How to get the private sector to do its bit

le 28 October 2019

In any economy, the relative strength of investment provides a true gauge of investor confidence! Because for investors, risk is an important factor but it’s confidence that ultimately determines the level of risk assumed. Under all circumstances, the prospective rate of return of course needs to match the level of risk incurred, particularly for the private sector! But, why are Moroccan private investors being blamed for investing less than the government? To what extent is their behaviour due to their lack of confidence?

We need to tackle this issue by first knowing the actual amount of private investment made in recent years it we are to ascertain whether it is adequate. But early on, we run into a brick wall, however, since none of the organisations and institutions providing this kind of data (HCP, DEPF, Bank Al-Maghrib) have any accurate figures. In as much as total annual public investment by state-owned enterprises and local authorities is known, despite the figures being budgetary only, the figures for private investment, however, are either an approximation at best or entirely unknown at worst. And as the following tables show, we must settle for estimates it we are to continue with our enquiry.

A well-kept secret!!!

We have taken GDP as our starting point, which has risen steadily over the past 5 years from MAD 925 billion to MAD 1,100 billion as well as Gross Fixed Capital Formation (GFCF), for which data is available since 2015, but still not for 2018 (!), and which has fluctuated around the MAD 300 billion mark. Despite the fact that it does not necessarily reflect investment as a whole, an initial observation can be made, which is that public investment accounts for more than half of total investment.

In 2015, 2016 and 2017, public investment fluctuated around the MAD 160 billion-mark, accounting for more than half of domestic investment.  The breakdown is as follows: MAD 67 billion for fiscal investment in 2017 and 2018; a relatively modest MAD16 billion for local authorities; MAD 80 billion for state-owned enterprises in 2016, before falling back to MAD 60 billion in the following two years.

As far as the private sector is concerned, the HCP each year publishes a figure for household investment, which can easily be calculated on the basis of the amount of loans disbursed to fund this investment. The figure stands at around MAD 76 billion a year. Therefore, by subtracting public and household investment from total GFCF, we arrive at an estimate of investment by private sector companies of around MAD 65 billion on average per year. This figure, by comparison with private investment globally, is barely 25%, perhaps even as low as 20% of our country’s total investment. And 40%, when compared to public investment. From these estimates, we can certainly conclude that investment by private companies is relatively weak!

This observation is particularly significant in current times with the government lacking adequate resources for it to remain the country’s leading investor. And this is even truer when one considers that, having carried out a major infrastructure-related public investment programme, the government now needs to focus on social investment, which has become an urgent matter.

To each according to his means

It must be acknowledged that the country’s development over the past 20 years has been financed to a large extent by government. It is therefore reasonable to expect the private sector to adopt a more dynamic approach as far as the country’s investment burden is concerned, if economic growth is to accelerate!

If this is to be achieved, however, we need to address the issue as to whether confidence is indeed the missing ingredient that is holding the private sector back from investing? A major investor harbours doubt. The existing level of private investment might simply be commensurate with the actual size of the private sector.

To be able to demonstrate that, we would need to look into companies’ cash flows and evaluate how much is reinvested by comparison with the amount distributed in dividends or the amount set aside to pay down debt. And if we have been able to make an estimate for private investment, then, by applying the same logic, our entire argument would be based on a series of suppositions!

Estimate of private investment
MAD billions
GDP at current prices
Gross Fixed Capital Formation
Public investment budget
Average rate of budget execution estimated at 73%
GFCF – Civil Service bodies
GFCF – State-owned enterprises
GFCF – Public sector
GFCF – Household sector
GFCF – Private sector (corporates)
Private investment/(Private investment + Public investment) ratio
Private/Public investment ratio

If investment therefore equalled one-third of companies’ cash flows on average, it could be concluded that the amount invested was entirely in keeping with the size of the private sector and that the latter’s level of investment was indeed commensurate with its size. This may well be the case in Morocco. At some point, we might even have invested too much in real estate and land, creating a bubble that eventually burst.

So, based on this new approach, it could be argued that, if private investment amounted to about 30% of companies’ cash flows, and assuming that shareholders need to be remunerated and debt paid down, the private sector is in fact investing to the best of its ability. But this type of practical reasoning could also show the contrary to be true, that private investment is insufficient and that companies are paying out more to their shareholders or that they are quite simply too indebted.

Therefore, all in all, for the 20,000 or so private Moroccan companies, it would have been entirely feasible to adopt such an analytical approach and the results obtained would have been highly effective for our enquiry. Furthermore, regardless of the wealth generation aspect, companies invest as a response to market expansion. Consequently, either they don’t believe in it, or they don’t want to get involved, or they are simply not committed to entering new markets, overseas markets for example. We know, however, that the Office des Changes has made it easier for companies to invest abroad by allowing them, without requiring prior authorisation, to invest up to MAD 100 million per company per year in Africa and MAD 50 million elsewhere.

Even beyond these ceilings, it willingly supports overseas investment. Therefore, whenever companies have these opportunities and they remain hesitant, it is because that they lack confidence. Investing is an act of faith in the future. But why are companies lacking confidence?

Falling demand

One of the answers given by this same investor, our interviewee, is based on a well-known fact, which is that growth in aggregate demand, since the Arab Spring of 2011, has halved by comparison with the previous decade. Real economic growth, previously at 5.5%, has fallen to 3%, resulting in a significant decline. The Arab Spring was therefore a massive game-changer as far as consumption was concerned. But all, a new approach to management has replaced the old model. Decision-making has become slower, more hesitant, preventing the business model from achieving the same goals with the same level of efficiency.

Investment expenditure (MAD millions) GOVERNMENT – GENERAL BUDGET (1) Projected Actual Local authorities (2) Projected Actual Tax receipts State-owned enterprises and institutions (3) Projected Actual (1) Government – General Budget – public finances statistical bulletin (2) Local finances statistical bulletin (3) Report on state-owned enterprises and institutions, draft finance bill for 2019 (4) Year-end forecasts – Report on state-owned enterprises and institutions, draft finance bill for 2019

The political establishment’s understanding of economic mechanisms has also changed. And the private sector is suffering the consequences of hasty political decision-making. Businesses are also stating that government is not working in unison. Only a certain number of ministers are working, each in their own little corner, trying to do their best. A team, overseen by a coordinating arbitrator, who would decide on what the priorities are, would be more effective, as is the case in Spain where the Deputy Prime Minister is responsible for the economy. This post, working alongside 5 or 7 technical ministers, ensures that business get done much quicker. A unit of this kind is needed within a politically-inspired government, a representative democracy, to be able get things done. When the private sector sees that the government is dynamic, that it announces things clearly and that it is able to coordinate everyone, then it will inevitably follow suit. If not, progress will be slow…

A change of direction

Furthermore, public investment, admittedly high, must be redirected. It has long been focused on basic infrastructure with spending amounting to at least MAD 50 billion each year. If a small portion, MAD 10 billion, were to be allocated to the economy’s ‘fixtures and fittings’, it should prove highly effective. Having to invest in the ‘bricks and mortar’ of hotels, factories and land places an additional burden on the private sector and causes projects to be delayed. Insofar as public investment projects in roads, airports, ports, etc. are one-off and, therefore, not a net positive for the economy, asking the private sector to manage these infrastructure assets could provide a means of reinvigorating the economy.

Specifically, the government could complete the construction of eight tourist resorts whose main problem is the bricks and mortar aspect, finance these projects and hand them over to international operators to manage. It is worth noting that, in 2006 and 2007, the bricks and mortar were financed out of real estate developers’ profits. But, since the crisis of 2008, real estate companies have not generated any profit. For this reason, the government should therefore assume responsibility in tourism and industrial zones, lease the assets to private operators, until the moment that REITs are able to take over. This means shifting from so-called ‘basic infrastructure’ to ‘production infrastructure’, which generates jobs. ‘Diverting’ MAD 10 billion of public investment a year would reinvigorate the private sector by removing barriers to entry and inciting it to get involved. The government would therefore act as a catalyst, focusing on the infrastructural side of things while enabling the private sector to concentrate on the superstructure…