01:09 pm
21 October 2016

Africa is still hot – and here are the little things that can turbo charge business growth

KIGALI: Africa is home to 700 large and increasingly pan-African companies that make above $500 million in annual revenue, but on average, even the big African companies are smaller than those in other developing regions of the world, a session at the World Economic Forum on Africa that is coming to a close in Kigali, Rwanda was told.

According to data presented by Acha Leke, director of McKinsey, these companies together boast $1.4 trillion in revenues, and many continue to grow very fast.

“But there are several constraints for large company growth on the continent, including fragmented markets, difficult supply chains and a lack of an enabling environment,” said Leke.

Leke was moderating a panel that was looking at Africa’s growth challenges and opportunities, which underscored the message that the continent’s growth story is still solid but needs to be more nuanced.

Also on the panel was Aliko Dangote, chairman of Dangote Group and Africa’s richest man; Dominic Barton, global managing director of McKinsey; Makhtar Diop, World Bank vice president for Africa; Carlos Lopes, executive director of the UN’s Economic Commission for Africa; and Ashish Thakkar, entrepreneur and chairman of Mara Group.

Bullish message

Dangote doubled down on his bullish message that he has talked up this year, highlighting that his company sees this as good a time as any to invest on the continent.

“Last year alone, we put down $4.3 billion in cement investment in Africa. We’re working to build a refinery, gas pipeline and fertiliser factory in Nigeria, and on average, the current economic environment means that our projects are 30% cheaper than before,” said Dangote.

“But the problem that African businesses face in trying to scale is access to finance, and this depends on having strong domestic banks. The reason why Nigerians are some of the most entrepreneurial people in Africa is because 90% of domestic banks are owned by Nigerians. That makes getting business loans easier because they understand the market and the people,” said Dangote.

ECA’s Lopes brought into focus the tremendous opportunity for boosting African growth, simply by better managing existing funds.

“Pension funds are a disaster in Africa right now; we have $1 trillion in pension funds lying idle and not being properly managed. Even for a country like Namibia that has the equivalent of 80% of its GDP in pension funds, it can do so much better,” said Lopes.

Still, said Lopes, we are underestimating Africa’s economic size.

“Only 12 countries have up-to-date national accounts. If we have proper data, we will definitely find that the continent’s economy is much bigger than we think.”

World Bank president Diop added that institutional investors like pension funds need predictability and stability, and “these things are under our control. The savings rate in Africa is very low, and this affects the availability of long-term funds and business growth.”

Large companies in utilities, transportation and healthcare have achieved double-digit revenue growth in local currency terms between 2008 and 2014, and on a broader scale, the continent’s prospects are strong, powered by four factors.

First is the demographic opportunity – the continent will have the world’s largest working age population, which by 2034 will have reached 1.1 billion; a highly valuable asset in an otherwise ageing world.

The jobs story

21 million new stable (formal, wage-paying) jobs were created over the past five years, and 53 million over the past fifteen years. Stable jobs grew at a rate of 3.8% between 2000 and 2015, 1% faster than growth in the labour force. This is still far from the job-creation trajectory Africa needs to fuel future growth, but it is progress.

“85% of Africa’s population is under 35 years of age,” said Thakkar. “This is the time to act bigger and bolder.”

Second is rapid urbanisation – another 190 million people would have moved to urban centres by 2025, and on average, urban areas have 2.5 times more productivity than rural areas.

Third is technology leaps, which is creating opportunities to leapfrog in key sectors, including financial services, education and retail/ wholesale trade, says McKinsey.

And fourth is increased infrastructure spend by governments; investment in infrastructure on the continent has risen 30% over the past five years, and reached $80 billion in 2015, or 3.6% of GDP, up from 3.2% in 2010.