Rod Reynolds on FDI

From the PAC

The above photo features Rod Reynolds at a maize co-op talking about the contracts necessary to bring in a maize drying-and-storage facility.

ISOKO: Can you briefly introduce yourself and your work?

Reynolds: I am CEO of Scotiabank Europe Plc, a London based corporate and investment bank. I am currently on a 24-month sabbatical focusing on development efforts in Africa and India. My experience includes living and working in seven different countries, mostly in the developing world. I have seen the efforts and frustrations of the people of these countries as they battle to improve their livelihoods against often daunting environmental situations. I am a believer in helping entrepreneurs help themselves improve their economic and social standing and, in the aggregate, having an impact on their country.

My approach is to use my business experience to assist both the entrepreneurial community as well as poverty-alleviation focused NGOs. I am hopeful that these entities can accelerate their advancement by tapping into my experience as well as my network of qualified individuals and organizations.

ISOKO: Why is FDI important for Africa’s economic development?

Reynolds: Foreign Direct Investment (FDI) is one of the most potent tools for accelerating a developing country’s economy. It has direct, positive correlations to poverty alleviation, GDP growth and the advancement of skills for the workforce. The benefits of FDI are widely documented and also include technological transfers, creation of more competitive marketplaces, increased governance standards and enhanced foreign trade. The latter has significant, positive balance of payment implications and can help to decrease reliance on foreign aid.

FDI, being a major catalyst for development, should be an integrated part of a government’s economic growth plan and significant efforts need to be undertaken to create the right environment to attract such capital.

ISOKO: What are the key issues to think about in attracting FDI?

Reynolds: I see three types of FDI: natural resource based, infrastructure and the rest. In my experience, natural resource based FDI is much less selective than the others – they go where the resources are. FDI in infrastructure most often depends on the government being on one side of a key agreement as a supplier or customer; hence the credibility of the host government tends to be the largest factor in this type of investment decision. The ‘rest’ category would include the highly desired manufacturing and knowledge based sectors. These sectors are much more selective and basically can choose from a much broader list of candidate countries in which to invest. This means countries are compared against each other to see which one offers the best set of inducements, ease of doing business, safety of investment and framework for investment.

Much of the current FDI in developing countries has come through the purchase of indigenous companies by foreign entities. In the case of Rwanda, FDI will necessarily be more weighted towards greenfield-type activities. It is important to recognize the significantly higher risk involved in this type of investment. As a result, investors will be much more circumspect. The obstacles that natural resource FDI or acquisitions might withstand could well preclude greenfield investments.

ISOKO: In Africa/Rwanda, what policies or institutions have you seen as inhibiting potential investments? What social practices have you seen inhibiting FDI?

Reynolds: Firstly, I would like to say the Government of Rwanda has done a tremendous job improving the FDI climate. They have successfully moved up in the major metrics of doing business as measured by the World Bank and have addressed a number of other areas to encourage FDI.

I have talked to a number of companies that have invested and, probably more importantly, companies that considered investing but decided not to proceed. My assessment is then, of course, anecdotal. Nevertheless, it does suggest that there are some areas that merit further examination.

I have heard concerns with the lack of depth in the bureaucracy, the delay of obtaining decisions, obfuscated tax and VAT policies, a shortage of experienced general managers, the unreliability of infrastructure (e.g. power), and lack of jurisprudence in contract law or in the rule of contracts. I have often heard comments from investors that it was just too much effort and required too much management.

This later point is critical from the standpoint of foreign companies deciding to invest. After assessing risk and return, a company will look at the amount of head office management effort required and assess that against all the other competing investment opportunities.

ISOKO: Are there any other inhibitors to FDI that you would like to mention?

Reynolds: It would be highly insightful to approach these questions in a more formalized manner. As I indicated above, my views are based on a number of interviews I have conducted but, notably, they are not statistically valid. As well, there may be a gamut of inhibitors whose varying degrees of importance would provide guidance on where efforts should be focused.

ISOKO: What are the necessary steps for moving forward to mitigate these obstacles?

Reynolds: The basic tenet of a good FDI regime is the need to establish a transparent, broad and effective environment that enables investment. Supporting that is the building of human and institutional capacities required to implement the regime.

As mentioned above, the goal for a country should be to offer a very competitive environment. It is not realistic to believe that non-resource, greenfield FDI will flow to a country with apparent investment obstacles when there are so many other choices available.

In my experience, it is often the issues behind the issues, which organizations such as the World Bank measure, that actually hinder investment decisions. To move forward in Africa, greater clarity on the specific obstacles potential investors have experienced is necessary as well as an understanding of the relative importance of each factor (as a note, the World Bank ranks all factors equally). Once these have been identified, clear plans must be published on how they are currently being mitigated and will be mitigated further.

ISOKO: Why might Rwanda be especially poised as a laboratory for exploring these issues?

Rwanda has set clear objectives in its Vision 2020 for a viable private sector as the principle growth engine of the economy. The Government is fully onboard with increasing FDI as an important element of this goal and it has been especially successful in marketing itself as a potential FDI candidate.

To date much has been done and the Rwanda Development Board continues to move forward in this regard. However, by further studying the issues experienced by current and would-be investors as well as better understanding the relative importance of the issues additional guidance could be generated on crucial focus areas. An independent party might be better suited to this effort in order to extract the most real and meaningful data possible.