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Opinion

In Africa, the best 'charity' is aid for business

The traditional approach to solving Africa’s problems through aid has created a cycle of dependency. A better approach is to use donor subsidies to fund private, for-profit ventures. Those ventures create systemic and sustainable change in the community.

By Tony O. Elumelu / May 6, 2013

Tony Elumelu, chairman of the Transnational Corporation of Nigeria, speaks during the Presidential Power Reform Transactions signing ceremony in Abuja, Nigeria, April 22. In his op-ed Mr. Elumelu writes: 'Private enterprise cannot compete with highly subsidized capital, and the net result is that charity often provides a short-term fix at the expense of a long-term solution.'

Afolabi Sotunde/Reuters

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Lagos, Nigeria

The traditional approach to solving Africa’s problems has been to rely on charity and aid – free money, more or less. And while charity has done much good for millions across the continent in terms of food security, health care, emergency response, and education, its chief weakness is that its results have not proven sustainable.

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Africa finds itself continually going back to donors simply to maintain the status quo. What the continent really needs is to create the environment – political, economic, and social – to achieve self-sufficiency. 
  
Experience teaches that connecting the private sector to economic development is the most effective way to build wealth and resources in local economies, and ensure sustainable development. Philanthropists, nonprofits, and nongovernmental organizations can help achieve this self-sufficiency if they harness their resources to create change in the private sector.

Consider my own experience as a founder of Standard Trust Bank (STB), which later became United Bank for Africa. We started with a defunct bank and a $5 million investment in 1997 – partially funded with “development” capital.

By the time I retired in 2010 we had created a pan-African financial institution, now serving nearly 7 million customers, through 750 branches in 18 African countries – and providing direct or indirect employment to 20,000 employees. That business now contributes to employment and skills development, a growing tax base in local economies, and an integrated financial infrastructure to facilitate trade and investment. 
 
Donor funds flowing into Africa annually are many times the $5 million investment that started our bank, but have they created equivalent impact? Philanthropy and development aid can, and should, be components of Africa’s growth strategy. But perhaps it is time to rethink how that capital is deployed and to focus more on sustainable private sector solutions.
  
Take water, for example. Charity can pay for a new well, but if no one has a personal interest in it, or responsibility for maintaining it, soon it will fall into disrepair and disuse. Structuring that donation as a for-profit, micro-utility creates incentives and resources to maintain it – improving its sustainability and long-term impact.
  
Local commercial enterprises have proven to be much more sustainable than charity projects. This flies in the face of the common misperception that developing economies are “aid dependent” – i.e., they cannot possibly have the resources to support commercial enterprises.

On the contrary, free money can crowd out vital private sector solutions. Private enterprise cannot compete with highly subsidized capital, and the net result is that charity often provides a short-term fix at the expense of a long-term solution.

A better approach is to partner with communities to use the donor subsidies to reduce the risk to investors to enter developing markets, by helping to fund private, for-profit ventures. This is an approach we advocate and practice at The Tony O. Elumelu Foundation and Heirs Holdings.

Private investors are willing to take risk, but are often wary of taking the full brunt of development risk in emerging regions. Philanthropic dollars can help in many ways, from co-investing with the private sector, to partially subsidizing operations until businesses can achieve profitability and sustainability, or subsidizing management training to help specific businesses gain the skill sets they need for growth.

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