BUSINESS WORLD Meeting the Challenge of Attracting Investors—Foreign and Diasporan Posted by Omotunde E. G. Johnson, PhD (econs.)Freetown and McLean, Virginia on Apr 16, 2008, 02:49

One hears these days a lot of discussion about making Sierra Leone attractive to investors, running Sierra Leone as a business establishment, and attracting Sierra Leoneans with money and entrepreneurial capacity, in the Diaspora, to come home and invest to help their dear country. First, I shall make some general remarks about the bottom line for investors. Second, I shall give a brief overview of reforms that help attract investors, with a view to narrowing down the challenge that Sierra Leone faces at this juncture. Finally, I shall turn to aspects of three of the four factors that I believe are among the priorities right now for Sierra Leone, namely, skills development (as part of development of human capital), removing administrative barriers to investors, and fostering greater cooperation, innovation, and export orientation in business. The fourth priority is, of course, improving infrastructure, but I will not address it here since it is the least ignored of the four in popular discourse in Sierra Leone.

Investors’ Bottom Line

The objective of investors is to earn the highest return they can for any given risk. That is, they look at both likely profit and the risk associated with it. Investors make up their minds as to where to put their money by looking at the real world evidence on these two elements.

To convince investors one must find a way to demonstrate to them that after controlling for risk they would be better off with their money in good old Sierra Leone than anywhere else. One can accumulate the evidence to show investors from data of profits being made by other businesses currently operating in Sierra Leone. When the data are not there, the challenge is harder. For in that eventuality, one must convince the investors that under the conditions that currently prevail or that will prevail from the near to the foreseeable future, an investor is best off with his or her money invested in Sierra Leone.

The investors could be told and shown the current conditions in Sierra Leone, and told the conditions that the government will ensure in the near to the foreseeable future. Then the government must find a way to make the investors believe—in other words trust—the information about the future being supplied by the government. A lot of thought and strategizing will be required here. Otherwise, the investors will revert simply to the history (near and distant) of the country, in assessing the credibility of the government’s information.

Reforms that Matter for Attracting Investors

If the policymakers in Sierra Leone are given a few minutes and asked to reflect on the sort of environment that would convince businesses to take a serious look at Sierra Leone, they would agree on certain microeconomic, macroeconomic, institutional and organizational reforms. They would then most likely argue that the government has indeed been implementing such reforms. In other words, in selling Sierra Leone, the government will try to convince the investors that Sierra Leone has been making efforts over the last five to eight years (and in some cases even longer) to:

•improve macroeconomic stability;

•liberalize markets—commodity, financial, foreign trade, and foreign exchange;

•create an investment-friendly taxation system;

•raise human capital (health, education, skills);

•reduce political instability;

•minimize the risk of expropriation of property;

• reduce government corruption and raise government efficiency in general;

•increase domestic saving and enhance development of capital markets and financial           infrastructure;

•promote development of physical infrastructure; and

•reduce administrative barriers to investment.

The question will then be: if Sierra Leone has made all these efforts, then why is private investment not flowing in, outside of the mineral sector?

To answer such a question, traditionally, economists will look for evidence that the reforms have not gone far enough. They will also look for evidence that the sustainability of the reforms is not sufficiently credible to investors. They will, in addition, look for evidence in credit ratings that Sierra Leone is still perceived by investors as high risk, despite the liberalizing and other reforms. Not so strange, many investors, especially those being approached by Sierra Leone’s promoters, will look for the same evidence, for they will be trying to answer the same question. Why? Because investors would want to know if some profitable territory has been ignored, and hence wealth waiting to be captured. 

I would like to focus on two of the items listed above that are extremely important for investors but which I fear are not being given adequate attention, namely, skills development and  removing administrative barriers to investors. Then I will introduce another element which is important in determining the quality of the investment that Sierra Leone will be able to attract and hence worth serious attention. This third element is: fostering greater cooperation, innovation, and export orientation in business.

One of the more interesting findings in the economics literature on growth is that the productivity of investment outside of the mineral and oil sectors appears to be on the low side in Sub-Saharan African countries for which the data exist. This implies two sad things: one is that raising the rate of investment is not going to give as much growth as would otherwise occur; the other is that the low rate of return that is implied by the low productivity of investment discourages investment inflows of the sort that Sierra Leone wants to see. If Sierra Leone government policy focuses on the objective of raising the productivity of investment in Sierra Leone, they will kill two birds with one stone: they will raise the rate of growth and they will have credible evidence to base their selling package to investors. Focusing on human capital (especially skills development), physical infrastructure, reducing administrative barriers to investors and fostering greater cooperation, innovation, and export orientation in business will at this juncture do the trick. This of course, assumes that all the good work that has been done on the macroeconomic side and on political stability will continue.

Skills Development

Youth unemployment and underemployment is the most serious socio-political-economic problem facing Sierra Leone today. And yet, a clear coherent strategy to address the problem is not apparent. There is a great need for technical and vocational education and training (TVET), at the same time that the government is heightening its efforts to attract and promote the private businesses that will gainfully employ trained workers, mainly the youth.  The authorities of Sierra Leone need to develop a coherent programme of skills development and organize to implement it resolutely.

Good quality basic education is a necessary foundation for skills development (TVET). This means that adult education should be an important ingredient, since the unemployed and underemployed youths lack basic literacy and numeracy skills.

Technical and vocational education and training should always be responsive to the market. Hence, the labor market must be understood. TVET and government initiatives must be coordinated with business response, and curricula of training courses must respond to market demands.

An appropriate institutional and organizational environment needs to be put in place. Encouraged in this environment are governance arrangements that foster cooperation of government, business, and other non-government trainers. Establishing some national deliberating and coordinating body and a national training authority would be useful. The issues to be decided by the deliberating and coordinating body would include:

•the role of government in technical and vocational education and training (TVET);

•the financing of TVET whether provided by government, for-profit trainers, non-profit trainers, or private businesses employing the trainees;

•what sort of vocational training should be added to academic curricula in regular schools; and

• how to organize and implement, systematically, skill development for the informal economy.

No doubt, Sierra Leone will not be coming from scratch on any these issues but there is a lot of knowledge that has been accumulated, based both on theory and global experience, from which Sierra Leone can benefit.

Government, for instance, can be important in providing labor market information to trainers, and in removing skills bottlenecks in the economy by providing skills training in priority areas where nongovernment providers are reluctant to invest and/or financing some skills training irrespective of the trainers. Unfortunately, in practice, public systems of skills development in Sub-Saharan Africa have often failed to adapt to changing economic environment and so have had problems with respect to relevance and quality. Quality shortfalls too often result especially from lack of appropriately qualified instructors and budgetary constraints.

Government also can play a role in increasing access to skills of the poor and economically disadvantaged; in supporting associations of trainers to set standards and enforce them; and in supporting development of training markets, especially via efficient financial assistance, oversight, and appropriate legal framework. Indeed, government can be proactive in developing policies, setting standards, investing in training materials and instructors, improving public information about the training system, and carrying out evaluations of training.

In the area of financing of TVET, there is a huge literature on the various devices: payroll levies on employers in conjunction with grants for training (levy-grant system); tuition and other fees paid by enterprises or trainees; production and sale of goods and services by training institutions; community support and donations; government direct budgetary assistance and tax concessions.

When the government is involved in implementing a programme of finance, there are issues of general administrative capacity to do so, especially the ability to ensure compliance, minimize diversion and misuse of funds, and not allowing the financing methods to compromise the quality of the training. In general, also, each of the financing methods has issues relating to equity and efficiency.

Similarly, on training for the informal sector, issues such as the role of traditional apprenticeships and informal sector associations, financing on the demand side via vouchers, and the advantages of short duration courses, are all issues that have been widely discussed, based on theory and experience, including in Sub-Saharan Africa. Sierra Leone can benefit from this discussion and experience. The World Bank, for instance, would be quite happy to help Sierra Leone in finding out the nature of this theory and experience.

Administrative Barriers to Investors

I am convinced that much more could be done in reforming the system in the area of administrative barriers to investment, namely, ameliorating the barrage of licenses, approvals, permits, and other requirements that raise the costs of setting up and doing business in Sierra Leone.

The country will do well to invite the Foreign Investment Advisory Service (FIAS) of the World Bank Group to come in and do a study on the administrative barriers facing investors in general and foreign investors in particular. Alternatively, FIAS has produced several occasional papers that are quite accessible technically. A study of key ones should enable the policy makers in Sierra Leone to find persons in Sierra Leone to apply the same methodology in assessing the situation in the country. FIAS has studied a lot of countries around the world and helped many to reform in this general area.

Registering companies can be time-consuming because of problems like: unavailability of forms in the proper offices, large number of forms requiring completion, absence of facilities for registration outside the main towns or sometimes outside the capital, requirement that company statutes can be prepared only by certain specific accredited persons, and demands for large supporting documentation. Foreign investment registration can be even more tedious for various reasons, including additional information about the foreign shareholders and minimum capital requirements. It is not clear to me what all the facts are in Sierra Leone but the word is that the procedures are tedious.

Special investment incentives to attract foreign-owned enterprises, which in addition appear to be negotiable and available only to qualifying firms as defined in legislation, are another source of problems. There are all kinds of issues raised, apart from merely the delays and corruption they can engender. The economic rationale for these incentives needs to be carefully thought through. For me, they are invariably suboptimal and harmful to the development of the country. Any socially valuable benefits they yield could be achieved via other instruments.

In Sierra Leone, customs and ports procedures tend to be unnecessarily complicated and often nontransparent.

The institutional environment and requirements governing industrial relations and social security also need to be re-examined to make sure they are not unnecessarily burdensome to achieve their social benefits. For example, one could look at reporting and other requirements of the National Social Security and Insurance Trust, and industrial relations legislation.

Apart from general approvals, licenses, and registrations, additional requirements and  authorizations to do business in areas such as broadcasting and media, financial services, fishing, forestry, health services, pharmaceuticals, mining, tourism, transportation, and utilities, to ensure that certain public policy objectives are being achieved, should be re-examined. Some of the requirements and authorizations may be unnecessary. More importantly, many potentially useful ones may be too complicated as set out, vague, and nontransparent or difficult to enforce, and thus encourage corruption, lack of enforcement, and/or discouragement of investors.

Greater Cooperation, Innovation, and Export Orientation in Business

In order to raise the productivity of investment and the quality of investors attracted to Sierra Leone, both being positive for the long-term growth prospects of the country, I would suggest that the policymakers foster greater cooperation, innovation, and export orientation in business. This is not the place to attempt the full development of this big topic. My intention here is merely to draw the attention of the interested reader to issues worth serious thought and immediate policy action by the Sierra Leone authorities. Again, this is all consistent with the current state of knowledge in this general area.

In the global world of today, of importance are innovation systems, clusters, and global value chains, to be clarified below.

The Sierra Leone authorities should be proactive toward understanding and nurturing a national innovation system. A national innovation system is the set institutions, organizations, and mechanisms supporting technical innovation in a country. It involves cooperation among universities, businesses, and government. Action plans that are resolutely implemented are often useful. But the cooperation can be spontaneous as well. The international experience is that, for economic growth and development, strong firms are key. Such firms are typically central players in innovation systems. But government and universities are also very important. In fact, in many countries (industrial and developing), government laboratories play an important part in the national innovation systems as do the modern research universities.

Clusters are agglomerations of enterprises and when they work well, they help such enterprises innovate, upgrade their processes, products, and functions, and join global value chains discussed below.

  Clusters are observed everywhere in the informal sector in Sierra Leone. If you want jelly coconut in Freetown you know where to go. If your wife wants to find a lady to do her hair, African style, she knows where to go. In arts and crafts, clusters are also pervasive, including those constructed by government action, such as Big Market and Victoria Park. But alas, one does not see the collective efficiency that is a major advantage of the best clusters in the world, and one certainly does not see innovation. Technology stays constant, no serious standards are set (benchmarking) that the businesses in the clusters have to meet, business services to the clusters (accounting, credit, etc) are absent, and even where they could develop export capacity one does not see any concerted effort in that direction.

Now, as regards global value chains, one can think of production as comprising a ‘chain’ of activities that begins with the conceptualization of the product and ends with taking the product to market. The concept of a ‘global value chain’ highlights not only the fact that the different activities can be performed in different parts of the globe but also the value addition that is created at each step. Each activity in a chain adds value to the final product. The highest returns generally go to those who control the network. For the others, this may be the easiest way to start benefiting from globalization.

A major objective of those at the lower end of the chain is upgrading.  Four types of upgrading have been identified in the literature and listed in the order they fall in the usual upgrading path, namely: process upgrading, product upgrading, functional upgrading, and chain upgrading.

Process upgrading increases the efficiency of internal processes, making the firm more competitive in making existing products. Product upgrading involves introducing new products or improving old products. Functional upgrading involves increasing value added by changing the mix of activities conducted within the firm, or moving from low-return activities to high-return activities. Chain upgrading is moving to a new and more profitable chain.

The government could: do something about skill development in the clusters, encourage process and product upgrading, and where possible encourage formal businesses to associate with informal clusters. Innovation can be encouraged through linkages with some elements of a national innovation system, through government assistance in the absence of formal business leadership.

The Sierra Leone government itself introduced a constructed cluster in Wellington—the Wellington Industrial Estate. It has not been a success, and has certainly not been an innovative cluster or export-oriented. Government should revisit the idea, making use of all the accumulated knowledge in the world of how to promote and make sure that firms benefit from collective efficiency of being in clusters that are also innovative.

Government can do a lot in promoting export-orientation of businesses. Export oriented firms tend to be strong firms and innovative, since otherwise they lose ground in the global market place. Even an Export Processing Zone or Industrial Park idea can be beneficial as part of an export promotion strategy. The challenge of such constructed clusters is to ensure sufficient cooperation and innovation within the clusters to make them big contributors to the development process. Export promotion activities would also involve finding ways for Sierra Leone firms and clusters to join global value chains in ways that favour strong incentives and possibilities to innovate and upgrade. Sierra Leone can benefit from the several decades of world-wide experience in these areas.