Red Tape and Risk Hinder Liberia’s Businesses

Apr 19, 2012 at 3:59 pm Leave a comment

This post originally appeared at Africa.com on October 18, 2011.

As the Liberian presidential elections head towards an imminent run-off between current leader Ellen Johnson Sirleaf and Winston Tubman, infrastructure development is weighing heavily on Sirleaf’s mind. In a recent interview with Kira Kay of PBS Newshour, Sirleaf said she spent her first term laying the basic groundwork for better infrastructure. A process that took longer than she anticipated, she admits.

Among the many infrastructure hurdles Liberia faces, ease of doing business is certainly one of them. This year the nation ranks 155 out of 183 countries in the World Bank’s Ease of Doing Business Rankings. That’s worse than the country’s rank in the two previous years.

To Sirleaf’s credit, her administration has begun to loosen the red tape. But it cannot be a one-man show. All actors in Liberia must do what they can to better the business climate. Even then, the process will takes years.

“Lack of collateral is the biggest challenge,” says Dalberg associate Jason Wendle in a recent blog post for Venture Capital for Africa. “Banks see the SME market as attractive but they have difficulty assessing the risk and there are few assets in place needed to secure the investment.”

For now, entrepreneurs are financing their own businesses, which is not sustainable, to say the least. Take Lu Tolbert, for example. He founded the Liberia Cocoa Corporation, which began planting in late 2009.

“To demonstrate the potential of my project to investors, I used my own cash and essentially pre-financed everything,” says Lu. “Liberia is a high risk environment in terms of doing business – interest rates are high, access to capital is difficult, you need collateral. Everything needs to be done through personal finance.”

Post-conflict countries are viewed as risky environments for investment, which result in high interest rates and short payback periods. This is particularly a problem for agricultural-based companies, like Lu’s, which depend on seasons and long growth times. Cocoa’s gestation period takes four to five years.

“It’s just not economically viable for people to get involved [in cocoa] because there are so many constraints,” says Lu. “As an investor you really must want to do what you want to do.”

Compounding the problems of accessing finance is a lack of specialized technicians, public support services and corruption. Todd Moss, director of the Emerging Africa Project, at the Center for Global Development can add to the list: no electricity grid, few roads, a generation of kids that didn’t go to school.

“If you were starting a business, you would have to provide for a lot of your own services that you would [normally] get from others in other countries,” says Moss. This leaves a lot of room for failure if you are a small- or medium-sized enterprise (SMEs). It’s just one more reason why banks and private equity players tend to finance only large projects and multinationals in places like Liberia.

Even if the capital were available, many entrepreneurs in Liberia are not quite ready to access it. Moss gave the example of the US-led Liberian Enterprise Development Fund, which provides capital to get SMEs off the ground. It was launched in 2007.

“They’ve done well, but really they’ve had a hard time identifying companies even in that small to middle space that were ready for second-stage financing,” Moss said. “That’s a good indicator that there’s still a long, long way to go.”

In April the Liberian government announced a new digitized business registry that will ease the process to start a business. It will reduce the number of procedures to register a business from 12 to five, the time from 68 to 20 days and lower the cost by $700.

Five months later, the government officially launched its program supporting micro- and SMEs through advocacy, training and finance.

These are both helpful, but not enough. Entrepreneurs and investors must plan accordingly but ultimately take risks. Moss is hopeful, “If [Liberia] actually stays stable and continues to push reform, you’ll see a lot of that entrepreneurial activity take off.” As elections near, let’s hope that’s not too big of an “if.”

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Entry filed under: Africa, Economic Development, Humanitarian Aid & Assistance, Liberia. Tags: , , , , , , , , , , , .

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