Tag Archives: investment

Growing Pains or Insurmountable Odds?

south-sudan-un-refugees

South Sudan just successfully hosted one of the largest events in the country’s short two-year history. On December 4 and 5 an impressively diverse crowd of potential investors and business owners from more than 60 countries came together in the capital Juba for the South Sudan Investment Conference, titled “Investment for Economic Diversification and Prosperity.” With more than 800 people registered to attend the two-day event, and at least 500 actually in attendance, observers and participants alike were relatively pleased that the event was carried out with only a few hiccups.

Logistically, it was just shy of a miracle. With only one major paved road in the entire country, a nascent hospitality and service industry, and a lack of local transportation options, it is noteworthy that an event of this magnitude even took place.

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Lights Out for Business

A man cooks by candlelight at a small roadside shop. (Photo: AP)

For the last several days, half of India’s population — HALF — has been without electrical power. That’s 600 million people, twice the population of the United States, trying to keep on about their lives without lights, public transportation, or utilities. That’s tens of millions of businesses losing income, product, and potentially livelihoods.

Last month a powerful, fast-moving storm called a derecho disrupted power for hundreds of thousands of people in the Washington, DC area. We all complained mightily, but most suffered little more harm than some spoiled food and a few days without air conditioning. In many places around the world, including India, a few days without power is not at all unusual. In fact, daily brownouts or blackouts are sometimes the norm. Many established firms and wealthy individuals adapt by installing batteries or generators — a drain on the economy. But how can small and medium-sized businesses and entrepreneurs survive and thrive in such uncertainty?

When power is unreliable or inaccessible, businesses and businesspeople suffer. An appropriate, adaptable infrastructure is crucial for economic development and growth, and governments must make it a priority. Investing in infrastructure doesn’t mean simply that the lights stay on. It means that power is available for offices, factories, schools, and hospitals. It means that roads are clear and available to transport goods and services. It means that water is clean and accessible for public consumption, as well as for manufacturing and agriculture.

Infrastructure is not cheap, and many nations believe they have more pressing needs. As India swelters in the dark, however, it is worth remembering that investing in infrastructure is worth it.

The great race for independence: the private sector in Kurdistan

Go cart racing in Erbil. Photo: http://bolen88.files.wordpress.com/

On a recent trip to the Iraqi Kurdish region, my friends invited me for a night out in Erbil.

Having been to Erbil many times, I thought I knew the drill. If lucky, I would go out to a nice restaurant. I would sit at a white table parked on lush, green grass. There, I would eat terrific kabobs until my heart was content. Sometimes, I would eat so much maskouf that my stomach would beg for mercy. I would drink coffee, listen to music, and make conversation.

While these relaxing nights cemented some of my closest friendships, I had never come close to using the words exhilarating or thrilling to describe a night out in the Kurdish region. On my last trip, that changed.

We headed out to Erbil Speed Center, a sprawling course of go kart race tracks adjacent to an upscale housing subdivision called Dream City. There were three types of go karts available and kilometers worth of tracks as wide as highways. Upstairs, there was a full restaurant and bar.

I popped on a helmet, thankful for once that I no longer have to worry about helmet hair, and strapped myself into a kart. Driving along so many others, so unsteady in these imitations of automobiles, was terrifying. I zipped around the track, laughing much of the way.

Having lived in Washington, DC for so long, I had forgotten that driving can be fun. More importantly, driving fast can be very fun. Driving on a world-class course that symbolizes the Kurdish region’s fast track to a better future, however, was nothing short of exhilarating.

After taking off my helmet and catching my breath, I pondered the future of a region that is changing so quickly. Indeed, there is a race underway in the Iraqi Kurdish region.

Above ground, the Kurdish private sector is flourishing. Often referred to as “the other Iraq” because it has been relatively unencumbered by the instability that has plagued the rest of the country, the Kurdish region has been a magnet for post-war investment. Joining the Erbil Speed Center are new stores and restaurants opening every day.

Already a vibrant national tourist destination, replete with brand new hotels and tourist operations, the Kurdish region appears poised to become an international attraction as well. This year, National Geographic named the region one of the twenty most enticing tourist destinations of the year. When a Washington Post reporter visited to confirm the region’s charm, she noted that in Erbil “businesses are flooding here to gain a foothold, and tourists from the rest of the country swarm here to shop in the rapidly proliferating malls and to eat and drink in safety at the restaurants, bars and outdoor cafes.”

The development of the region’s private sector is a good thing for its people. Throughout the Middle East, Arab populations have been rising up against their governments because those governments have largely denied them the ability to achieve dignity through high value employment. If granted the proper environment in which to develop, the Kurdish region’s private sector appears poised to offer that dignity.

Its ability to do so, however, may be under threat. In 2007, when the semi-autonomous Iraqi Kurdish Regional Government enacted an oil law allowing it to sign agreements with foreign companies and profit from them, it set off a race that could determine the fate of the Kurdish region. The Kurdish Regional Government’s budget will grow rapidly. The question remains whether the private sector can grow fast enough to keep pace.

Thus far, disagreements with Baghdad and growing pains in its technical capacity have limited the Kurdish region’s ability to generate significant oil revenue. That it will one day do so, however, seems clear. When former BP CEO Tony Hayward’s investment firm Vallares Plc announced that it was making a $2.1 billion investment in the Kurdish region of Iraq, he called the region “one of the last great oil and gas frontiers.”

Indeed, the riches under the ground that have investors salivating will soon pump the government full of cash to spend. This year, the budget for the Kurdish Regional Government sits just below $10 billion. Next year, some have predicted that it could nearly double. Whether that cash will benefit public officials or the Kurdish people holistically depends on whether the private sector can grow strong enough to compete.

Already, the government has used some of that revenue to benefit businesses in the short term. For example, the government has offered businesses no-interest loans, subsidized electricity and water, and even provided free land for those that fit the government’s strategy of development. Many businesses, noting the deluge of subsidized Turkish and Syrian goods entering the region, argue that this assistance is crucial if Kurdish enterprises are to survive what they perceive as a dirty fight. Some businesses have even argued that the level of their own subsidization is insufficient.

The danger, of course, is that these training wheels, designed to get Kurdish businesses moving, could become crutches as businesses become dependent on the handouts of an ever richer government. At this point, currying government favor would likely become more important to success than elevating efficiency and competitiveness.

The private sector, which in well-functioning democracies serves to provide job opportunities independent from public office, could become a supplicant. Waste, inefficiency, and misallocation of resources could stunt the economy. Corruption and abuses of power could destroy what could have become a promising democracy.

Of course, this dark scenario is not inevitable. It is certainly possible that businesspeople and public officials will determine at some point that the threat of Turkish and Syrian goods no longer merits the danger of resource misallocation posed by subsidies. Iraqis in the Kurdish region might also determine that their lives are better if they are served by a private sector that exists to meet their demands, such as the demand for a well-maintained go kart course, not to lobby for government subsidies.

Creating an environment that enhances the long-term competitiveness of Iraqi Kurdish regional firms will require the cooperation of the private and public sectors. A competitive, free market economy requires institutions that protect property rights, ensure secure contracts, facilitate freedom of entry and exit into the market, and assure freedom of information. The rule of law is essential in ensuring that laws and regulations are applied consistently and fairly to all citizens.

In addition, we’ll also have to see a change in the mentality of companies, where they demand a more competitive institutional and business climate that gives them a fair chance to grow and develop rather than hand-outs and protections from the government.

Currently, CIPE is working with a range of private sector and civil society organizations to identify the specific needs and opportunities facing Iraqi Kurdish regional businesses. These partners are in the process of drafting a provincial business agenda to articulate the needs of the full range of the private sector to government. By working together with the private sector, policymakers can help create an environment that fosters competitiveness and ensures that the growing Kurdish Regional Government is accompanied by a strong, independent, and increasingly competitive private sector capable of delivering the prosperity that its citizens need.

The Kurdish region remains appealing to investors for reasons that have nothing to do with oil. That means that Kurdish regional businesses still have ample chance to grow faster and stronger than their government’s budget. If the Kurdish region is to have a healthy economy and democracy, they must.

A tale of two tax systems

 

AFRODAD
(photo: AFRODAD, “What Has Tax Got to do with Development”)

Taxation plays an important role in democratic governance and market economies. Tax revenue finances social and physical infrastructure. It reinforces national sovereignty. When coupled with good governance and institutions, it ensures that the costs and benefits of development are felt across society.

In two reports, each titled “What Has Tax Got to Do with Development,” The African Forum and Network on Debt and Development (AFRODAD) examines the tax systems in Zimbabwe and Mozambique. The reports paint two very different pictures, as one familiar with both economies might imagine. One of the major problems for Mozambique’s system is that it differs greatly between smaller national businesses and larger foreign firms. On the other hand, Zimbabwe’s biggest obstacle is monitoring business transactions and informal sector activities.

By the letter of the law, the tax system in Mozambique is not discriminatory for national versus foreign companies. In practice, however, it makes the national private sector less competitive than ventures with foreign investment.

Eighty-five percent of private investment in Mozambique comes from foreign sources who then receive tax benefits, such as duty exemptions and profit exports. The majority of the population, however, never feels the positive effects of that investment. Since foreign actors have tax exemptions for imports, they tend to import raw materials and export profits. Meanwhile, national companies do not get to enjoy these tax incentives, even though their growth would contribute to employment and use of national production inputs.

In Zimbabwe, state-owned enterprises and publically-established corporations (including the National Oil Company of Zimbabwe and the Minerals Marketing Cooperation Zimbabwe) are exempt from tax. There are also more than 100 categories of tax-exempt products which do not necessarily shield vulnerable groups from onerous tax obligations.

Because of rampant corruption in the government, many Zimbabweans are also reluctant to pay taxes since they believe their money will eventually wind up in the pockets of corrupt public officials. Furthermore, it is often easier to pay a bribe to a tax official rather than to pay the actual tax itself. There is no “culture of tax” among individual citizens and private sector actors alike, and the Zimbabwe Revenue Authority (ZIMRA) fails to effectively monitor business transactions in its sizeable mining sector.

The informal sector represents 60% of all businesses in Zimbabwe and remains the biggest obstacle to broadening the tax base. It is also problematic that while Zimbabwe has a Tax Steering Committee — consisting of representatives from the ministry of finance, ZIMRA and private sector actors — the informal sector is not represented in this group.

With regards to investment, AFRODAD was not able to fully research Zimbabwe’s experience with providing tax incentives for foreign investment because ZIMRA and the Zimbabwe Investment Agency refused to disclose relevant information. It is generally understood, nevertheless, that tax incentives to attract investment have had limited benefits for Zimbabwe. For example, one company that benefitted from exemptions to the Zimbabwe export processing tax incentive for manufacturers was not, in fact, a manufacturer.

Overall, Zimbabwe must broaden the tax base, simplify tax collection, and improve government legitimacy in the eyes of its citizens. In Mozambique, not only does tax avoidance and evasion remain an obstacle, but available data also shows the country is also losing money due to fiscal incentives that do not result in real benefits for the majority of the country.

As these two cases and some of our other blogs show, there are various types of tax problems that developing countries can have. Perhaps as a result of this, mobilizing domestic revenues has been neglected as a strategy for development, as many countries are either pessimistic about the potential of domestic revenue, prefer a small-state apparatus to a larger one, or seek foreign aid to fund solutions. That, however, may be changing. Perhaps more research like the AFRODAD reports would be useful to expose the major obstacles and point to the solutions in tax for development.

Understanding emerging markets

Even before the recent economic downturns in Western economies, investors and international development professionals have been interested in emerging economies. The BRICs – Brazil, Russia, India and China – have commonly been the focus of discussions about emerging markets but that is changing and the definition of emerging markets is expanding. For example, the Financial Times’ BeyondBRICS section covers countries as diverse as Turkey, Poland, South Africa and Thailand. Many African economies are on the rise as well, though governance and institutional challenges remain.

The language used in conversations about emerging markets is also fascinating. “Developing countries,” sometimes exclusively perceived as desperate places where people depend on humanitarian aid for their survival, transform into “emerging economies,” regions with untapped potential where innovation can thrive.

In many emerging markets, however, political instability and poor governance remain major obstacles, repelling investment that drives growth. A lack of transparency and poor governance within local businesses themselves also deter international investors.

To explore those and other issues crucial to the development of emerging markets, George Mason University in Virginia recently established the Center for Emerging Market Policies  (CEMP) as a hub for research and teaching on international commerce, economics, and public policy issues relating to emerging markets. In this Economic Reform Feature Service article, Co-directors of CEMP Andrew Hughes Hallet and Sonia Ketkar explain why adherence to good corporate governance practices affects foreign investment and growth; the rise of country-specific solutions for political and economic reforms; and the prevalence of public-private partnerships in infrastructure development.

Article at a Glance

  • The rise of emerging markets is increasingly shaping the global economy, the relationship between developing and developed countries, and development policies of countries and donors alike.
  • As emerging markets strive to attract more foreign investment and expand abroad, they face a number of institutional challenges stemming from often weak governance and market structures.
  • In addressing challenges to emerging markets’ growth, focus is shifting from universal policy prescriptions towards country-specific solutions.

Read full article here: http://www.cipe.org/publications/fs/pdf/091511.pdf

Why golf?

Photo: www.safariegypt.com

On a normal day I would characterize my golf game as frustrating and borderline embarrassing. On the best of days I hit shots that save me from being embarrassed, but I am still frustrated by inconsistent play.

After a recent outing in which my score approached something similar to Gabon’s ranking on the Economic Freedom Index (in case you don’t have Gabon’s ranking memorized), I asked myself for the thousandth time, “Why in the world do I continue to play this sport?” My virtuous response…golf is good for the economy.

According to the most recent Golf 20/20 report which measured the U.S. golf industry in 2005, golf was responsible for 2 million jobs in the United States and generated $76 billion of goods and services. That makes the golf industry larger than performing arts, spectator sports, and the motion picture and video business.

At the local level, if a community is lucky enough to host a Professional Golfers’ Association (PGA) Championship, the economic impact for that region averages between $40-80 million. Exposing these figures may help eliminate the long-held belief that golf is a sport which only benefits the rich – both recreationally and financially.

In the United States, golf became popular amongst all social classes in the 1990s and the industry boomed as a result. Although golf still has a long way to go in shedding its elitist image, affordable courses can now be found in nearly every town throughout the country.

The National Golf Foundation reported that in 2009 there were 9,132 daily fee facilities (i.e. privately owned but provide public access) and 2,449 municipal facilities (i.e. owned by a tax-supported entity and open to the public). Compare this to the 4,398 private facilities that restrict play to members and their guests, and you see that Americans do have significant access to the game of golf even if they can’t afford a country club membership.

So we have access, but is golf really affordable? The average green fee for 18 holes in West Virginia and Kentucky (the cheapest places to play in the U.S.) was $34.20 in 2010. Still too pricey for some; but when you consider that the initiation fee for many private country clubs tops $100,000 – not including the monthly fee after becoming a member – $34.20 for four hours of outdoor recreation seems like a good deal.

In the developing world, however, golf remains a hobby for tourists and the local bourgeois. Specific statistics on the number of public vs. private golf courses in developing countries are hard to come by, but online searches generally show foreign golf facilities are only open to club members, tourist groups, and hotel guests if the course is associated with a hotel.

Based on the economic success of the game in the United States, other countries – particularly in Africa and the Middle East – are slowly beginning to pick up on the sport. Currently, 118 countries belong to the World Golf Foundation, whose goal is to grow the game of golf around the world. In addition to addressing challenges related to culture, climate, and resources, these countries must create golf industries that are inclusive if they want to popularize the sport and enjoy similar economic benefits.

It is clear that the golf industry can provide significant benefits for a country’s economy. The U.S. saw a boom once it popularized the sport for the masses and made it accessible to people from the middle and lower class. For countries looking for an economic boost, particularly in terms of job creation, golf seems to be a good option. The problem is that golf is available at expensive venues but remains out of reach for ordinary citizens.

Perhaps the 28.7 million golfers in the United States rationalize their golf hobby differently than me, but until my score tally consistently reflects Turkey’s Economic Freedom ranking and I am making money on the PGA Tour, I will just keep reminding myself how the golf industry benefits our economy. Hopefully other golfers around the world can soon begin saying the same thing about golf in their respective countries.

Is 2011 Ghana’s 1978? New National Pension Fund Scheme Could Repeat History

 

Traders work on the floor of the Ghana Stock Exchange in Accra, Ghana, June 15, 2006. (Photo by World Bank/Jonathan Ernst)

Editors’ note: this post originally appeared on Nextbillion.net.

1978. How many Nextbilllion.net readers weren’t even born yet that year? That was the year, for example, when Garfield the Cat made his comic-strip debut. Two Popes died that year. The Chinese government lifted its ban on works by Aristotle, Shakespeare, and Charles Dickens. Israel and Egypt made peace. Atlantic City, N.J. opened its first casino. 1978 also happens to mark the birth of today’s U.S. venture capital industry. 2011 could be that year for Ghana.

In 1978, the U.S. Department of Labor relaxed key provisions in the Employee Retirement Income Security Act, allowing pension funds to invest in private equity (PE) firms, including venture capital groups. The change caused a tsunami of capital to new and growing firms, as capital under PE firm management went from $39 million in 1977 to $570 million in 1978. Startup and growth capital in the U.S. has never been the same.

This year, key changes from Ghana’s 2008 pension law come into effect that might lead to a similar explosion in private equity and venture capital. The pension scheme is now mandatory for all public and private formal sector workers in Ghana; 13.5 percent of formal sector salaries will be deducted and placed under the management of Ghana’s Social Security and National Insurance Trust. An additional 5 percent of each formal sector worker’s salary will be deducted and placed under management of private institutional investors.

That 5 percent could be as much as $400 million annually for institutional investors, as Bloomberg News recently reported. About 25 percent of that will go into equities, implying $1.9 million in capital per week moving into a stock market with a current weekly turnover of only $1.8 million, according to the Bloomberg report. The rest of the estimated $400 million will go into local currency debt investments.

“The entry of new institutional investors is therefore expected to have a marked effect on the local equity market,” a local economist told Bloomberg. “The new fund managers are also expected to make markets more liquid, efficient and transparent, offer alternative sources of financing from local commercial banks and stimulate financial innovation.”

More competitive institutional investors and more liquid stock markets would be a boon for impact investors, who need buyers and liquid capital markets to make exits more frequent and more lucrative.

The new pension law also calls for a privately-managed voluntary pension scheme catering to the 80-plus percent of Ghanaians who work in the informal sector – i.e. Ghana’s BoP markets. Just imagine: retirement savings from Ghana’s BoP helping to finance Ghana’s new and growing businesses. Time will tell if the scheme will gain traction, but it’s tantalizingly close to reality.

Additionally, as workers never lose ownership of pension fund contributions, Ghana’s new pension scheme allows both formal and informal sector workers to use the value of contributions under private management as collateral to obtain a bank loan. The effect that has on bank lending to Ghana’s BoP still depends upon a range of other factors, but liquid collateral is a major step in the right direction.

There’s no guarantee that Ghana’s new pension law will produce the same results as the 1978 changes did in the U.S. Things could go smoothly for a few years until Ghana’s economy hits a rough turn, and if there were any weaknesses in the transparency or accountability of pension fund manager governance, operations, licensing or oversight, then the whole system could collapse. In a speech at the launch of the new pension scheme, Ghana President John Evans Atta Mills urged pending pension fund managers to take the lessons of the recent global financial crisis to heart.

Plenty of blog posts have provided glimpses of the development power of savings, including long-term savings for retirement, weddings, or funerals. Ghana’s new pension scheme builds on the power of savings, mobilizing capital domestically rather than channeling capital from abroad, and using local savings for much more than just microcredit or buying central bank bonds.