of psychology or character). To have all three would obviously be an added bonus. I believe that a person's ability to adapt to the changes and constant challenges of a private company is the essential thing. A second element is an ability to find the technologies which are properly adapted to the needs. something which is neither too big, nor too expensive, nor too sophisticated. Lastly, and I should perhaps have started with this one - although frankly, for me, the priority is on the person - there is the availability of a market. There has to be a local, regional or external market. Given that many of the ACP countries we are talking about have debt-related financial problems, are looking for foreign exchange from any available source and are anxious to become part of the international trading system, we are finding ourselves increasingly involved in projects where it is the European partner who is providing the market. So these are the three elements which are absolutely vital for success.
· The Vienna Conference on Human Rights recently revealed a growing Norrh-South divide in production and employment conditions. How far is the CDl aware of these problems - of child labour and so on - in its work ?
- Yes, we are concerned with working conditions. The CDI will not usually help a firm which, for example, makes use of child labour. Whenever we can, we avoid this kind of project and we certainly do not support schemes which would only work if they did use child labour. They would be ruled out automatically. Having said this, the reality is often more complex and can be at variance with the theory. In many ACP countries, problems of human rights and human dignity are linked with extreme poverty and we are often faced with dilemmas. If these countries are to put their poverty behind them, the development process has to be set in motion and providing jobs is all important. The first priority is for people to be able to live in a dignified manner. That means we must be pragmatic in our efforts to trigger self-sustaining economic development. I should say that in those countries where the European Community has decided to suspend aid because basic human rights are not being respected, we recognise this fact and call a halt to any active seeking-out of projects.
In such circumstances, our role is effectively a passive one - receiving proposals submitted. If they turn out to be viable, we will support them, however. In the final analysis, what counts is the longterm view of the problem.
'The CDI has reached an absolutely crucial turning point'
· The LomV md-term review is about to be carried out. As head of the CDl, do you plan to make any alterations to the Centre's role? Have you had any requests, from Europe or the ACPs, to change the way in which the CDI operates over the next five years ?
- I think that the CDI has reached an absolutely crucial turning point. With the implementation of LomV, we embarked upon quite a fundamental reform of our policies and strategies. As things stand, the Centre focuses on the ACP countries. They themselves mobilise significant amounts of resources which are combined with CDI resources to back up coherent industrial promotion policies. We deal with medium and long term projects. We do not aim to give aid and just leave it at that, but rather, once we know a firm, to help it make a success of whatever it is trying to achieve, whether it be establishing itself, restructuring, or coping with privatisation. This means providing successive trenches of assistance to the same enterprise. We help fewer firms this way, but we help them better. Finally, taking the sectoral approaches which I described to you earlier, we seek to capitalise on experience gained in particular fields. We can then gradually apply that experience elsewhere, allowing us to be more effective overall.
Parallel to this policy of focusing assistance, we have now embarked upon a policy of decentralising our work. The idea is to create support structures that are close to businesses, independent of local political influences and flexible, with as little red tape as possible. So we have fixed on the idea of service companies, set up jointly with financial institutions as well as both bilateral and multilateral funders who are interested in using them as local operating agencies. What we are doing, in fact, is pooling the potential of organisations that are interested in having proper coordination of their efforts in a particular country or region. So the set-up we are moving towards is one in which external aid is coordinated through systems created and managed by the CDI. I believe that this is a truly forward-looking approach. We have, accordingly, made a lot of changes to the CDI. It currently has two operational divisions: one network for the ACPs and one European network. The interface is the committees, where projects are assessed or examined critically from every angle to investigate the finances, the quality of the promoters, the standard of the technology, whether there is a market and so on.
In practical terms, this means that the CDI has, since 1991, been undertaking some far-reaching changes. These have been comparatively difficult to implement and it will certainly be some time before they are completed. The process is fully in line with the recommendations of Commissioner Marin and of the ACP Secretary-General, Dr Berhane, that the Lomnstruments should be updated and strengthened.
Sooner or later, we are also going to be faced with the question of the continuing existence of the CDI. Can its present policies reasonably be carried through by an institution which is still only an EDF regional programme? The idea behind the CDI is an excellent one: that of promoting ACP-EC business partnerships, but ever since it was established it has had to cope with ups and downs caused by its continuing precarious status, notwithstanding the very definite progress that has been made under LomV.
If the aim really is for the CDI to become an efficient tool, geared to meeting today's and tomorrow's challenges, perhaps the time has come to consider ways of giving it the status of a joint international organisation operating more predictably and transparently and better able to take on work and pursue policies for the long term. Speaking purely for myself, I wonder whether sooner or later we ought not to give the CDI itself - meaning the headquarters in Brussels - the same status as that of the service organisations that we are busy setting up in the ACP countries. Without wishing to pre-empt the political decisions which will eventually determine its future, the CDI is always ready to take part in the joint task of forward thinking which it views as desirable and necessary before the forthcoming renegotiation of LomV's second financial protocol.
Interview by Dominique DAVID