ADF IV PRIVATE SECTOR AND GOVERNANCE FOCUS GROUP

ISSUES PAPER

Introduction

In any modern economy, the pace of private sector development will be significantly affected by the prevailing standards of corporate governance. But these standards are particularly important in African countries because of the need to attract foreign investment. While there are many other impediments to the flow of capital into Africa, such as inadequate information about local business prospects, one major reason is the widespread negative perception of corporate governance in African countries as compared with that in alternative investment destinations.

The New Partnership for Africa's Development (NEPAD) advocacy for pro-active public-private dialogue and partnership in advancing a value-added production culture is timely. It will, however, involve heavy investment in labor at all levels and mutually beneficial business relationships at the continental and international levels to attain such goal. Goals for the partnership include:

• Formation of strong African private sector associations with a special focus on small and medium-sized micro-enterprise development;

• More focused and integrated public-private partnerships in sponsoring home-grown national and regional development strategies;

• Reliable and dependable information and analytical interfaces between the African private sector, international business and capital, and the NEPAD Secretariat;

• Timely, credible, structured, comprehensive and usable information on business opportunities to advance private sector development;

• Regional integration efforts more focused on building productive capacity, as opposed to an overemphasis on trade.

The memorandum of understanding on the African Peer Review Mechanism (APRM) that was adopted in March 2003 at the sixth summit of the NEPAD Heads of State and Government Implementation Committee acknowledged the challenges that face the continent in relation to corporate governance. The document recognises the need for openness in Africa's international trade and investments and for new partnerships between government, the private sector and civil society. There are priority codes and standards-designed to achieve market efficiency, control of wasteful spending, consolidation of democracy, and larger private financial flow-in such areas as: monetary and financial policies; fiscal transparency; budget transparency; public debt management; corporate governance; international accounting standards; international standards on auditing; and effective banking supervision.

In the area of corporate governance, key objects include: a) the provision of an enabling environment and effective regulatory framework for economic activities; b) ensuring that corporations act as good citizens with regard to human rights, social responsibility and environmental sustainability; c) promoting the adoption of codes of good business ethics (e.g., the Cadbury and King codes) in achieving the objectives of the organization; d) ensuring that corporations treat all their stakeholders (shareholders, employees, communities, suppliers and customers) in a fair and just manner; and e) assuring accountability of corporations and directors.

In response to appeals for good governance, the Africa Business Round Table (ABR) is putting together, with assistance from a number of international organisations and agencies, a rating system by which to judge eligibility for the award of a Seal of Good Corporate Governance. This project aims to establish continent-wide standards of good corporate governance that will apply throughout the business landscape. The intention is to set out appropriate standards, obtain general approval for these, train corporations in their application, and measure compliance with them. When fully implemented, the project is expected to give African private enterprise a unique gateway to international markets, attract major inflows of foreign direct investment, develop strategic partnerships with world-class corporations, and be recognised as a central feature of the NEPAD initiative.

Objective of the Focus Group

The purpose of the Private Sector and Governance Focus Group is to take up the processes and structures necessary for creating a corporate governance architecture that encourages a strong and vibrant private sector. It will examine policy and regulatory frameworks, means for combating corruption, business standards and codes of conduct, and public-private partnerships.

Key Issues

1) The setting of standards

Any system which formally evaluates African corporations for quality of governance must aim for a certain balance between rigour and achievability in the standards it applies. On the one hand, its method of judging needs to be sufficiently rigorous: potential foreign investors need to be convinced that a positive evaluation is sound and reliable. On the other hand, it should try to ensure that its demands are fair and sensible by taking into account the actual capacities and circumstances of African enterprises, and the requirements it lays down should be such that compliance is not too difficult to verify. One therefore needs to ask:

• How is such a balance to be struck? Is the ABR's system promising in this respect? What specific proposals would it do well to take on board?

• Is there a danger that corporate bodies will not be sufficiently motivated to comply with the standards? What is suggested by the record thus far?

• How far can countries be fairly and reasonably assessed in their compliance with the listed set standards for corporate governance?

• More generally, when is it appropriate to tackle poor corporate governance via incentive schemes, and when via the penalties of law?

2) The role of governments

It is generally accepted today that the first task of governments in relation to the national economy is to provide, as far as possible, a sound macroeconomic framework to stimulate sustainable social and economic development. But certain questions of interpretation may be raised:

• Is there adequate recognition of how important a part of this task it is to improve standards of corporate governance? If not, how is such recognition best to be promoted?

• What specific measures are vital in stimulating domestic and external investment?

• How much of the material and technical prerequisites for good corporate governance can African governments be expected to provide, or assist with?

• What else can realistically be done to curb corruption?

3) The intra-African perspective

One of the numerous factors contributing to the low level of cross-border trade within Africa is the ineffectiveness of domestic policies in the area of market access/pricing and of incentive mechanisms. And one problem that stands out is the lack of streamlined, harmonized and enforceable regulatory mechanisms to integrate cross-border business dealings and trade. Answers are urgently needed to the following questions:

• How can intra-African trade and investment be speedily advanced beyond regional protocols and policy enactments?

• If, as the EU experience suggests, policy harmonization is an important prerequisite for sound regional corporate governance, what are the challenges facing the African continent in this respect?

Conclusion

These are some of the issues that the focus group will need to consider before the ADF IV in October 2004. The group's agreement on key areas of concern, and consensus on recommended actions, is intended to guide the plenary deliberations, with other stakeholders and selected heads of State, at the Forum itself.