Private Sector gaining shape - Michael Porter

Renowned Harvard University Economist and Author Prof. Michael Porter visited Rwanda this week. The New Times Arthur Asiimwe interviewed the scholar whose academic objectives focus on how a firm or region can build a competitive advantage and develop a competitive strategy. Below are the excerpts. TNT: Let me begin my interview looking at the larger picture. How you see Africa emerging out of the current global crisis. Do you think this continent will be the hardest hit? Porter: Well, first of all, I would be more comfortable speaking about Rwanda than Africa because I haven’t worked in most of the countries. I think the crisis is not over yet. I think the US Economy is starting to slowly grow again. The US will probably be the first of the advanced economies to start growing. Europe will be behind, Asia will be behind, the US is restructuring and I think that the financial system is being rebuilt and so the US will start growing again. I think fortunately unlike some of the Asian economies and other economies that were heavily dependant on exports, Rwanda’s exports have not been much affected by the financial crisis and even though Rwanda is going to face slow economic growth, it will continue to have quite a good growth rate this year and next year. So I think part of the reasons that Rwanda hasn’t been so hard hit is because it is not yet a globally connected economy. It’s still very much a localised economy. That said, I think what is affecting Rwanda is the liquidity and tightness in the financial systems around the world. The situation in the banking systems around the world is putting pressure on Rwanda from the liquidity point of view and I think some of the companies in Rwanda, even though they are still growing, the slower growth is putting a little bit pressure on some of the companies, so is the opening of the East African Community and the reduction of tariffs. I think one of the things to watch carefully now is the ability of Rwandan companies to get financing from the banks and there is quite a bit of concern now in the corporate sector on that issue. TNT: Certainly there’s is a concern of ‘credit squeeze’ in banks, its difficult, almost next to impossible to access a loan from the bank. Porter: I think there is going to be a need for probably a new package of financial support; particularly for Small and Medium size Enterprises (SME’s) and I think there is the discussion about the plans underway. There is some discussion about the tax system and whether we should simplify the tax system. I think Rwanda is going to need to think about how to provide more support for businesses during this time of credit squeeze. I think some initial steps have been taken but so far not quite enough. TNT: What exactly do you think should be done, what package do you think can be put in place? Porter: Well, typically what government can do is to start putting some more capital into the banking system to really facilitate lending. It can provide loan guarantees so that the risk goes down. But I think probably the fundamental problem is that banks right now don’t have a lot of liquidity and it’s not a fact that they do have a lot of money and they are holding it---no, its just that their liquidity is low and therefore they still need enough capital to grow. The first step should be injecting some more capital into the banking system to enable more lending and probably there’s going to be a need for incentives and perhaps tax exemptions to facilitate or make companies more competitive. Rwandan Development Bank probably needs to step up and play a more aggressive role during this period. It needs to adopt a more aggressive strategy of supporting SME’s in particular. TNT: I know you have been coming to Rwanda quite often and a renown economist like you, you must be interested in seeing this economy take shape. What exactly have you been advising Rwanda? Porter: I have probably had a relationship with the Government of Rwanda and I think this is the 9th year and my fundamental role is to try to work, heavily with the Private Sector. The core issue in Rwanda just like any other developing country is how to build capabilities and strength in the Private sector so I spend enormous amounts of time working with the Private Sector Federation. We are trying to launch cluster initiatives where we organise coffee, tea and tourism and get the private sector really working together to start taking steps to improve themselves rather than wait for the government. I have also spent time on really all aspects of government policy and I have provided my guidance and input because I work with so many countries on competitiveness and economic development. TNT: Are there government policies that enable a vibrant private sector? Porter: Yeah…and various issues in the business environment…you know, University systems, logistics, airport, etc. Last year for example we spent a lot of time in a working group discussing about this airport right here and everybody was focussed on the new airport and I identified and led the effort point out that we really had to fix this airport (Kigali International Airport) because it would be a long time before the new airport comes up. This airport was providing bad services---It was very unattractive, the baggage never came yet this was the first impression many people had of Rwanda when they came here first. (Interview was conducted at airport-Ed)So when this happened last year, there has been quite a lot of progress. What I tried to do is identify critical issues that are holding back business development and then be a sort of catalyst. Am not a consultant, am not paid, am a friend of Rwanda and I have now got to know many of the Ministers and many of the private sector leaders and so am sort of a councillor and advisor who in a friendly way tries to get things move along. TNT: When you look at Rwanda’s Vision 2020, it seeks to make the Private sector the engine of growth, the driver of the economy. Do you think this is a realistic dream? Porter: Yes, I think so. Officially there is no other way and I think it’s inevitable that in a developing country the government has to play a big role in pushing and catalysing and investing but ultimately the Private Sector is the economy. I think we are making actually good progress in Rwanda in the private sector. There is a broader base of businesses now, the Private Sector is acting in a more proactive way, the PSF is much improved. I actually think during this visit, the thing I have noticed most is that the Private Sector has strengthened significantly in terms of its role in the economy. Am encouraged by that but of course there are as many challenges still to overcome. TNT: In your view, what do you think remains the major obstacle that keeps pulling down the private sector? Porter: Its hard to point a finger on one, there are many obstacles but I think probably the biggest single obstacle facing the private sector and Rwanda in general is the issue of skills and capacity. I think there are lots of business opportunities, lots of areas where you can make profit, lots of good policy initiatives underway but over and over again we are limited by lack of skills and capacity. TNT: Rwanda recently joined the Customs Union of the EAC. There has been some outcry that Rwanda might turn into a dumping site for goods manufactured from within this trading bloc. Dou think by opening up to these stronger economies, Rwanda made a calculated move? Porter: I think Rwanda is inevitably dependent on having good economic relationships with it neighbours. Its much more of a small country, it’s quite isolated and it has to trade through its neighbours in order to reach international markets and frankly I think Rwanda has nothing to fear from its neighbours in terms of competitiveness. For example in Kenya there is a good private sector which is much more developed but the Government in Kenya is very ineffective and there are no signs of progress.Kenya is not a good place to do business. I think we are going to see Kenyan business move here because it is a more stable environment and more efficient and effective. I believe that opening up is not something we should fear. It’s going to create more opportunities for Rwandan business. I also think that companies here fear competition from other companies in the regional, this I have noticed in more than the 50 companies I have spent time with, probably the greater fear is from China. TNT: Why would an Investor from your country or our neighbours here Kenya seek to do business in Rwanda? Porter: Well, everybody invests for various reasons but the most important reason is that you can build a very good business that can make a profit and I think that there are a lot of profit opportunities in Rwanda because the economy is lacking many essential things. For example we don’t have enough building materials, we don’t have enough ICT services, we don’t have enough of anything in terms of running the economy so I think a well run business can be profitable here. This also is quite a good potential gateway to do business in the neighbourhood say in Burundi or Congo. I think when you look at where people would rather live, where people would rather have headquarters, Rwanda probably has an advantage right now because the other countries are less effective in improving the government, fighting corruption and making business rational. You know Rwanda is not just an economic innovator but it’s also a social innovator. The agriculture process and healthcare improvements that have taken place here, all those things I think are making Rwanda very appealing to many outside investors. TNT: About your latest trip, what has been your major focus? Porter: The major focus of this particular trip has been working with the Private sector through the PSF to really understand the progress we are making in various clusters in the economy. So I have spent a lot of time reviewing our progress in mining, tourism, silk production which is an exciting new opportunity, in ICT, coffee and other various areas and then talking to Private sector leaders about what obstacles they are facing. What I have been working on for many years now is how we can get the private sector in Rwanda to step up and take its own leadership role, to be a discussion partner with the government. We have to create a better balance between the private and public sectors. For example the PSF has done a number of studies and surveys this year and they have started keeping data hence becoming better advocates for doing business. I was with President Kagame earlier today and I told him that, 3 to 4 years ago, the Private Sector has registered exponential improvements. The dynamism is improving if you look back the past 3 years and where we are this year. TNT: What drives the passion you have for Rwanda? Porter: I must say that am invited to work in many, different countries around the World. After many years of experience, what I am more interested in is actually working with countries where there are opportunities of getting things done and that actually change will happen. What I have come to understand is that fundamentally this is heavily based on leadership. My initial attraction to Rwanda is that as I got to know President Kagame, I found him to be a capable, disciplined and performance oriented leader. Over time I got to know many more people and I have come to really treasure the culture and warmth of Rwandans and I think we are making very good progress. As long as I continue to be invited, I will take the pleasure to be here. Ends