Race to the Next Income Frontier
Chapter

Chapter 15. Relieving Constraints on the Business Environment and Supporting Foreign Direct Investment

Author(s):
Ali Mansoor, Salifou Issoufou, and Daouda Sembene
Published Date:
April 2018
Share
  • ShareShare
Show Summary Details
Author(s)
Mamadou Lamine Ba and Tom O’Bryan

Introduction

A country’s business environment may be defined as the set of political, legal, institutional, and regulatory conditions governing corporate activities. It is a subset of the investment climate, comprising the administrative mechanisms and enabling regulations used to implement national policy and institutional agreements.1 These factors shape the way key stakeholders (including government agencies, regulatory authorities, and professional associations) act in enabling the private sector to take better advantage of investment opportunities and fully perform its function as the driving force behind the creation of wealth and jobs in a given country.

Countries with a welcoming investment climate often achieve a higher investment rate when they also manage to attract more foreign direct investment (FDI). That, in turn, enables them to achieve higher rates of economic growth to generate more value added and jobs. In short, it spurs corporate investment and subsequent growth (Fries, Lysenko, and Polanec 2004). Most empirical studies have shown that private investment (combined with public investment) is the chief long-term determinant of economic growth and of the economic transformation needed for sustained improvements to citizens’ well-being, which is the ultimate goal of all government action.

This is why it is so important for those countries striving for emergent status to make arrangements conducive to private sector investment and to develop a set of effective administrative services for the domestic and international private sector. Such arrangements quickly make a difference by enhancing the impact of both public and private investment, expediting the pace at which both value added and jobs are generated. Organisation for Economic Co-operation and Development (OECD) member countries and emerging market economies are generally considered to appeal more to private investors. Developing countries such as Senegal need to embark on reforms aimed at creating a business environment similar to that found in the emerging market economies and OECD countries in order to improve their investment climate, thereby attracting more FDI, innovation, and technology transfers and reducing both country and environmental risks.

The government of Senegal is intent on charting a path to emergence with the private sector as the driving force for growth. The pursuit of that objective requires the establishment of a business environment conducive to increased productivity, domestic investment, and FDI. In the area of firm productivity, Senegal needs to make progress, as suggested in the latest World Bank (2017b) investment climate report. Labor productivity in Senegal’s formal manufacturing sector, although higher than in most sub-Saharan African countries and higher than its level of development would suggest, is more than three times lower than that in China, four times lower than that in Brazil, and five times lower than that in South Africa (see Annex 15.1). Senegal fares relatively well in terms of total factor productivity, which is higher for the median manufacturing firm in the country than it is in Ethiopia, Côte d’Ivoire, Mali, or Nigeria. However, total factor productivity in Senegal remains much lower than in the best-performing comparator countries (Annex 15.1). Overall, in terms of productivity, Senegalese manufacturing firms appear competitive only on a regional basis, but not outside sub-Saharan Africa.

Against this background, as part of the Plan Sénégal Émergent,2 the government has announced that flagship reforms will be undertaken to complement key development projects. Thus, the Program of Reforms to Improve the Business Environment and Competitiveness (PREAC), adopted at the 11th Meeting of the Presidential Investment Council (CPI) in December 2012, has been incorporated into the plan as one of the instruments for carrying out the plan’s flagship reforms and promoting key development projects. The initial review of the PREAC conducted at the 12th Meeting of the CPI in June 2015 provided an opportunity to acknowledge improvements and initiate a PREAC Phase II (2016–18). This new initiative seeks to reduce factor costs to increase competitiveness and strengthen government services.

To that end, it will be necessary to draw on and make use of instruments and methods tested in other countries, such as Mauritius and Morocco, which in the past 10 years have managed to increase their per capita income significantly, improve their business environments, and join the ranks of emerging market economies.3 It will also be necessary for the various stakeholders to build and consolidate coalitions that will enable the economy to prosper and remain competitive over the medium and long terms by upholding the principles of free enterprise and of widely recognized economic and democratic governance.

Foreign Direct Investment and Business Environment

Determinants of Foreign Direct Investment

The literature identifies a vast array of determinants that influence how attractive investors consider a given country’s business environment to be. Considering the example of Turkey, Loewendahl and Ertugal-Loewendahl (2001) identify a number of determinants, all of which are broadly tied to key location factors in a host country. These determinants are broadly divided into (1) economic determinants, such as FDI track record and telecommunications infrastructure; (2) FDI-enabling environment determinants, including social amenities and investment incentives; and (3) political and institutional determinants, such as coherence of FDI policies and of the political system.

Bloningen (2005) also highlights evidence of exchange rate effects and effects of taxation, institutions, trade protection, and trade as determinants of FDI. Conducting a comparative analysis of Morocco and Tunisia, Nicet-Chenaf and Rougier (2008) find evidence that improving these determinants in one country can even have a knock-on effect in a neighboring country. Their analysis suggests that increased FDI in Tunisia indirectly attracts FDI to Morocco, most likely by driving improvements in national and regional business climates.

Research also indicates that total market size is a robust determinant of FDI (Chakrabarti 2001). Lipsey (1999) studies FDI flows to Asia and finds that market size is a highly influential determinant for affiliates that sell mostly in the local market. Daniels and Quigley (1980), examining Latin American countries, find that market size is not only significant, but in fact the most important variable, in explaining FDI inflows.

Love and Lage-Hidalgo (2000) examine outward US FDI into Mexico for the period 1967–94 and find that a number of determinants are influential, with the most influential being market size, interest rate, wages, and exchange rates. In particular, they find that the relative wage difference between the United States and Mexico has a significant effect on the flow of FDI. Yet the coefficient on the interest rate is relatively small and nonsignificant for all types of FDI, indicating that user cost of capital is not an influential variable for determining inflows of FDI in that case.

A number of economists have also identified FDI determinants beyond these variables. This group includes Krugman (1991), who pioneered a focus on geographic factors and in particular highlighted the relationship between transportation costs within a county and FDI inflow. Wei (2000a, 2000b) finds evidence that political stability and the quality of institutions are important to FDI volumes, while Froot and Stein (1991) highlight the role of banking system performance and restrictions on the movement of capital.

This brief literature review indicates that multiple variables play a part in the assessment of a given country or zone’s attractiveness to investment even if, depending on how the economy is structured, some variables may turn out to be more influential than others.

In the theoretical and empirical literature, attractiveness is assessed using macroeconomic models to identify the factors that explain choice of location or the volumes of FDI received by an economy or region. The appeal of a geographical area is defined as its capacity to attract and retain capital, especially foreign capital. The main measure used is the dynamism of FDI flows or stocks. In addition, however, a country’s performance in international ratings, especially of competitiveness (Global Competitiveness Index), business environment (Doing Business), and corruption (Transparency International), now also serve as a barometer for private investors to employ to compare one country’s performance against another.4

Some important determinants of FDI are also areas that countries most commonly seek to address once they have established an agenda for improving the business environment and promoting investment and start paying more attention to the main variables at play.

In practice, OECD countries and new emerging markets are regarded as having the best environment for businesses, that most conducive to development of the private sector and FDI. Countries such as Senegal seeking emergent status must analyze their own environment and effectively implement improvements and innovations that will help them achieve that goal, while guaranteeing the higher profits needed to take advantage of capital flows capable of generating value added for investors and productive jobs for the economy.

The development of competitive productive environments in newly emergent economies such as Mauritius and Morocco, along with their integrated and effective administrative services, has enabled those countries to reach a high level of attractiveness and production factor competitiveness. These countries were in a situation similar to Senegal’s in the 1990s. However, they have since succeeded in creating good business environments thanks to reforms and innovations carried out by both political and technical champions. Mauritius and Morocco have consequently been able to attract structurally transformational private investments, forming value chains by positioning themselves as service and production hubs in manufacturing, finance, agroindustry, and tourism. These countries are good examples for Senegal to follow.

Stylized Facts: Foreign Direct Investment and the Business Environment in Senegal

To maintain its growth, Senegal should aim to attract an increasing share of the total FDI going into Africa. FDI into Africa has increased since 1996, rising from US$4 billion in that year to US$41 billion in 2014, after peaking at more than US$50 billion in 2008.5 In recent years, African countries that have been able to attract high shares of FDI relative to GDP have seen their growth rates increase considerably.

FDI to Senegal has increased from about 0.5 percent of GDP in the early 1990s to slightly over 2.2 percent of GDP in recent years. However, with the exception of the late 2000s and 2006, net FDI inflows in Senegal have almost always been inferior—or equal at best—to those in sub-Saharan Africa as a whole. Further, Senegal’s FDI flows were fairly uneven between 1992 and 2015. Erratic changes in FDI volume followed the devaluation of the CFAF in 1994 and through to 2005. Indeed, FDI was estimated at US$66.8 million in 1994, fell to US$5.47 million in 1996, and then rose to US$176.8 million in 1997. This pace was maintained until 2005, when FDI volume was estimated at US$44.6 million. From 2006, when FDI was US$220.3 million, the volume grew 45.3 percent to reach US$397.0 million in 2008, thanks to dynamic growth in public works and civil engineering and in telecommunications. During this period, the country’s annual economic growth averaged about 4 percent. Net FDI flows subsequently dropped again during the period 2009–12, before picking up in 2013 (US$311.3 million) and 2014 (US$342.7 million). With the subsequent discovery of oil and gas, Senegal should be able to attract more FDI than was previously possible.6

However, while waiting for the development of its extractive sector, Senegal must continue to attract FDI by improving its existing business environment. Indeed, Senegal would need to double its share of FDI in GDP so that it exceeds 5 percent in order to see a real impact on growth.

This would not be an easy undertaking, as there is increasing competition for investment among large economies in the region, such as Côte d’Ivoire, Ethiopia, Ghana, Kenya, and Rwanda. A complex external economic environment overall also implies that countries must work harder to attract investors (Figure 15.1).

Figure 15.1.Fast-Growing Economies in Sub-Saharan Africa: Real GDP Growth and Net FDI Inflows, 2012–15

Senegal now has an advantage as investors become warier of resource-rich countries and the emphasis turns, as it is currently doing, more toward agriculture investments and the services sector. With its abundant agricultural land and youthful population, Senegal should be able to take advantage of this changing environment.

To do so, however, Senegal must continue to focus on areas of its business environment in which it lags its close competitors or has a competitive advantage not fully exploited, such as a stable macropolitical environment and improvements in the energy and agriculture sectors and in its regional position.

Senegal has weathered recent challenging economic conditions well, and improvements in the investment climate are an important part of its resilience strategy. As a net commodity importer, Senegal has benefited substantially from the drop in commodity prices. It has successfully navigated the overall tightening in financial conditions of recent years as well as the repeated bouts of regional turbulence and instability, the Ebola pandemic, and the increasing security threat across the region.

Current Achievements

In the face of these challenges, Senegal has nevertheless made progress in implementing the policies and reforms required to increase FDI and attract investors. Senegal’s private sector is involved in the preparation and establishment of public policies, primarily through professional associations of employers and workers. Analysts have long highlighted the key role of its private sector as the driving force in the creation of wealth and jobs, recognizing the need to provide conditions conducive to the development of private investment and enterprise.

Consensus-Building Mechanisms and Special Government Bodies

Within that context, the government has successfully put in place a number of consensus-building mechanisms. Notable efforts to advance public-private dialogue include, in the 1990s, the establishment of the Private Sector Foundation, the Competitiveness and Growth Study Group (Groupe de Réflexion pour la Compétitivité et la Croissance, or GRCC), and the Business Environment Support Group (Cellule d’Appui à l’Environnement des Entreprises, or CAEE). These organizations have made it possible to identify, prepare, negotiate, and monitor implementation of policies intended to support private sector initiatives and assist in the management of the postevaluation process.

The government has also created a series of specialized bodies to support the private sector development strategy. These include the Agency for the Promotion of Investment and Major Works (APIX), the National Agency Responsible for Developing and Monitoring Small and Medium-Sized Enterprises (ADEPME), and the Senegalese Export Promotion Agency (ASEPEX). The impact of these organizations, however, appears to be restricted to technical coaching of formal sector enterprises, above all in Dakar.

Since 2002, the CPI has been the main forum for the exchange of ideas between the private sector and the public sector under the aegis of the President. To date, the CPI has held 12 presidential meetings, and it carried out three generations of business environment reforms between 2002 and 2015. It functions through a series of working groups, each tasked with analyzing constraints and formulating reforms to improve Senegal’s business environment. It then seeks a consensus recommendation among its members regarding the reform policies and instruments to be implemented and submits that to the President, who, once he approves the recommendation, instructs the government to implement the proposed reforms.

Three Generations of Reform

APIX serves as the Permanent Secretariat of the CPI and to date has overseen three generations of reform.

First-Generation Reforms, 2002–05

The first generation of reforms, decided on during the first five meetings of the CPI, concerned the legal and regulatory framework for various administrative procedures. The amendment of existing instruments and the preparation of new regulations improved the operating framework for firms and for infrastructure works prepared under public-private partnership arrangements. For example, Senegal’s toll road, the country’s main highway, was built within this framework. Finalization of the works and management of the highway was then entrusted to a private enterprise, which was awarded a 30-year concession contract.

BOX 15.1Principal Reforms, 2002–05

  • Establishment of alternate traffic arrangements for entering and leaving Dakar.

  • Adoption of an Investment Code, updating incentives and including a revised version of free-zone export enterprise status (for companies exporting at least 80 percent of their output).

  • Adoption of a General Tax Code, which lowered the corporate income tax from 33 percent to 25 percent.

  • Revamping of the regulatory framework for infrastructure projects and labor legislation.

  • Establishment of the Agency to Promote Industrial Platforms.

  • Passage of the Law on Contracts Governing the Building, Operating and Transfer of Infrastructure (the BOT Law, known as the Loi CET in French) in 2004.

  • Adoption of the 2003 Mining Code.

The CPI recommended the establishment of Agency to Promote Industrial Platforms during this period to facilitate land use by enterprises. A further notable measure adopted during this period was the implementation of alternating traffic arrangements for entering and leaving downtown Dakar during rush hours, maintaining urban mobility and relieving congestion in the city. This is a clear example of the practical nature of the decisions taken by the CPI to enable the private sector to achieve its maximum potential. Box 15.1 lists some highlights among the reforms enacted in this period, including adoption of legal texts by the national assembly and establishment of processes or institutions.

Second-Generation Reforms, 2006–10

The second generation of reforms, starting with the sixth meeting of the CPI in 2006, consolidated the first series of structural reforms concerning administrative procedures and operational methods for social and economic policy implementation. This period also saw the start of the country’s Accelerated Growth Strategy, the first pillar of which sought to create an international-class type of business environment, designed to lead to a rate of growth of approximately 7 percent in 2015. This period was also characterized by the gradual introduction of “one-stop shops” and the digitalization of administrative procedures, especially for trading across borders and setting up companies. As a result of these reforms, in 2009 the World Bank’s Doing Business index ranked Senegal as a top business reformer in Africa. Box 15.2 offers some highlights among the reforms enacted in the period.

BOX 15.2Key Reforms, 2006–10

  • Establishment of the APIX Business Startup Support Office.

  • Modernization of the justice system.

  • Adoption of the Government Procurement Code in 2007.

  • Implementation of fully electronic customs clearance.

  • Implementation of orders for the 2008 Labor Code.

  • Shortening of ownership transfer times.

  • Passage of the Electronic Transactions Law.

  • Passage of the Economic Zones Law.

After 2009, the first signs of resistance to change emerged. Conflict surfaced between trade unions and employers over the direction and content of the reform of the Labor Code. This included a misunderstanding over the proposed more flexible rules for renewing contracts of indefinite duration.

While it had taken up to eight months to formulate the reforms, it took almost 48 months to implement them. This was linked to the complexity of the rules governing the adoption of reforms, but was also due to resistance to change, which blocked implementation. Here, it is worth stressing that the effectiveness of reforms undertaken in year N (when the new legal instrument is enacted) is generally felt around the middle of year N + 1 (implementation on the ground by the administration), with the full impact being felt in year N + 2 (effect of the new instrument on the user, echoed by the rating agencies’ perception). This has led to a widespread perception that the reforms existed only on paper. This highlights the importance of shortening the time it takes to prepare, adopt, and enforce legal instruments, which became the CPI’s focus when formulating the PREAC in 2012. In particular, it sought to shorten delivery time for administrative acts, including construction permits, property transfers, and connection to networks.

Hence, effects of the reforms were not felt before 2014, when they translated into improved international ratings, such as in the Doing Business index scores. When Doing Business published its annual report in October 2013, showing that Senegal had fallen two places in the rankings, many in the government reacted with confusion. Many policymakers believed the new policy and legal instruments enacted in 2013 had already been implemented. In reality, however, the “users” had yet to fully experience the reform in practice.

Furthermore, it often happens that an instrument adopted in the Council of Ministers enters into force only months later as a result of the often-substantial delays in publishing new laws and regulations in the Official Gazette. For example, Decree 2013-1071, amending certain articles in the Code of Civil Procedures, was adopted in May 2013 but did not enter into force until August 2013. This period ought to be shortened.

Third-Generation Reforms, 2011–15

With the medium-term goal of achieving emergence by no later than 2035, Senegal embarked on a new cycle of reforms known as the triennial program, involving multiple flagship projects. Senegal has pursued corporate competitiveness objectives (associated with the compelling need to address issues relating to social aspirations) in an effort to catalyze the private sector to create wealth and jobs.

Monitoring the effectiveness of these reforms is a key component of the mechanism for managing the PREAC. The PREAC, incorporated into the Plan Sénégal Émergent (which was formulated in 2013 and adopted in 2014), will enable Senegal to continue to enhance its business environment and attract an increasing number of high-quality private investors. The PREAC pays particular attention to increasing FDI in Senegal (see Annex 15.2).

Improvements in the Business Environment

Since 2013, the pace of reforms has been increasing. Structural reforms in the areas of vocational training, land reform, and labor legislation are in the process of implementation. Services provided to firms regarding the creation of companies, ownership transfers, trade across borders, and the registration of security interests have improved. However, the government has yet to complete digitalization projects (tax payments, construction permits, and procurement, among others).

Between 2013 and 2015, Senegal updated and reconciled the principal instruments in its legal framework for business, namely the Customs Code, the General Tax Code, the Code of Civil Procedure, and the law governing public-private partnerships, in order to bring them into line with best practices and support Plan Sénégal Émergent projects. It also supported reforms undertaken at the regional level in the West African Economic and Monetary Union (WAEMU) and the Organization for the Harmonization of Corporate Law in Africa (OHADA, after its French name), engaging in consensus building with social partners.

While simplifying legal instruments and streamlining administrative procedures, the government also worked during this period to lower transaction costs to consolidate Senegal’s position as one of the world’s leading reformers. Key reforms between 2013 and 2015 included (see Box 15.3 for a more detailed listing) the following:

  • There is no longer a minimum capital requirement for setting up limited liability companies (LLCs, or SARLs in French) in the country: the capital required is freely defined by those setting up such companies. Businesses can now be established in a time frame similar to that in the United States (5.6 days versus 6 days in Senegal, according to World Bank 2017a), even though the related financial costs (fees, stamps, and so on) need to be further reduced. Formal firm creation has become much faster and simpler.

  • The notary fee for registering land ownership transfers has been lowered to 5 percent (as of 2015), following an earlier reduction from 15 percent to 10 percent in 2013.

  • The government has undertaken significant regulatory reforms to support tourism: extending a value-added tax (VAT) reduction to all tourism activities, halving government royalties on airline tickets, and eliminating entry visa requirements for tourists.

  • The electricity consumption prepayment required for connection to the grid has been halved. Senegal is now building a network of efficient public services, with one-stop shops and electronic (replacing paper) procedures to achieve more effective delivery of administrative services to users, especially enterprises.

BOX 15.3Recent Regulatory Reforms

Regulatory reforms favorable to firms and foreign direct investment (FDI) implemented in recent years, according to the Doing Business data set, include the following:

  • In 2017:

    • Registering property: Senegal made registering property easier by increasing transparency at its land registry and cadaster.

    • Getting credit: Senegal improved access to credit information by establishing a new credit bureau.

    • Paying taxes: Senegal made paying taxes less costly by reducing the cap on the corporate income tax and implementing more efficient accounting systems and software.

    • Resolving insolvency: Senegal made resolving insolvency easier by introducing a new conciliation procedure for companies in financial difficulties and a simplified preventive settlement procedure for small companies.

  • In 2016:

    • Starting a business: Senegal made starting a business easier by reducing the minimum capital requirement.

    • Registering property: Senegal made transferring property less costly by lowering the property transfer tax.

    • Enforcing contracts: Senegal made enforcing contracts easier by introducing a law regulating voluntary mediation.

    • Obtaining electricity: Senegal’s electric utility made establishing electric services less time-consuming by streamlining the review of applications and the process for making the final connection, as well as by reducing the time required to issue an excavation permit. It also made obtaining electricity less costly by reducing the security deposit required.

  • In 2015:

    • Starting a business: Senegal made starting a business easier by reducing the minimum capital requirement.

    • Dealing with construction permits: Senegal made dealing with construction permits less time-consuming by reducing the time for processing building permit applications.

    • Registering property: Senegal made it easier to transfer property by replacing authorization from the tax authority with a notification and setting up a single step at the land registry.

    • Obtaining credit: Senegal improved its credit information system by introducing regulations developed by the West African Economic and Monetary Union (WAEMU) that govern the licensing and operation of credit bureaus.

    • Protecting minority investors: Senegal strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions to companies’ boards of directors; by making it possible for shareholders to inspect documents pertaining to related-party transactions and to appoint auditors to conduct an inspection of such transactions; and by making it possible for shareholder plaintiffs to request from the other party, and from witnesses, documents relevant to the subject matter of claims during trials.

    • Paying taxes: Senegal made paying taxes easier for companies by abolishing the vehicle tax and making it possible to download the declaration forms for the value-added tax online.

All these reforms have contributed to raising Senegal’s scores and rankings in international classifications (Figure 15.2). It is hoped that these improved international positions will encourage new investors to enter the country and existing investors to expand their activities. Over the 2012–15 period, net FDI inflows averaged 2.3 percent of GDP, and this figure is expected to increase. For now, Senegal is the third-biggest recipient of FDI in the WAEMU zone and the second-largest economy in this single-currency (CFAF) economic union.

Figure 15.2.2011–17 International Rankings for Senegal

Sources: World Bank 2017a (panel 1); the Ibrahim Index of African Governance (http://mo.ibrahim.foundation/iiag/) (panel 2); and the Legatum Prosperity Index (www.prosperity.com) (panel 3).

  • The reforms of the past few years have led to improved competitiveness and governance. Nevertheless, over the past decade, the pace of improvement has remained slower than in countries like Morocco or Rwanda, whose respective business environment scores (as measured by the Distance to Frontier indicator)7 of 69.8 and 67.5 in the 2017 Doing Business survey (World Bank 2017a) are vastly superior to Senegal’s. Likewise, many comparator countries are outperforming Senegal for now on this indicator (Figure 15.2, panel 1). However, Senegal has been catching up over time, now outperforms Ethiopia, and is currently close to Côte d’Ivoire.

  • In the Mo Ibrahim (Ibrahim Index of African Governance) rankings,8 Senegal is improving on the dimension related to the business environment (the sustainable economic opportunity component). The country scores well above the African average on this component and did better than countries like Côte d’Ivoire, Ethiopia, and Ghana in 2015 (Figure 15.2, panel 2).

  • In the Legatum Institute’s prosperity ratings,9 Senegal is improving on the Business Environment subindex, with its score having risen from 42.9 to 47.4 between 2001 and 2015 (Figure 15.2, panel 3).

As a result of the regulatory efforts in recent years, the country also saw its position improving on the Transparency International Corruption Index between 2011 and 2015. Overall, the Plan Sénégal Émergent impulse has helped the country to improve a number of key rankings (Table 15.1).

TABLE 15.1Senegal’s Evolution on Key International Rankings
Rating Source2012–13 (One Year before PSE)2015–16 (One Year after PSE)
ScoreRankingScoreRanking
Mo Ibrahim6110th62.49th
(52 [2012–13]/54 [2015–16] countries in Africa)
Transparency International4177th4369th
(177 [2012–13]/175 [2015–16] countries in the world)
World Economic Forum (148 [2012–13]/140 [2015–16] countries in the world)3.70113th3.73110th
Doing Business (Distance to Frontier) (189 countries in the world)46.01178th48.57153rd
Legatum Institute: Global Prosperity Index (142 countries in the world)−1.22104th−0.82100th
Sources: The Ibrahim Index of African Governance (http://mo.ibrahim.foundation/iiag/); The Legatum Prosperity Index (www.prosperity.com); Transparency International; World Bank, Doing Business; and World Economic Forum.Note: PSE = Plan Sénégal Émergent.
Sources: The Ibrahim Index of African Governance (http://mo.ibrahim.foundation/iiag/); The Legatum Prosperity Index (www.prosperity.com); Transparency International; World Bank, Doing Business; and World Economic Forum.Note: PSE = Plan Sénégal Émergent.

Next Steps

Senegal’s current challenge is to curb structural constraints on investment, seeking to limit practices and statutes that guarantee profits only to a segment of firms. These firms either function in sectors in which profits, not to say rent, are guaranteed from the outset or engage in informal activities that are barely recorded in the national accounts, even though they are highly profitable.

During the twelfth meeting of the CPI, Senegal’s President instructed committee members to formulate a second phase of the PREAC, to cover the period 2016–18. The implementation strategy should generate a win-win coalition geared to lifting Senegal out of a rent-driven economy, reducing factor costs, and enhancing the quality of services provided by the administration. The three-pronged working method aimed at shifting from a bureaucratic to an effective administration that was tested in the 2013–15 PREAC needs to be enriched by best business environment and results-based management practices. This will involve

  • Simplification of legal instruments, stages, provisions, etc.

  • Automation of processes, tools, and processing windows.

  • Modernization of resources and working environments.

Such a working method will enable the enactment of laws and enabling regulations in less than a year and will ensure that business operators and the population quickly feel the implementation and impact of the law. From a governance-and-reform-financing point of view, it is vital for Senegal to overcome ongoing problems with anchoring the reforms and getting institutions to cooperate. This will ensure that this generation of structural reforms is completed by 2018, at the end of this cycle.

Moreover, in addition to resolving constraints derived from a lack of institutional cooperation, it will be important to ensure that key stakeholders are involved from the beginning. This will facilitate an analysis of the dynamics of key players and allow estimation of the resistance to change.

In short, the new PREAC road map aims at completing structural reforms (Table 15.2). These reforms relate to property rights, land reform, the payment of taxes and tax collection procedures, the commercial law court, transparency regarding the fees charged for central and decentralized administrative acts, regulation of the informal sector, and labor legislation. They should also include the scaling-up of e-procedures for investment and trade.

TABLE 15.2Key Areas for Future Reforms
Institutional ProblemsProposed SolutionsParty or Parties Responsible
Lengthy and Overly Complicated Process for Preparing and Adopting Long Legal Instruments
  • Computerize the instrument circulation process.

  • Involve all stakeholders from the start.

  • Prepare base documents for enabling regulations and set a six-month deadline for adopting draft decrees or enabling regulations.

  • Establish a system for following up on instruments rejected in the Council of Ministers, with a view to returning them to the council within two months.

Office of the President,

Office of the Prime Minister, National Assembly

Ministry that initiated the instrument
Ineffective Telepayment Processes
  • Draw up an electronic procedures charter, with the requisite interconnection and telepayment provisions.

  • Finalize the telepayment project in E.tax or, failing that, decide on the choice of a new business model for online tax collection.

  • Disseminate information regarding online payments.

Ministry of Economy, Finance, and Planning (MEFP)
Insufficient Budget to Finance Implementation of Reforms and the State Counterpart Share
  • Register the 2016–18 Program of Reforms to Improve the Business Environment and Competitiveness (PREAC) in the Programme triennal d’investissements publics (PTIP).

  • Set up a “business environment budget support” basket pooling ad hoc donor and creditor resources (Deutsche Gesellschaft für Internationale Zusammenarbeit [GIZ], International Finance Corporation, US Agency for International Development, World Bank, and so on).

  • Ensure clarity regarding the reform budget portion of the Emerging Senegal Fund appropriation.

  • Make allocations to the Emerging Senegal Fund.

MEFP, Ministere de la Promotion des Investissements des Partenariats et du Développement des Téléservices de l’Etat (MPIPDT), Agency for the Promotion of Investment and Major Works, Bureau Opérationnel de Suivi du Plan Sénégal Émergent (BOS).
Resistance to Change
  • Support program at all levels of government.

  • Organize benchmark study trips.

  • Revive the Administrative Excellency Awards.

  • Provide incentives for best government officials and managers.

  • Ensure that official pronouncements contrast users’ actual experience with policy goals.

Prime Minister’s Office



MEFP



Agency for the Promotion of Investment and Major Works, Bureau

Organisation et Méthodes (BOM), ministries in charge of the civil service and communication
Source: Authors’ analysis.
Source: Authors’ analysis.

The projects and sectoral reforms required to lower factor costs (logistics, irrigation, electricity, vocational training, financing, interconnection with neighboring countries, and an investment platform) must be finalized by mid-2018 to establish and reinforce competitiveness and to strengthen Senegal’s position as a hub in the West African subregion.

Finally, parallel to the above, and to accelerate change, internationally oriented special zones need to be installed, modeled on the economic zones and focal points of growth established in China, Mauritius, Morocco, and Singapore. These dedicated export- and consumption-oriented zones could be set up by updating a framework that provides for autonomous management, respecting corporate governance and economic management rules and building on the 2007 law governing special economic zones in Senegal.

By carrying out the structural reforms needed to make firms more competitive and establishing global market-oriented special zones, Senegal will enhance its appeal and increase its chances of fully exploiting its national opportunities and wealth of resources. Resident enterprises, whether large businesses or small or medium-sized enterprises, will be able to develop profitable value chains through greater private investment. That in turn will help to scale back the informal sector and provide future generations with meaningful resources for increasing their skills and inheriting an emerging market economy in 2035.

Annex 15.1 Firm-Level Productivity Indicators

Annex Figure 15.1.1.Labor Productivity in Senegal and Other Countries

(2009 US dollars)

Source: World Bank 2017b, based on data from the World Bank Enterprise Surveys.

Note: Labor productivity data are in 2010 US dollars. All data points are for the median firm in the country. Data in the figure cover manufacturing only.

Annex Figure 15.1.2.Labor Productivity in Manufacturing and Level of Development

Source: World Bank 2017b, based on data from the World Bank Enterprise Surveys.

Note: All data points are for the median firm in each country on each measure of performance. For presentation purposes, the figure shows only countries with per capita GDPs of US$12,000 or less. Countries with GDP per capita greater than this amount are, however, included in the calculation of the linear projection.

Annex Figure 15.1.3.Firm-Level Total Factor Productivity in Senegal and Comparator Countries

(Percent)

Source: World Bank 2017b, based on data from the World Bank Enterprise Surveys.

Note: Total factor productivity, or technical efficiency, is calculated using regression analysis. Total factor productivity differs from labor productivity in two ways. First, it takes capital use into account. Second, it controls for the subsectors of manufacturing. To the extent that differences in labor productivity are due either to firms not using capital intensively or to their operating in low-productivity sectors, total factor productivity should control for this. Total factor productivity and labor productivity tend to be very highly correlated at the country level. The country estimates in the figure are from LAD regressions. Data in the figure cover manufacturing only.

Annex 15.2 Reforms Carried Out From 2013 to 2016

Simplification of Instruments and Procedures to Ensure Affordable and Effective Services

  • The minimum capital requirement is no longer in force, and stamp taxes are no longer levied when one is establishing an enterprise.

  • Registration fees for real estate purchases have been lowered to 5 percent, and the procedure is complete up within 30 days following the establishment of the prior declaration and the merging of the registration and land registration procedures.

  • Construction permit applications can now be made online using the TELEDAC electronic platform and are resolved within 40 days.

  • Connection to the wastewater system now takes only 30 days for a company, using the Special Counter for small and medium-sized enterprises.

  • For connection to the electric grid, both consumption prepayment fee and setup times have been halved; a one-stop shop for small and medium-sized enterprises to be connected to the electricity grid has been set up in the Large Accounts Department of Senegal’s electricity company (SENELEC).

  • A billing system for terminal handling charges for containers has been adopted, with pricing simplified from 46 prices to 6.

  • Internship and apprenticeship contracts have been incorporated into labor legislation in order to make the rules more flexible and to make it easier to employ young people.

  • Alternative conflict settlement mechanisms have been promoted, to encourage the use of mediation, conciliation, and arbitration to settle commercial disputes within no more than 90 days.

  • Users of collateral—especially bankers, notaries, and attorneys—are now able to check out collateral online (http://www.seninfogreffe.sn).

  • Work will shortly be completed on the telepayment site and the charter of electronic procedures will consolidate progress already made with setting up a services administration system in Senegal based on more widespread digitalization.

  • Work is under way on setting up investment platforms outside Dakar to improve the supply of administrative services in the regions and to promote investment opportunities in ecologically and geographically suitable sites in the north, south, center, east, and west of Senegal, in partnership with local communities.

Structural and Sectoral Reforms to Raise Factor Competitiveness

  • Legal framework: The legal framework for business—the Customs Code, General Tax Code, Code of Civil Procedure, and law on public-private partnerships—has been updated to increase efficiency and consistency.

  • Shipping: A billing system for terminal handling charges or containers has been adopted and prices have been simplified to 6 instead of 46.

  • Tourism: A tourism revival package is being implemented—the VAT has been reduced to a flat 10 percent; the visa requirement has been abolished; the stamp tax on airline tickets has been abolished and the incidental tax on such tickets cut by half; and tax exemptions for tourist facilities are available for 10 years in southern Senegal.

  • Agriculture: Irrigation equipment has been suspended/excluded from the VAT.

  • Vocational training: Employers’ share of the wage tax contribution to vocational training rose from 5 to 25 percent between 2012 and 2015, and the Higher Education Institutes (ISEP) were established.

  • Hydraulics: The Rural Wells Drilling Office (OFOR) has been established as part of a service delegation plan.

  • Financing for small and medium-sized enterprises: Financial leasing and credit information on borrowers has been developed. At the same time, a Priority Investments Guarantee Fund (FONGIP), a National Economic Development Bank (BNDE), and a Sovereign Fund for Strategic Investments (FONSIS) have been established to support specific segments of small and medium-sized enterprises.

  • New land use rights (Foncier aménagé): The economic development zones and industrial platforms were scheduled to start becoming operational, and the first designated hectares were scheduled to become available, in late 2017.

  • Energy: The Energy Mix Plan has been implemented, with the eventual aim of achieving a price of US$0.15 per kilowatt; 120 megawatts of additional capacity were expected by the end of 2017.

References

    BloningenB.2005. “A Review of the Empirical Literature on FDI Determinants.NBER Working Paper 11299National Bureau of Economic ResearchCambridge, MA.

    ChakrabartiA.2001. “The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions.Kyklos54(1): 89114.

    DanielsJ. D. andC. J.QuigleyJr.1980. “Pull Factors for Direct Investment: A Cross Regional Comparison.Foreign Trade Review15(3): 26388.

    FriesS.T.Lysenko andS.Polanec.2004. “The 2002 Business Environment and Enterprise Performance Survey: Results from a Survey of 6,100 Firms.EBRD Working Paper 84European Bank for Reconstruction and DevelopmentLondon.

    FrootK. A. andJ.Stein.1991. “Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach.Quarterly Journal of Economics106: 11911217.

    KrugmanP.1991. “Increasing Returns and Economic Geography.Journal of Political Economy99(3): 48399.

    LipseyR. E.1999. “The Role of Direct Investment in International Capital Flows.” In International Capital Flows edited by M.Feldstein.Chicago: University of Chicago Press.

    LoewendahlH. andE.Ertugal-Loewendahl.2001. “Turkey’s Performance in Attracting Foreign Direct Investment: Implications of EU Enlargement.ENEPRI Working Paper 8European Network of Economic Policy Research InstitutesBrussels.

    LoveJ. andF.Lage-Hidalgo.2000. “Analyzing the Determinants of US Direct Investment in Mexico.Applied Economics32(10): 125967.

    Nicet-ChenafD. andE.Rougier.2008. “FDI, Diversification and Growth: An Empirical Assessment for MENA Countries.GREThA (Groupe de Recherche en Économie Théorique et Appliquée) UMR CNRS 5113University of Bordeaux.

    SternN.2002. “A Strategy for Development.World BankWashington, DC. Unpublished.

    SternN.2003. “Development as a Process of Change: Toward a Dynamic Public Economics—Keynes Lecture in Economics.” In Proceedings of the British Academy Volume 12: 2002 Lectures.London: British Academy. doi:10.5871/bacad/9780197263037.003.0011

    WeiS. J.2000a. “How Taxing Is Corruption on International Investors?Review of Economy and Statistics82(1): 111.

    WeiS. J.2000b. “Local Corruption and Global Capital Flows.Brookings Papers on Economic Activity31(2): 30354.

    World Bank. 2017a. Doing Business.Washington, DC.

    World Bank. 2017b. Senegal: An Assessment of the Investment Climate.Report AUS 7348Washington, DC.

    World Bank. 2017c. World Development Indicators.Washington, DC.

The authors would like to thank Jean-Michel Marchat and Vera Songwe for valuable comments, suggestions, and contributions to the chapter.

It is now widely acknowledged that the development of the private sector in a market economy requires an improvement in the “investment climate” in order to promote economic growth and a reduction in poverty. The implicit logic of this strategy is that higher living standards and poverty reduction can be achieved only through sustained economic growth, which itself depends on an improvement in factor productivity. This relies on increased investments in human and physical capital and an acceleration of technical progress, which in turn depend on an investment climate conducive to economic activity. Thus, the investment climate is defined as the present and expected economic, institutional, and behavioral policy environment that affects the profitability and risks associated with investments. As such, it covers a broad area ranging from the regulatory and behavioral framework to the performance of firms and the functioning of factor markets in a given country (Stern 2002, 2003).

The Plan Sénégal Émergent is the government of Senegal’s new policy framework aimed at helping Senegal become an emerging market economy by 2035. It is based on three strategic pillars: (1) structural transformation of the country’s framework, (2) development of its human capital, and (3) good governance and rule of law.

According to World Bank (2017c) data, Mauritius’ GDP per capita (expressed in 2010 constant dollars) rose from US$6,245 in 2005 to US$9,470 in 2015, while the figures for Morocco indicate that GDP per capita rose in that country from US$2,369 to US$3,240.

These figures are for sub-Saharan Africa (all income levels) (World Bank 2017c).

Historically, resource-rich countries have seen a higher inflow of investment in the period following discovery of oil and gas resources than non-resource-rich countries. However, a number of non-resource-rich countries with a better business environment—such as Cabo Verde, Mauritius, and Namibia, have also been able to attract high levels of FDI. This underlines the importance of improving the business environment irrespective of conditions in the extractive sector.

According to World Bank 2017a, the Doing Business Distance to Frontier score captures the gap between an economy’s performance and a measure of best practice across the entire sample of 41 indicators for 10 areas (labor market regulation indicators are excluded). Calculating the Distance to Frontier score for each economy involves two steps. First, individual component indicators are normalized to a common unit in which each of the 41 component indicators y (except for the total tax rate) is rescaled using a linear transformation (worst – y)/(worst – frontier). In a second step, scores obtained for individual indicators for each economy are aggregated through simple averaging into one Distance to Frontier score, first for each area and then across all 10 areas. An economy’s Distance to Frontier score is indicated on a scale from 0 to 100, on which 0 represents the worst performance and 100 the frontier.

According to its web page (http://mo.ibrahim.foundation/iiag/), the Ibrahim Index of African Governance is an annually published index that provides a statistical measure of governance performance in every African country. Governance is defined as the provision of the political, social, and economic public goods and services that every citizen has the right to expect from his or her state and that a state has the responsibility to deliver to its citizens. The index’s governance framework comprises four categories: Safety and Rule of Law, Participation and Human Rights, Sustainable Economic Opportunity, and Human Development. These categories in turn are made up of 14 subcategories, consisting of more than 90 indicators.

According to its web page (http://www.prosperity.com), the 2016 Legatum Prosperity Index is based on 104 different variables analyzed across 149 countries. The 104 variables are grouped into nine subindexes (Economic Quality, Business Environment, Governance, Education, Health, Safety and Security, Personal Freedom, Social Capital, and Natural Environment), which are averaged using equal weights. Index scores range between 0 and 100.

    Other Resources Citing This Publication