Africa outline

Capital & Economics

Learning From Africa: Balancing Complexity And Opportunity

July 28th, 2016

Overview

Home to 54 countries with a population of 1.2 billion people, Africa is the second largest continent in the world. And with the UN predicting the population will double by 2050, it’s easy to see the opportunities that investment in Africa presents.

While some volatility in commodities has returned, today countries in sub-Saharan Africa are looking to more diverse investment opportunities, ranging from manufacturing and infrastructure to technology and financial services. From 2000 to 2010, the continent experienced average real GDP growth of 5.4 percent per year and, even with a slowdown, is projected to remain the second fastest growing region in the world in the next five years.

Despite the potential for significant growth for African and multinational corporations, “There remains a lingering perception that trade with and investment in Africa is fraught with complexities,” says Joe Onsando, CEO, Aon Sub-Saharan Africa. “While unbridled Afro-optimism is premature, the Afro-pessimism of the past is entirely outdated,” he says.

So where do the opportunities lie, and how can the risks be offset?


In Depth

Some of Africa’s most promising growth areas lie in the coastal, urbanized and relatively rich regions, such as the continent’s largest economies of South Africa and Nigeria and fast growing countries such as Kenya. It is in these key countries that ports are becoming hubs for international trade activity, access to technology is steadily advancing and shopping centers are filled with consumers – all indicators of a strong economy.

According to Terence Williams, CEO, Aon South Africa, in recent years, “Africa has seen the birth of open market economies, free enterprise, significant investment opportunities, technological progress, growing sophistication and a burgeoning middle class.”

Today, the biggest opportunities revolve around infrastructure development, mining and construction, as well as agriculture, with the development of new transport links key to driving long-term economic growth.

Africa already has one serious investor making significant claims in the country: China. Since 2000, The People’s Republic has been the continent’s largest trading partner while Chinese firms invested over $70 billion in Africa in 2014. The $60 billion of African loans and aid announced by President Xi Jinping in December 2015 demonstrate that China’s commitment is not in decline despite the country’s economic slowdown.

The introduction of better transport links, such as superhighways to halve travelling times between commercial centres and increasing investment in sea ports, has resulted in a continent that is better connected than ever before – not only between African nations, but to Europe and Asia as well.

Opportunities abound, says Onsando. But “the reality is that very few organisations have invested enough to actually gain knowledge of how to operate on the ground,” he says. “There seems to be a mistaken perception that territories in Africa are one amorphous mass,” agrees Ndivhuwo Manyonga, Executive Head of Employee Benefits, Aon South Africa. Yet with 54 different countries, more than 2,000 languages, and an estimated 3,000 different tribes, the reality is that Africa is probably the most culturally diverse continent on the planet.

But what exactly are the key challenges and opportunities for organizations operating within Africa at this time of rapid change?

Overcoming Challenges: Political Risk And Fluctuating Exchange Rates

“There are 50 different regulatory regimes in Africa,” says Onsando, “and some regulatory changes have unintended consequences.” Corruption in some African governments has long been a problem, but improved communication, infrastructure and a more connected and informed population thanks to increased access to the mobile web have increased awareness and advocacy.

Despite an increased awareness of corruption, recent findings show that the threat of government interference and instability is a severe threat to business in Africa. 60% of the countries with the highest levels of political risk are in Africa. From rebel insurgencies to threats of military coups to terrorism to piracy, many African nations from all parts of the continent face serious security challenges. Other countries suffer from high levels of corruption. The situation is improving in many countries, but political instability remains a serious challenge for businesses across the continent – the different combinations of political risks varying considerably from state to state, making planning for potential political changes particularly challenging.

African currencies can be particularly susceptible to global economic shocks. The UK’s recent vote to leave the EU, for instance, saw the South African rand fall 3 percent against the US dollar. These rapid changes in currency rates can leave businesses unable to pay overseas invoices and premiums, and reduce profitability for foreign investors. The difficulties are highlighted in Aon’s political risk map, which reveals that Nigeria holds a high exchange transfer risk, while Kenya and South Africa are rated as medium.

But measures can be taken. For example, Onsando says, “Where a country has insufficient foreign exchange and the forex controls are stringent, it’s possible to nominate a convertible currency.”

Tomorrow’s Opportunities: Improving Health, A Growing Middle Class And The Spread Of Technology

Disease outbreaks remain common in parts of Africa, but levels of nutrition and access to clean water across the continent are improving. This in turn can have benefits far beyond local communities. In the wake of the West Africa Ebola outbreak, Aon’s latest Global Risk Management Survey found that “proper investment in healthcare for communities in poor countries can not only save lives but also contain dangerous outbreaks before they spread to other parts of the world.”

Where nutrition and health improve, so do local economies, says the African Development Bank, with an estimated 11 percent of African GDP lost each year due to lost productivity from malnutrition. And according to the World Health Organization, every $1 invested in clean water leads to $4-12 in economic returns. By developing local infrastructure that improves public health, local economies can also be made more resilient, leading to improvements in education and productivity.

The emergence of a youthful middle class indicates “huge growth potential,” according to Williams. With a median age of 25 in sub-Saharan Africa, and literacy rates among that group exceeding 70 percent, today’s young Africans are better educated than ever, providing a rising young workforce keen for opportunities.

More than that, the middle classes are expanding and becoming richer, creating stronger local markets for businesses operating in continent. Onsando has seen the changes first hand. “Multinationals are building investment opportunities which, in turn, grow consumer middle classes and improve social conditions,” he says. Now, these emerging middle classes are a valuable and growing new potential customer base. But the key to unlocking their potential is driven by local buy-in. Manyonga advises “getting local buy-in is very important,” as the differences between African countries and regions present a significant challenge.

The surge in mobile phones and foreign investment in 4G mobile networks has transformed e-commerce in Africa. Half the population of sub-Saharan Africa is expected to own a smartphone by 2025, opening up access to education as well as online marketplaces. Mobile-money systems such as Kenya’s M-Pesa, a service that allows users to transfer money between mobile phones, have also given people tools to better manage their finances and further aid the continent’s rise out of poverty.

The rise of technology is also leading to a boom in creative business models and African entrepreneurship, with crowdsourcing, micropayments, and investment in new ways of providing access to key infrastructure like telecommunications and electricity rapidly transforming the continent’s potential.

Local Understanding: The Key To Unlocking Africa’s Potential

While there are many myths about doing business in Africa, leading multinational organizations are very strategic about the decisions they are making within the region. For example, the Harvard Business Review cited multinational GE relocating its Africa headquarters from South Africa to Kenya to capitalize on the country’s talent pool and strategic geographic location.

From geographic decisions to joint ventures and local partnerships, it’s clear that having strong local understanding is a key factor to success.

“Different markets have different operating conditions, local legislation and even social conditions,” says Manyonga. If an organization comes into South Africa, it might be a completely different experience than doing business in Zambia or Namibia. But with the right approach there are opportunities to expand throughout the continent, Onsando notes. “Many Kenyan companies have subsidiaries in Tanzania and / or Uganda, and are expanding into South Sudan and Rwanda, among others,” he says. Joint partnerships, for example, are another consideration for multinationals – in which they are able to balance on local companies’ knowledge of the region with their global infrastructure and financial stability.

While Africa may have its own unique set of challenges, finding the right partners and people with the right mix of expertise and experience is key to long-term success. “It is critical for multinationals operating across Africa to be armed with local knowledge and to use a trusted and experienced partner with a thorough understanding of local market conditions and cultural nuances,” says Williams.


Talking Points

“In Africa, there is a new generation of leadership, which is pushing the continent forward, confident in its future. This optimism has seen them embrace technology, and use it as a force for good.” – Tony Blair, former British Prime Minister

“Increasing rates of entrepreneurship and accelerating the rate at which ventures grow is the only realistic path to creating enough jobs for the next generation.” – Ashish J. Thakkar
Chair, Global Entrepreneurship Council, United Nations Foundation

“What the Great Western Railway was to Victorian England, the mobile networks are to Africa.” – Miles Morland, veteran Africa investor


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