How does the Private Sector Development unit help deliver economic transformation in Africa?
Charles Odoom: Everything we do in ACET is driven by our economic transformation framework of growth with DEPTH. In the past, we have partnered with policymakers and the development community to drive African countries’ economic transformation agendas through research, analysis, advisory services, and advocacy to influence the economic development policies of African governments. With the slow uptake of policy recommendations and lack of implementation, the expected impacts are hardly felt on the ground. Working directly with the private sector provides us with a holistic approach to economic transformation. This means that our interventions and recommendations are directly implemented at the micro level, where the impact is felt immediately. Backed by research and sound analysis, we are able to provide bespoke and impactful support to the private sector, whose growth drives economic development and transformation. Our private sector collaboration also helps us create an informed body of evidence for policy improvements that enhance the business environment.
How is PSD supporting small- and medium-sized enterprises?
Odoom: Our main SME support program is called ACET Business Transform (ABT). It all starts with research and analysis. We undertake studies to identify which strategic sectors and priority products development efforts should be focused on to increase the kind of diversification that helps African countries become more resilient to both internal and external shocks. For instance, in Ghana we found that growth in the non-traditional products space, with products such as cosmetics, food processing, and building and construction materials, could most effectively diversify the economy and create jobs. We find that manufacturing has the potential to very quickly create many jobs and grow the value chain extensively. Based on those findings, we undertake further deep-dive value chain analyses of the products and sectors identified. We then further identify promising SMEs whose growth would drive the development of the value chains. The selected firms undergo a comprehensive diagnosis of their business models, processes, operations, and governance, which forms the basis of our bespoke interventions to support them to scale, become investment-ready, and integrate into the value chains of bigger enterprises. Ultimately, this leads to the growth of entire value chains.
The first cohort of ABT businesses was admitted one year ago – what can you tell us about the 10 SMEs and their ‘transformation journey’ thus far?
Odoom: With our technical partners, we have performed a diagnostic analysis on each of the companies, and this has yielded a lot of insights. Some of the issues that were uncovered were expected. Some also came as a surprise even to the CEOs themselves. For example, Maxtachem, a cosmetic manufacturing company has had issues with floor space, which was an obvious challenge. However, the technical review provided an opportunity to undertake a redesign of the production floor layout and process, to increase efficiency without an immediate rent expenditure for a bigger space. Homefoods, another ABT SME, also received technical support for their factory floor layout. The company produces palm oil and vegetable oil, which is an expensive and time-consuming process. We identified some equipment and process improvements that can lower the costs and complications of producing both oils simultaneously. Once our recommendations are implemented, they will be able to seamlessly produce both products on the same production line.
Generally, we found that the diagnosis process helped CEOs appreciate how certain issues impact their performance. Going forward, we will provide tailored technical support, which will increase the efficiency of their production lines, improve their governance and management structures, and help them become more attractive to investors. The program is not just helping the businesses, it is also improving our understanding of how SMEs function in these different markets, and what their needs, challenges, and opportunities are. This is helping us provide more holistic support to African SMEs.
Based on the existing research that you’ve done and your experience with ABT, what are the main challenges that SMEs face in Ghana and Africa?
Odoom: Challenges facing SMEs in Ghana are similar to those faced by companies across the continent. The most significant obstacle is financing. Access to finance is a major issue, and even when SMEs do have access, the cost of financing is prohibitively high. For example, in Ghana, SMEs are usually not the type of clients a traditional bank will lend to. And while banks might offer interest rates between 17-25%, non-bank financial institutions offer much higher interest rates, between 40-120%. Secondly, most SMEs operate at a lower equilibrium, with limited adoption of modern technologies and sophisticated business processes, which means SMEs have difficulty remaining competitive – especially with a lot of international competition. Thirdly, weak legal and regulatory regimes affect the growth of small firms. Startup costs are very high, and it is expensive for companies to maintain compliance. A fourth issue is the poor state of infrastructure, which leads to difficulty accessing raw material and high utility costs, driving up production costs. Lastly, there is a major lack of access to market intelligence. Small businesses do not have a repository of intelligence available to them, even where they want to pay for it. Very few institutions are gathering the data and even fewer are making them available at a cost that is manageable for smaller firms.
What opportunities will the African Continental Free Trade Area offer small businesses in Africa?
Odoom: One of the main benefits of the AfCFTA is the opportunity for African businesses not just to expand and enter into other markets, but to do so with increased cross-border collaboration. This will allow smaller businesses to leverage each other’s capabilities to bring services and products to new markets within Africa. With the SMEs in ABT, we look beyond financing and help companies to be properly set up in a way that allows for more collaboration, for instance through international joint ventures. By helping these companies to be well structured and shoring up their capabilities, they are also able to collaborate with companies outside of Ghana to maximize their markets and growth ambitions.
Is there something that policymakers can do to support SMEs and entrepreneurs to deal with the current global economic headwinds?
The current headwinds present both challenges and opportunities for the private sector in Africa. For example, if we look at the shortage of flour on the African continent, there are substitutes for imported wheat flour that African businesses could quickly produce themselves. Already, some of the baked goods in the local markets contain locally produced cassava flour. Another example is the rapidly rising energy costs, which could be offset if countries with access to raw materials rapidly ramped up their refinery capacities. Local production would temper the cost of fuel and energy and allow manufacturers to produce more competitively. But companies will need access to financing to make this happen. Policymakers should provide incentives to drastically enhance the availability of both local and international financing, so that these companies can take advantage of such opportunities.
It is also time that governments provide subsidies to support companies that have the potential to rapidly innovate. One way to do this is by strengthening national development banks – the new National Development Bank Ghana is a great example, but there are other opportunities around the continent. PSD just published a series of case studies examining the role of national development banks in driving economic development, which contain recommendations for policymakers that are perhaps more urgent now than ever before.
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