14 Oct 2013

The Africa-EU partnership: a platform to boost the African private sector?

by Alberto Lemma and Raphaelle Faure.

‘Regional Economic Integration, Trade and Infrastructure’ has been identified as one of the priority areas of Joint Africa-EU Strategy. Nonetheless, progress on the issue has been disappointing, partly due to the repercussions of the Eurozone crisis, including the trend towards greater EU protectionism, but also to the fact that Africa has developed closer ties with other emerging economies, making it more difficult for the EU to establish and maintain privileged relations with the continent.

The upcoming EU-Africa Summit in April 2014 provides an opportunity for both partners to consider why so little progress has been achieved to date, and to revive the partnership by focusing on issues of mutual interest and added value.

The recognition that the development of a strong African private sector could contribute to the continent’s development is gaining momentum in debates on African development and within African institutions. Reforms have positively altered the market and business environment, giving African economies greater macroeconomic and political stability, which in turn has incentivized increased domestic and foreign investment. The global economic crisis put these reforms to the test and demonstrated their success in reducing African economies’ vulnerability in a period that shocked most advanced economies. Furthermore, African economies have huge potential: abundant natural resources, growing middle classes, and an increasing pool of skilled and educated citizens. These provide solid bedrock from which African companies could enter the global marketplace.

Nevertheless, the reality is that African companies are still struggling to integrate into domestic and global markets and to establish themselves as competitive actors internationally. So what is preventing African companies from growing more and tapping into the opportunities offered by the global market?

One of the major issues holding them back is their size. According to the World Bank, the African economic landscape is dominated by small and medium enterprises (SMEs), which account for around 90% of businesses in Sub-Saharan Africa. In addition, 35% of the large companies operating in Africa are foreign-owned, compared to around 25% in East Asia, 20% in Latin America and only 5% in South Asia. Whilst some African SMEs have managed to successfully compete at the global level, they are more often too small to compete effectively.

Several other constraints pose further challenges to SMEs in Africa.

These are:
  1. A weak institutional and regulatory environment. 
  2. Insufficient hard and soft infrastructure, e.g. inland and maritime transport, electricity, logistics, telecommunications and trade-facilitation services. 
  3. A lack of access to finance, with banks regarding SMEs as high-risk borrowers and thus charging higher interest rates or requiring larger collateral for the provision of loans, leaving many SMEs unable to access finance. The only way most SMEs can accumulate expansion capital is to save a portion of their revenue or rely on risky and uncertain informal loans. 
  4. A lack of support to build the capacity of small firms to formulate business plans and enhance their marketing skills; or to provide other non-financial support services required for enterprise development. 
  5. Institutional issues, such as corruption, the high level of taxes, and the practices employed by their non-regulated (or informal) competitors. 
  6. Labour skills and trade regulations. 

Given these constraints, what type of support do African companies actually need, and what can the EU do to support them?

Many European countries have, at some point, faced similar challenges to the ones outlined above. The EU is currently implementing a number of regulatory measures to improve SME access to capital markets and their visibility in the EU market. It also closely monitors the SME lending situation, helping them identify their financing needs and subsequently adjusting the capital requirements financial institutions reserve for loans to SMEs.

The EU-Africa Partnership has the potential to serve as a platform where these experiences and practices can be shared offering a way for the EU to support the African private sector to play a central role in the structural transformation of African economies.


Photo by Rhys Williams.

This post was written by ODI.

This topic will be discussed in greater detail at the upcoming European Think-Tanks Group conference: Looking Beyond 2013 Are EU-Africa Relations Still Fit for Purpose?


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