Policy Proposals Middle East and Affrica Keidanren Proposals for TICAD VII
With its rich reserves of natural resources, Africa has recently been enjoying rapid economic growth. Total GDP has increased roughly 3.4 times over the past 15 years, from US$632 billion in 2001 to US$2.1 trillion in 2016. Its population passed 1.2 billion in 2016, and is expected to exceed 2.5 billion people by 2050#1, potentially comprising a larger consumer market. With ongoing economic growth and the growing middle-income population expected in the future, Africa has even greater potential for the future.
Japanese companies have been aware of Africa's potential for many years, and have energetically pursued business in African countries, particularly in resource and energy development, infrastructure, manufacturing, and services. Japanese companies already have more than 700 operations bases in Africa overall. Through their various business activities, they have contributed to economic development, improving standard of living, creating jobs, and upgrading the African industries.
In addition to dispatching economic missions to Africa and actively engaging in dialogues with the leaders of African states visiting Japan, Keidanren has regarded the Tokyo International Conference on African Development (TICAD) as a valuable opportunity for promoting exchanges between Japan and Africa, and has played an active role since TICAD I in 1993. Keidanren dispatched the mission lead by the Chairman to TICAD VI, the first meeting held in Africa; in the TICAD VI Business Declaration, we gave strong support and endorsement to the idea of development based on African ownership and using the strengths of Japanese companies, and outlined our intent to build stronger partnerships for the sake of African development.
To bring together Africa's latent potential with the interest and ambitions of Japanese companies and industry, and to build stronger partnerships, a business environment is essential that will allow companies to do their business with less restrictions. This means removing the shackles on business mentioned in the proposal made at the TICAD IV Public-Private Roundtable Meeting: a mono-cultural economic structure over-dependent on natural resources, slow improvements in public safety and hygiene, and void of skill training.
At the time of TICAD VI, the Nairobi Declaration set forth three pillars for improving this situation: (1) structural economic transformation through diversification and industrialization; (2) resilient health systems for quality of life; and, (3) social stability for shared prosperity. However, the reality is that no major improvements have been seen since then. Considering these circumstances, continuing dialogue involving both the public and private sectors is vital to discuss the necessary policies based on the voices of business.
1. Visions for TICAD VII
1-1. Inclusive Growth through Innovation (Society 5.0 for SDGs)
Adopted at the United Nations summit in September 2015, the Sustainable Development Goals (SDGs) set out objectives to be achieved by 2030 with the aim of achieving inclusive growth in all member states. There is a need for steady practical action to achieve these aims in Africa.
In May 2016, the Japanese government established the SDGs Promotion Headquarters, hosted by the prime minister, with the Chief Cabinet Secretary and the Minister for Foreign Affairs as deputy chairs, and all cabinet ministers as members. The Headquarters was charged with putting in place a framework for taking the lead in both domestic policy and international cooperation efforts, and in December 2016 guidelines were agreed for Japan's implementation of the SDGs. As part of efforts to meet the SDGs, Keidanren is promoting measures that will realize Society 5.0, a super smart society, which addresses social issues (e.g. healthcare, climate change) by promoting innovation across a broad range of fields and using revolutionary technology.
As the Nairobi Declaration points out, innovation is an effective way of achieving ongoing high-quality growth not just in added-value industries but in a wide range of fields, including food security, healthcare, climate change and other environmental problems, and social stability. Innovation is thus intimately linked to African development and the achievement of the SDGs. In the occasion of TICAD VII, the successful cases should be therefore shared with Africa to contribute to achieving the inclusive growth through innovation#2.
1-2. Free and Open International Economic Order and Regional Economic Integration
The world economy has been invigorated by the free and open international economic order driven by the WTO; in recent years, free trade and economic partnership agreements have encouraged regional economic integration.
At the same time, anti-globalization and protectionist movements are on the rise around the world. In this context, we should remind ourselves of the importance of a liberal trade and investment environment for achieving inclusive growth around the world, and make this understanding the focus of our actions. In Africa, in particular, many countries are small in market scale on an individual basis; this makes merger with the global market through liberalization of trade and investment and the growth of the regional market through economic integration vitally important in helping to make Africa more attractive.
For this reason, as well as sharing our ongoing strong commitment to maintaining and strengthening the free and open international order at TICAD VII, we also need to discuss the policies necessary for building systems and rules within each country and promoting regional partnerships and cooperation, in order to achieve our aim of economic development under a liberal trade and investment environment.
1-3. Strategic Partnership through Private-Public Collaboration
In economic development in Asia, the provision of Japanese public funding and technology helped to build infrastructure and systems and human resources (HR) training, leading to public sector trade and investment, job creation, technological improvement, and industrial development in the region. In Africa too, at TICAD V a statement was made on the importance of viewing African countries not simply destinations for aid but rather as trade and investment partners, and the Nairobi Declaration mentions that public-private partnerships can help to maximize the development.
Accordingly, at TICAD VII, with the aim of achieving autonomous economic growth in African countries, the aim should be to use a public-private partnership to achieve a collaboration incorporating the three strands of investment, trade, and aid. We should look to deepen public-private cooperation further, under an equal partnership between Japan and African countries.
1-4. Focusing on Partner Countries
Africa is home to numerous economies that differ considerably; this makes it important to focus on countries that are well-suited to becoming strategic partners for public-private partnership. In this perspective, Keidanren's proposal "Contributing to Sustainable African Growth: The Business Community's Strategy for Africa in the Lead-up to TICAD VI," makes a number of recommendations, including the following: 1) The country should be sympathetic to Japan, ambitious about trade and investment promotion by Japanese firms, and proactive about improving its business environment; 2) It should be an important supply area for resources or energy, and have latent growth potential; 3) It should offer large infrastructure demand for electricity, transportation, ICT, and other infrastructure for economic development; and 4) There should be a good chance of improved income levels and increasing population with a potential large-scale market.
From these perspectives, and considering the number of Japanese firms already doing business in Africa or planning to expand there, partner countries should be selected based on a comprehensive decision of the above points, together with discussion of aid policies for infrastructure and HR training.
2. Improving Business Climates in Africa
2-1. Enhancing Infrastructure
Africa still lacks satisfactory infrastructure essential for business activities and daily life, including roads, railways, ports, electricity, housing, communications, and sewage and waterworks. This lack is a major factor limiting business in Africa by Japanese companies. For instance, transportation is subject to delays or takes a long time owing to the lack of infrastructure; destinations and goods for transportation are limited; there is chronic traffic congestion; volume and quality of electricity are unstable, including frequent power outages owing to insufficient electricity infrastructure, and; communications and business information transmission are limited (in terms of location, quality, volume, and speed) owing to inadequate communications infrastructure. All these aspects have a negative impact on business activities and on the lives of employees stationed in African countries. In light of these circumstances, the Japanese government should continue to give a strong push to assistance at infrastructure development in Africa throughout the following measures from a) to c).
a) Public Financial Aids
Assistance from the Japanese government and other public funds has played an important role in infrastructure development provision in Africa; increased yen loans, grant aid, Japan International Cooperation Agency (JICA) overseas investment and loans and Japan Bank for International Cooperation (JBIC) investment and loans as well as relaxed conditions for financing, and increased guarantees through Nippon Export and Investment Insurance (NEXI) will continue to be essential.
Specifically, the following steps need to be taken. Securing sufficient funding for ODA projects, expansion and greater flexibility in the range of countries and projects eligible for this funding, quicker procedures for yen loans and greater flexibility with regard to changes after the loans have been made, active provision of yen loans not only for engineering, procurement, and construction (EPC) but also to help support post-build operations, management, maintenance, as well as repairs and renovations, greater flexibility in yen loans for private sector projects and business rights acquisition#3, further relaxing of major contract conditions for use of yen loans and special terms for economic partnership (STEP), contracts with single equity method affiliates#4, expanded co-financing between Japanese public financial institutions and international development financing bodies (World Bank, Africa Development Bank, etc.), increased budget for feasibility studies and improved running of feasibility study surveys, clarification of the standards for providing JICA overseas funding and JBIC funding#5, increased acceptance of country risk (emergency risk) by NEXI, construction of a system to allow NEXI to collaborate with African Trade Insurance Agency (ATI) and other international financial bodies to underwrite insurance, and support for strengthening the financial foundations of these international financial bodies#6.
In addition, in both yen loans and grant aid, even when Exchange of Notes includes provisions for exemption from tax and duties, in some cases the local tax authorities are not aware of this or it takes a long time to obtain a rebate on duties paid. The Japanese government and other entities involved should continue to lobby the governments of host countries to urge them to do more to ensure that the tariff and tax exemption provisions are implemented thoroughly.
b) High-quality Infrastructure
With international competition intensifying to build infrastructure in Africa, it is important for Japan to promote understanding of its approach, built on a partnership between public and private sectors, providing high-quality infrastructure offering economy, safety, resilience to risk, local job creation, and incorporating concern for society and the environment. Accordingly, Japanese infrastructure projects should strengthen the social and economic foundations in individual countries and the stability and prosperity of the region, and also make a major contribution to achieving the SDGs.
To this end, it will be important to work on further strengthening competitiveness. The government's Management Council for Infrastructure Strategy should further implement high-official dialogues with African states, as well as taking into account the needs of the host country, including high quality, in line with the concept "Made with Japan #7," working to formulate and sustain a strong masterplan through collaboration between public and private sectors, and offering optimal total solutions.
African governments need to improve their public bidding systems to make comprehensive evaluations of quality such as economic efficiency from the perspectives of life cycle costs, and revise the bidding requirements. To this end, capacity building will be necessary to carry out these evaluations, promote the wider use of technical criteria and standards, put in place systems related to public-private partnership (PPP) and train workers to operate them, and ensure appropriate risk sharing between the public and private sectors including guarantees by the host government. Under the public-private partnership, Japan should use all the aid tools to make progress toward achieving these aims and should continue to encourage host governments to work toward these ends.
c) Collaborations with Other Nations
Companies from countries like France, UK, Turkey, and India have already built local networks and have proven records of achievements in Africa. It is hoped that aid will be provided to increase matching opportunities with the aim of enhancing cooperation with the companies from these states. Consideration should also be given to ways to secure greater flexibility of public financial support to promote cooperation with third-country companies and collaboration with public financial institutions.
2-2. Institutional Reforms: Legal Systems and Administrative Procedures
Key solutions lie in strengthening governance to sweep away corruption and malfeasance by government officials, restrictions on foreign capital#8 (limitations on foreign capital ratio, requirements for local content, requirement to employ local workers, requirement for joint ventures with nationally run and local enterprises, royalty remittance regulations, and so forth.). Fairness, transparency and predictability should be ensured regarding permits and approvals such as customs clearance, immigration, quarantine and work permits, and the associated procedures should be simplified and sped up#9. There should be intellectual property rights systems in place, stronger rules and standards on measures against counterfeit goods, etc. should be carried out thoroughly, standards and criteria for compulsory vehicle inspections, etc. should be established and improved#10 and free trade / economic partnership agreements, investment agreements, and tax treaties between Japan and African countries#11 should be concluded promptly.
In addition to reducing tariffs in African countries and steadily moving to a system of customs union (regional common tariffs)#12, it will also be important to promote the free movement of goods, services, funds, HR, and information through free trade agreements and regional economic communities (RECs) between African countries.
We need to increase opportunities for partnerships with enterprises from the aforementioned third-countries, and establish a venue in which representatives from the public and private sectors in both Japan and African countries, especially focus partner countries, can engage in continuing discussions and exchange concrete ideas for solutions. It might be a good idea to have such a forum under Japan-Africa Public-Private Economic Forum which was successfully held in May 2018 with the participation of high level African officials and Japanese business delegates.
2-3. Skills Training for Robust Human Resources
It will be essential to train and strengthen the HR who will support these efforts, including administrators with a good grasp of industrial policy.
In this context, the African Business Education Initiative for Youth (ABE Initiative)#13 has been implemented since TICAD V, and has received positive evaluations from companies. In the future, as well as following up the subsequent activities of graduates from the program#14, it will be necessary to establish a succeeding program, to ensure that it will continue as a long-lived undertaking after the end of the promised period. At this time, it will be necessary to expand the sphere of people who can benefit from these programs, opening the door to currently enrolled university students and new graduates who do not yet have an employment history. Also, within Africa itself, it is essential to enhance and strengthen education from basic education through to higher education to lift the general level of HR, and bolster training support for technical workers and other industrial HR. To this end, Japan should look to enrich HR training projects under public-private partnership and strengthen its support.
For Japanese companies, as well as dispatching instructors to training centers in Africa, hiring outstanding graduates, and providing opportunities for practical training and internships in private companies for students coming to Japan, work is being done in collaboration with JICA and local universities to establish and run centers that will train the next generation of leaders. Scholarship and other programs for training young engineers are being run in partnership with local governments, and it will be important to expand these projects further under the public-private partnership.
3. Social Stability
Guaranteeing safety is a major precondition for promoting business activities by companies overseas. As the Nairobi Declaration made clear, countries in Africa need a comprehensive response to security concerns, including promoting education, technical and professional training, job creation and access to employment opportunities, and should promote social stability. In addition, it is urgent to improve the health care system and public hygiene, and build waste disposal systems. There needs to be a strong push to find solutions to these challenges, under a collaboration between the governments of Japan and African countries.
At the same time, the Japanese government is urged to increase information provision at its embassies in African countries and carry out support measures for helping enhance medical services, etc.
Japanese enterprises as well, by creating funds in Africa to support ventures that will contribute to society (CSV funds) and establishing joint ventures with local companies, are helping to create local jobs and support the nurturing of industry, working on measures to balance social value and economic value. They wish to continue to provide high-quality infrastructure and job creation, and training of local workers who can contribute to sustained growth, as well as contributing to the stability of society by mobilizing the HR, technology, and knowhow in their possession.
- Source: UNCTAD Stat (August 2018)
- For example, Japanese companies are engaged in enhancing agricultural productivity in Africa using big data analysis technology.
- Framework for issuing a yen loan in a case where a Japanese company takes part in bidding (or a Japanese company takes the lead in proposing a business project) and the bid is successful, and a framework for issuing yen loans for the EPC in a project for which a Japanese company has acquired the rights to do the business.
- Rules regarding extent of procurement from Japan (at least 30% of total value of contract covered by yen loan must be produced in Japan) and other rules on country of origin remain unchanged.
- JBIC's establishment of the "special project" category and the enlargement of the "facility to promote quality infrastructure investment for environmental preservation and sustainable growth" have meant an increase in risk; prior coordination and discussion with JICA's overseas loans and investment will sometimes be necessary.
- By collaborating with international financial bodies, as well as covering the financing of the 15% deposit for which the host country is responsible in sovereign equipment delivery type projects, build a framework so that NEXI and ATI collaborate in cases of business investment projects to shoulder 100% of the funding to the company that will carry out the business.
- An approach in which the necessary infrastructure is created together by the host nation and Japan, including the technological know-how and HR training needed by the host country.
- For example, in Zimbabwe and Algeria there are restrictions on sending foreign currency out of the country. Also, in Nigeria it is not possible to set up a local office staffed with expatriate employees, and companies must instead establish a local corporation; this is one factor that prevents companies from expanding into the Nigerian market.
- Formulation of a general administrative procedure law comprising such elements as treatment of applications (establishment, publication of evaluation criteria and standard process, disclosure of reasons for refusal of application, etc.), adverse disposition (setting and publication of disposal criteria, hearings and other preliminary procedures, etc.), notifications (the principle that they come into force from the time they are received), and public comments (a system to publish drafts for government/ministerial ordinances, etc. in advance and invite wide range of views from the public).
- For example, introduction of a car inspection system would help to guarantee the quality of vehicles on the road and lead to improvements in environmental and traffic safety. Likewise, safety standards for electric and electronic products would make it possible to remove non-conforming products from circulation.
- On the FTA/EPA situation, a different rate of tariffs applies compared to EU countries that have concluded an FTA with African countries. (For example, in South Africa, the import tariff on completed automobiles imported from the EU, with which South Africa has an FTA, is 18%, as opposed to 25% on completed automobiles imported from Japan.) Regarding bilateral agreements with such countries and agreements with regional economic communities in various parts of Africa, including the Southern African Development Community (SADC), Southern African Customs Union (SACU), East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA), on investment agreements, negotiations are proceeding with Angola (largely agreed, currently suspended), Algeria, Kenya, Ghana, Morocco, Tanzania; negotiations have started with South Africa, Senegal, and Nigeria, among others, while agreements on tax conventions have been achieved with Morocco, Kenya, Ghana, Nigeria, Uganda, Cote d'Ivoire, Senegal, Burkina Faso, as well as agreements with countries including South Africa and Kenya where Japanese companies have their bases. (For example, if an operation is carried out from a base in Kenya to other African countries, double taxation occurs as the operation is taxed both in Kenya and in the country providing the service.)
- Although a customs agreement exists within the East African Community (EAC), the tariff rates of each country are applied when exporting within the community area. (For example, if an automobile is assembled in Kenya and exported to another country within the EAC, the export is supposedly exempt from the tariff according to the regional customs agreement, but customs officials do not always have an accurate understanding of the latest rules on country of origin, and in some cases companies may be told to pay the tariff regardless.)
- For five years from 2014, the Abe Initiative has provided opportunities for over 1,000 young people from Africa to study at Japanese colleges and graduate schools, as well as internships at Japanese companies.
- For example, assistance for building a network of graduates, setting up a HR information bank to encourage employment at Japanese firms, establishing a public-private sector fund to support people starting businesses in Africa.