Africa's Business Climate Improving despite Obstacles: A Strong Private Sector-Led Development Is Crucial for Integrating Africa into the Global Economy. Yet the Climate for Small and Medium-Sized Enterprises-The Engines of Wealth Creation - Remains Challenging, despite Some Impressive Performances from a Small Group of African Countries

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Various institutional and physical barriers to SMEs--chiefly, undeveloped infrastructure, lack of venture capital, excessive red tape, higher taxes and an inadequate skills base caused by a combination of 'brain drain' and lower spending on education and vocational training, continue to dog many African countries.

As Sir Mark Moody-Stuart, former chairman of Anglo American plc, explained: "We know from our experience and from investing in small businesses in our supply chain how many barriers there are to doing business here, with regulations, customs, general bureaucracy and so on." Such obstacles undermine private enterprise and push businesses into the informal sector, which diminishes government's tax receipts.

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African entrepreneurs face more than twice the regulatory burden than that elsewhere when starting a company, filing tax returns, resolving commercial disputes through the courts and registering property.

It takes, on average, 45 days to complete 10 procedures for business start-ups and the minimum capital requirements are higher than in other regions. Not surprisingly, developed economies have on average 10 times as many newly registered firms per adult as Africa and a business density four times that in developing nations.

Nonetheless, 67 regulatory reforms were recorded in Africa, led by Rwanda (the world's top reformer) between June 2008 and May 2009, according to the World Bank's 2010 Doing Business report. "In times overshadowed by the global financial and economic crisis, business regulation can make an important difference for how easy it is to reorganise troubled firms to help them survive, to rebuild when demand rebounds, and to get new businesses started," said Penelope Brook, acting vice-president for financial and private sector development at the Bank.

But 20 African countries were stuck in the bottom 25 of the annual survey (covering 183 places), with only seven (Mauritius 17th, South Africa 34th, Botswana 45th, Namibia 66th, Rwanda 67th, Tunisia 69th and Zambia 90th) occupying the top half of the global rankings. Hence, much remains to be done to help SMEs and encourage more business formation in the region.

High-cost location

Findings of the World Bank's Enterprise Survey show that Africa is expensive in terms of labour, capital and infrastructure costs. Overall, for each unit of sale, firms spend half on inputs costs. Wage levels in sectors like textile/apparel and horticulture exceed those in India, China and Vietnam. One kilowatt hour (kWh) of electricity for industrial use costs, on average, $0.068--the highest of all the regions except South Asia--and power outages cost businesses $9,000 annually in lost sales. Inland transportation costs are among the world's highest, particularly for the 15 African landlocked states. It costs $1,100 and $872, respectively, on average, to ship an import-and-export container inland.

Depleted road and railway networks are major bottlenecks. Higher transport prices, too, reflect lack of competition in the trucking industry. A World Bank study, Africa's Infrastructure: A Time for Transformation, shows that transport, power, water, and information and communications technology (ITC) deficiencies cut annual economic output by 2% and reduce productivity by a massive 40%. The study argues that good basic infrastructure is vital to prosperity and that combating inefficiencies could result in real improvements in Africans' lives.

There are also indirect costs such as more stringent collateral requirements--firms usually pay additional 'hidden' charges to secure bank financing and waste lengthy time on red tape. The Enterprise Survey shows businesses pay 1.5% of sales in bribes to 'get things done' and 3% of contract value when dealing with government procurements, which far exceeds the amount reported elsewhere. In fact, SMEs are affected more by corruption than larger firms. …