Address by Mr Aziz Pahad Deputy Minister of Foreign Affairs to the Association of SADC Chambers of Commerce and Industry, 20 August 2007  

NEPAD AND AFRICAN BUSINESS OPPORTUNITIES - WHAT ARE THE CHALLENGES?

I wish to thank the Association of SADC Chambers of Commerce and Industry for inviting me to address this very important conference on the topic NEPAD and African business opportunities – what are the challenges?

This conference takes place at a time when the African continent is currently engaged in a deep and fundamental renewal process. The over-arching objective of this process is to break the vicious cycle of political instability, poverty, and underdevelopment, as well as Africa’s weak capacity to defend and advance her interests in the global arena.

In this regard, the key building blocks of this renaissance strategy are increased political unity and concerted action through the African Union, and accelerated socio-economic transformation through the AU programme, The New Partnership for Africa’s Development (NEPAD).

This twenty first century has been declared the African century, what do we do together to ensure that this century in reality becomes the African century.

The most recent Economic Report on Africa, published by the United Nations Economic Commission for Africa in February 2007, states that, during 2006, growth in Africa has increased. African economies continue to sustain the growth momentum of previous years, recording an overall real GDP growth rate of 5.7% in 2006 compared to 5.3% in 2005 and 5.2% in 2004. As many as 28 countries recorded improvements in growth in 2006, relative to 2005. Only Zimbabwe recorded a negative growth rate in 2006. The Report bases Africa’s growth performance in 2006, as in previous years, on the improvement in macroeconomic management in many countries, and strong global demand for key African export commodities, sustaining high export prices, especially for crude oil, metals and minerals.

This conclusion is for Africa as a whole, if we disaggregate the statistics, we found that despite the tremendous potential, for most African countries, real growth rates have remained low relative to their development goals. With only four countries recording an average real GDP growth rate of 7% or more during 1998-2006, few African countries are positioned to achieve the Millennium Development Goals by 2015. Heavy dependence on primary commodities remains a common feature of production, exports and growth in all the sub-regions. This exposes the continent to external shocks and makes economic diversification a top priority for growth policies on the continent.

Compared to other regions, Africa continues to lag behind in all indicators of social development. Measures of poverty have remained virtually unchanged over the past decades. The average share of population below the poverty line was 44% in 2002 compared to 44.6% in 1990; thus, one can hardly talk of any progress in poverty reduction.

The ECA report found that the majority of African counties are dependent on oil and minerals or a limited range of agricultural commodities such as tea, coffee, cotton and cocoa. Thus, fluctuations in commodity prices have a significant impact on export revenue and the exchange rate in these countries. This forces many African countries to accumulate excessive foreign exchange reserves at high economic cost. A better approach is to adopt a comprehensive (country-specific) strategy for prudential regulation and capital controls that can minimize exchange rate risk while allowing the countries to benefit from increased export revenue and foreign direct investment (FDI) inflows.

The ECA report concludes in an upbeat fashion. Global demand for African products – especially oil, minerals and agricultural – is expected to remain upbeat, but this is contingent on successful economic recovery in major industrial countries and continued strong growth in emerging Asian economies, especially China. Moreover, delivery of the promised aid and debt relief will allow African countries to boost expenditures in key sectors including public infrastructure and social services. Furthermore, consolidation of macroeconomic management will not only reduce inflation in the short run, but also encourage private investment and strengthen growth.

Many analysts have indicated that factors that are likely to hinder growth in 2007 and subsequent years include lack of diversification of production and exports and subsequent instability and vulnerability to shocks, and the increasing spread of the HIV/AIDS pandemic, which undermines labour supply and labour productivity. In addition, inefficient public infrastructure and unreliable energy supply at the national level as well as poor integration of transportation and energy network at the regional level will continue to undermine productivity and international competitiveness. Moreover, higher oil prices are a major concern for African countries, which need to continue to control inflation, promote fiscal stability, improve current account positions, and increase growth.

Africa countries need a new approach to growth policy

More than any time before, it is now understood that the general, one-size-fits-all growth policies embedded in macroeconomic stabilization and second-generation reform programmes will not help African countries. Increasingly accepted that programmes based on the Washington Consensus and the neo-liberal paradigm are unsustainable. Besides achieving macroeconomic stability, African countries need to tailor their fiscal and monetary policies to promoting domestic investment, employment generation, and growth. Moreover, it is necessary to identify binding constraints to growth as well as the sources of growth potential at a disaggregated level, and design incentive mechanisms to channel resources to sectors with the highest potential for growth and employment generation. This demands the active involvement of a developmental state.

The challenge confronting governments and the private sector is what must we do together to successfully deal with the above-identified challenges.

Chairperson

NEPAD is Africa’s response to tackle our many challenges to enable us to achieve fundamental socio-economic transformation

As you are aware since the 1970 ’ s , Africa had been in the search for a policy framework to guide a continental-wide and functional socio-economic transformation that would enable them to place the continent on the path of sustainable development . The adoption of NEPAD in 2001 was the affirmation by Africa of a shared vision, conviction and a pledge by Africa and its leaders to eradicate poverty and to place African countries, both individually and collectively, on a path of sustainable growth and development and thus halt the marginalisation of Africa in the globalisation process. These objectives are also aimed at achieving the Millennium Development Goals.

NEPAD is a holistic, integrated sustainable development initiative primarily established as an African rejuvenation plan that focuses on creating the conditions for sustainable development, namely:

• P eace, security, democracy and political governance;
• E conomic and corporate governance; and
• R egional integration .

Interlinked with these efforts to create conditions for investment, growth and development, are initiatives to raise the necessary resources to address the development chasm in critical sectors that are highlighted in the Programme of Action, such as infrastructure, education, health, agriculture and ICT .

Resources should be mobilised by way of increasing savings and capital inflows via further debt relief, increased targeted ODA flows and private capital investment, as well as through better management of public revenue and expenditure.

The underlying principles of NEPAD are:

• Accountability : NEPAD recognises the importance of good political, economic and corporate governance in creating the conditions for development, with African governments embracing greater accountability to their constituents. NEPAD also seeks to base Africa’s partnership with the North on mutual accountability.
• Ownership : NEPAD is a long-term vision that is African led and owned. Ownership should be promoted through broad and deep participation by all sectors of society, and by tapping into indigenous knowledge/expertise to define needs and solutions.
• Partnership : While NEPAD is foremost a partnership between and amongst Africans, it seeks to accelerate sustainable development in Africa through partnerships with the South, and to forge a new partnership with the developed North that changes the unequal relationship with Africa. 

Although NEPAD has had some critics thus far, it is likely to be more successful than previous OAU compacts and strategies for a variety of inter-related reasons .

1. NEPAD is a Pan-African strategy that focuses on how Africa should relate to globalisation . Globalisation cannot be ignored and how African countries confront this reality, will determine much of their economic and developmental future.  NEPAD provides a comprehensive framework to guide Africa’s engagement with this global process. 2.
2. The fact that most AU countries have backed the NEPAD vision, with its wide-ranging proposals for political and economic reform, displays a level of political cohesion and will that has, unfortunately, been lacking in many of the previous OAU strategies.
3. The composition of both the NEPAD Steering Committee and the Heads of State and Government Implementation Committee ensures that leaders on the continent remain seized with the NEPAD agenda to eradicate poverty and achieve sustainable development . B esides guaranteeing continued political commitment to NEPAD, this has placed its vision on the agenda of both African regional organisations and m ember s tates.
4. General acceptance of the need for Good governance [public and private sector]

• The Constitutive Act which established the African Union has interalia the following principles relating to good governance, democracy and human rights :

• promotion of gender equality;
• respect for democratic principles, human rights, the rule of law and good governance;
• promotion of social justice to ensure balanced economic development;
• respect for the sanctity of human life, condemnation and rejection of impunity and political assassination, acts of terrorism and subversive activities;
• condemnation and rejection of unconstitutional changes of governments;

4.2 Another important initiative is the Good governance Initiative: National Treasury is a member of the Collaborative Africa Budget Reform Initiative [CABRI] CABRI is a pan-African network of senior government officials in ministries of finance and planning. CABRI’s primary objective is to promote the importance of effective management of public finances to foster economic growth and enhance service delivery for the improvement of living standards of people living in Africa. The South African National Treasury houses the CABRI Secretariat.

• APRM

The APRM is a unique African initiative that introduced an instrument for monitoring compliance with the principles, priorities and objectives of the Constitutive Act and other decisions of the AU. It provides a mechanism for peer learning and the sharing of information and best practice. It has received international acclaim and the first set of reviews has been completed in Ghana, Rwanda, Kenya, Algeria and South Africa. Thus far, twenty-six countries have acceded to the APRM. The APRM process is addressing corruption, poor governance and inefficient delivery of public goods and services to their citizens.

The APR Panel agreed that lessons learnt from the five reviews done should be discussed at a Workshop/Brainstorming Session in Algiers towards the end of October 2007.

1. The historic opportunity for the advanced countries of the world to enter into a genuine partnership with Africa , based on mutual interests and benefits, shared commitment, under African leadership . Although some of the interest in NEPAD from the North emanates from normative concerns – for instance, the historical involvement of the Scandinavian countries in Africa’s economic development and reconstruction programmes. Today, migration and the Chinese factor. Much of this interest derives from eminently pragmatic considerations . The wealth being unlocked across the African continent provides a compelling motivation for the industrial countries not to ignore the African continent.

5.1 International support for NEPAD

• Adopted as a UN programme
• G8
• EU
• China Africa Forum
• TICAD
• New Asia Africa Strategic Partnership
• Africa South America Initiative

The challenge is – how to implement the various commitments and programmes. The sad reality is that today, many of the developed countries lack the political will to implement their commitments.

Chairperson

Over the past four years, the activities of NEPAD evolved from the conceptualisation of frameworks for the actualisation of the new vision and onwards to implementation strategies and action plans in the identified priority areas. Consequently, sectoral frameworks and mechanisms now are embedded in a 2004 – 2007 Strategic Action Plan have been developed and are being implemented on the programmes and projects in those priority areas. Such areas include:

• The Comprehensive African Agriculture Development Programme;
• The Short-Term Action Plan for Infrastructure Development;
• The Science and Technology Consolidated Action Plan;
• The Environment Plan;
• The AU/NEPAD Health Strategy;
• The Education Action Plan;
• The Tourism Action Plan;
• Standards and guidelines for the African Peer Review Mechanism, and
• The Africa Productive Capacity Initiative.

I will make available to the organisers a matrix document covering progress and costing of key aspects of the priorities identified. It is important to carefully study this matrix and identify areas for private sector participation.

The conceptualisation and the rolling out of the programmes have taken longer than expected because of the lack of capacity and expertise in all our countries and in the NEPAD Secretariat.

NEPAD seeks to address poverty eradication, sustainable socio-economic development and growth. The success of these programmes depends on public-private partnerships.

The state of market integration in Southern Africa

In the earlier sessions, you discussed the importance of regional integration. Let me, for the sake of emphasis again refer to some aspects of this debate. We must discuss regional integration in the context of the debate on an African government.

The AU held its 9th Ordinary Summit meeting in Accra, Ghana from 1 to 3 July 2007. The principal aim of the summit was to provide an opportunity to the African leaders to engage in the "Grand Debate on the AU government".

The Accra Declaration is a collective decision of the African political leaders on how to proceed with the question of African integration.

It stated that the African leaders who gathered in Ghana agreed to accelerate the economic and political integration of the African continent including the formation of a union government for Africa, with the ultimate objective of creating the United States of Africa. To realise this objective, the leaders agreed on the necessary steps that must be taken which include:

• The rationalisation, strengthening and harmonisation of the activities of the Regional Economic Communities (RECs) in line with previous decisions of the AU, with the RECs mandated also to work for regional political integration, with these acting as building blocks in the advance towards the creation of the United States of Africa.
• The conduct of an audit of the executive council, the AU Commission, as well as the other organs of the AU in terms of Article 10 of the Constitutive Act.
• The establishment of a Ministerial Committee that will examine a number of matters including the identification of the possible mandate of the union government and its relations with national governments, identification of domains of competence and the impact of the establishment of the union government on the sovereignty of Member States and the determination of the relationship between the union government and the RECs.

The next Ordinary Session of the AU, in January 2008, will consider a report on the implementation of the Accra Declaration.

Chairperson

As you have discussed t he key driver for development and deeper integration in Southern Africa over the next 15 years will be market integration. This will encompass financial and capital markets integration and the extension of intra and extra-regional trade. SADC’s immediate goal is the full implementation of the SADC Free Trade Area that is envisaged for 2008. The legal instrument for achieving the Free Trade Area is the SADC Protocol on Trade, which entered into force on 25 January 2000 after the required majority of SADC member states had ratified it.

When SADC member states started to implement the Trade Protocol in September 2000, some 45% of all goods traded in SADC were already traded at zero tariffs. All member states implementing the Trade Protocol follow their individual tariff phase-down schedules applying the asymmetry principle with SACU moving fastest and the other countries following more slowly.

Some challenges

Some countries have respectively not made any offer or not signed the Trade Protocol. As recent as 13 August 2007, Angola indicated that it was in the midst of a tariff restructuring exercise and promised to make an offer to SADC before the end of 2007. Other countries are behind in implementing tariff phase downs due at this point, however, these four countries have indicated that they are taking steps to implement these.

Also several countries have substantially ‘backloaded’ their tariff phase downs and would be obliged to remove duties on a large number of tariff lines (in some cases amounting to more than 50% of tariff lines in respect of SACU) in 2008. It must also be appreciated that complicated Rules of Origin hamper the use of the SADC Trade Protocol, and that, with the exception of trade with SACU, a large portion of intra-regional trade was taking place in terms of COMESA arrangements or through revived bilateral agreements. Agreement on simplifying the Rules of Origin for a number of lines have been reached and all member states are committed to resolving outstanding Rules of Origin issues by the end of the year.

It is encouraging to note that all SADC countries, including those who have heavily ‘backloaded’, in August 2007 indicated that they were in a position to meet all tariff phase down obligations under the Maseru Protocol by the time of the next SADC Summit in August 2008. To this end, this Summit may be designated as the date for the official launch of the SADC Free Trade Area.

If we analyse the regional trading pattern, we find that intra-regional trade within Southern Africa was estimated at about 20% of total trade in 1997. The overall figure for intra-regional trade stood at roughly 25% by 2003 and is expected to increase further by the time the Free Trade Area is fully implemented. Member states’ trade shares with SADC vary widely, from a low but increasing 2.1% of overall trade for Mauritius to up to some 80% for Swaziland. Malawi, Zambia and Zimbabwe trade 40 and 50% of their overall trade (imports and exports) with SADC partners. South Africa’s exports increased from R215 billion in 2001 to R320 billion in 2005.

South African imports from SADC are increasing, but it is unsustainable that commodities drive most of the growth. These products did not face tariffs before 2000 and therefore, it is unlikely that their performance improved due to the implementation of the SADC Trade Protocol. Another factor that explains why the region has not responded to market access incentives is due to capacity constraints.

It is in the interests of all our countries that intra-regional trade must diversify faster and more manufactured goods should be making up a larger share of overall trade in the region. Presently some increases in trade have occurred in the textiles and clothing, and sugar sectors, where special trade arrangements in these industry sectors opened up larger opportunities for trade in the region. Other important industry groups include agro- and food processing as well as processed base metals.

SADC priority intervention areas

Your discussions have shown that in relation to the SADC RISDP priority intervention areas two intervention areas are central to the overall process of economic development integration, as follows:

• The first area is trade/economic liberalisation and development including, among others, free movement of goods, services and factors of production, and intra-regional investment and foreign direct investment.

• The second priority area is related to the development of efficient infrastructure and services to facilitate the free movement of people, goods and services across the region, which will be enhanced through interventions in the following key areas: transport and communications, information communications technology, energy, water and tourism.

Additional to the above two key priorities, SADC also has to deal with the regional dimensions of emergencies such as HIV and AIDS, natural disasters and food security.

President Mbeki suggested that, within SADC, any programme to promote greater trade integration in Southern Africa must be complemented by programmes of sectoral cooperation based on a developmental agenda. To this end, President Mbeki articulated the priority areas within SADC as follows:

• Promotion of macro-economic convergence around agreed indicators;
• Progress in terms of infrastructure development cooperation programmes, spatial development initiatives and sectoral programmes;
• Achievement of some level of harmonisation of industrial development strategies and competition policies, as called for in the SADC Trade Protocol; and,
• Elaboration of a detailed and realistic activity matrix necessary to create the SADC Free Trade Area, to include processes to achieve balanced, mutually beneficial regional economic integration.

The challenge is how we achieve the development objectives. Some analysts have identified a few objectives of the SADC Trade Protocol where progress has been particularly slow, and where we should be paying more attention. This would include:

• The simplification and harmonisation of trade documentation and customs procedures;
• Liberalising the services sector;
• The promotion of an open cross-border investment regime, thereby enhancing economic development, diversification and industrialisation, including the improvement of productive capacity and competitiveness of the region;
• The harmonising of various trade facilitation arrangements as well as the finalisation of the Protocol on Industrial Cooperation;
• Agreement on the protection of Intellectual Property Rights, in accordance with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights; and
• The prohibition of unfair business practices; the promotion of competition and the adoption of coherent trade development strategies.

Foreign Direct Investment [FDI]

Despite many initiatives taken by our countries, we have not attracted sufficient FDI. South Africa as one of the strongest economic powers in Africa has the historic responsibility, in context of our developmental agenda.

South Africa public and private investments are the fastest new growing investments in Africa.

Botswana , Lesotho, Namibia and Swaziland have remained destination countries for South African investment since 1994, whilst the rest of the SADC region has become a logical place for expansion. Driven by our developmental agenda, a defining characteristic of South African investment is its diversity: Foreign direct investment has not been confined to natural resource extraction, but also the industrial and services sectors. The following figures illustrate South Africa’s investment to SADC countries for the period 1994 to 2004:

What is encouraging is the South African investment in infrastructure in Southern Africa. Since South Africa’s accession to SADC, South African companies such as Spoornet and Eskom have played a major role in infrastructure investment in the region. Both Spoornet and Eskom have a presence in eight SADC member states. Eskom is furthermore involved in electricity supply to the region through its participation in the Southern African Power Pool (SAPP).

South African Airways has codeshare agreements with various SADC airlines and is keen to increase its African business. The Department of Public Enterprises is in the process of developing a strategic framework for these investments, to ensure that their developmental impact is enhanced.

These private sector-led elements of the integration process highlight the fact that there is immense potential to drive the region’s economic development through the implementation of NEPAD and the SADC Regional Indicative Strategic Development Plan. It will serve to enhance the developmental impact of these flows of goods and capital, as well as mobilising additional resources for development and removing the constraints to growth in the region.

Chairperson

I am sure that we all agree that the critical challenge to meet our NEPAD objectives is the n eed for infrastructure development

In their study ‘Infrastructure, Regional Integration and Growth in Sub-Saharan Africa’, the authors Benno Ndulu, Lolette Kritzinger-van Niekerk and Ritva Reinikka recognise infrastructure and regional integration as two mechanisms that can help foster stronger economic growth in Africa. They recognise the general pattern in Africa that, since the mid-80s, the principle focus on development has been more on improving health and education. In terms of international donor support in the 1990s, support to human development for Africa increased from 14% to 34%. This shift was accompanied by similar shifts in governments’ own expenditures. At the same time, private investment in infrastructure did not materialise as initially expected. Consequently, infrastructure had not received adequate attention in public policy and spending.

During the African Development Bank annual meetings in Ouagadougou in June 2006, it was agreed that Africa’s infrastructure investment levels are far too low to support the magnitude and character of growth and development that the continent needs. Representing South Africa at the meetings, the Minister of Finance, Mr Trevor Manuel, said that in correcting these imbalances by scaling up investment in infrastructure, African governments must take responsibility for driving their own development trajectories.

The South African Minister of Finance, Mr Manuel argued that there is substantial agreement that regional infrastructure in the form of power pools, road corridors and communications networks are critical to the support of growth and competitiveness, in achieving economies of scale and in reducing costs. The responsibility for ensuring the rapid expansion of infrastructure within SADC lies squarely with member states: government budgets will continue to be the main drivers of infrastructure development. The domestic public sector remains the dominant source of finance for infrastructure all over the developing world. It accounts for 70% of current spending on infrastructure, with the private sector accounting for somewhere between 20 and 25%, and official development assistance for 5 to 10%. In Africa, private investment in infrastructure is a fraction of this developing country average.

As a direct response to this reality, in July 2007 the Pan-African Infrastructure Development Fund (otherwise known as PAIDF) was launched in Accra, within the margins of the African Union Summit. The vision for the Fund is to create a financing platform for infrastructure development that will accelerate Africa’s growth. The Fund estimates that over the next ten years at least US$150 billion of infrastructure investment opportunities are expected to be created, due to infrastructure demands in energy, water and sanitation, transport and communication technology.

The Fund represents investment opportunities to African States and Private investors in Africa and is structured to:

• Offer a range of investment instruments to offer opportunities for African pension fund portfolios to invest on the continent;
• Competitive instruments based on public-private infrastructure investments to increase returns;
• Flexible long-term investment horizons;
• The mitigation of risk at key levels;
• An opportunity to participate in an initiative for Africa’s post-colonial reconstruction that will help to put in place the drivers for Africa’s future growth.

The PAIDF has this far mobilised close to US$625 million that will be used to finance continental projects within the auspices of NEPAD. South Africa, Nigeria and Ghana have made firm commitments to the PAIDF and other African governments have expressed interest in making contributions pending legislation from their individual parliaments, allowing them to make the necessary payments.

Linking local economic development to regional development programmes

A synergy and close interface need to be established between the approach of NEPAD (continental framework), and the RISDP (regional framework) on the one hand, and the approach of national rural and urban development strategies.

In this process of finding an alignment between the local economic development programmes and the regional development programmes, it is clear that the private sector can play a valuable role in bridging the gap between national and regional programmes. An example of such an activity is to facilitate South African support to the RISDP within cross-border initiatives, through the identification, planning and implementation of local economic development programmes in collaboration with our neighbouring countries.

Conclusion

This whole process of regional integration as a foundation of NEPAD is to create a larger economic space where the private sector can operate without obstacles. In recent years, the private sector has been drawn in to participate in the development of policies and programmes for regional integration. Most of the instruments that are adopted by the regional economic communities on the Continent are only successfully implemented if the private sector reacts positively to the market integration process.

What should be of concern to SADC is the lack of momentum-drivers regarding the development of efficient infrastructure and services to facilitate the free movement of people, goods and services across the region. This, in the same way as the attainment of the roadmap mentioned above, falls primarily within the ambit of member states.

While significant progress has been recorded in NEPAD implementation, a number of challenges still exist. These need to be resolved to make progress on NEPAD. Key challenges include:

• Strengthening Political Leadership
• Capacity Building
• Integration of NEPAD Priorities into national development programmes
• Increase multi-country infrastructure projects
• Widening APRM Participation
• Converting pledges by developed countries into concrete actions:
• Making ODA more effective

Together, governments, the private sector and civil society can overcome these challenges.

Thank you

Issued by Department of Foreign Affairs
Private Bag X152
Pretoria
0001

20 August 2007