Africa’s private sector stands to lose from Brexit

Working with the private sector was long thought the antithesis of development, but the global narrative is changing.

Small-scale wins of providing clean water or building schools in remote villages are being replaced by the wish to make deeper structural changes to African economies by funding business opportunities.

And the main drivers of this approach are the UK and the European Union (EU). In 2014, the UK Department for International Development (DFID) overhauled its development policies to engage more with business and increasingly target private sector investment.

In June 2015, DFID invested an extra £735m in its development finance institution, the CDC Group, which specialises in private sector funding, marking Britain’s first capital injection into the institution for two decades. Beyond this, the UK contributes approximately 10% of its total aid budget through the EU.

The UK’s commitment to spending 0.7% of gross national income target on aid makes it one of the few leading EU economies to meet this UN target. Post-Brexit, the EU will lose not only this substantial contribution, perhaps forcing it to scale back on development funding, but also the UK’s leadership role on development policy, and more specifically its current focus on private sector development.

The UK is also one of the leading shareholders in the European Investment Bank (EIB), the world’s largest public lending institution. Two-thirds of the EIB’s total lending in the African, Caribbean and Pacific (ACP) regions and the EU’s Overseas Countries and Territories (OCTs) goes to the private sector.

This includes loans to the financial sector to enhance access to finance for small and medium-sized enterprises (SMEs), larger-scale operations with corporates, public-private partnerships and project finance initiatives. In 2015 the Bank invested almost €1.1bn ($1.17bn) in over 35 projects in the ACP regions and the OCTs.

The real post-Brexit question is whether the UK will keep its stake in the EIB. Its loss would reduce the bank’s base capital by 16%. Under the 11th European Development Fund (2014–20), the EU seeks to mobilise over €600m to improve the business environment and the development of regional value chains in the ACP countries.

The UK is currently committed to contributing just over 14% (€4.5bn) of the overall budget (which totals €30.5bn). The UK’s overall contribution is therefore significantly greater than this single programme. This underscores the substantial contribution Britain makes to the EU’s development funds, especially in the context of the allocation of resources directed towards private sector development.

Leveraging relationships

The allocation of private sector resources will be an important aspect of the post-Brexit reality. The UK will have an opportunity to cut red tape and streamline funding processes.

However, the changing focus of UK development policy puts the private sector emphasis in doubt. The UK secretary of state for international development, Priti Patel, has said the UK will “leverage” aid commitments in order to negotiate trade deals, essentially using aid to develop trade.

This flies in the face of the progressive approaches to private sector development advocated in recent times. The EU’s private sector trajectory, on the other hand, seems as though it is here to stay. It is an integral part of the current EU–Africa legal framework, the Cotonou Agreement, and seems not to be shifting in the EU’s plans for this agreement post-2020, when it expires.

Uzo Madu is founder at What’s in it for Africa and co-founder at the EU-Africa Brief.