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Africa: Business leads the way

Posted on Monday, 19 November 2012 12:24

Africa is finally off the starting blocks. With a far fewer coups d’Etats and costly white-elephant projects consigned to the past, the bandit-soldiers are gradually leaving the presidential palaces to those who can manage economies on a day-to-day basis.

World Bank figures show that the continent has boosted its gross reserves from $82.9m in 2003 to $301.5m this year. Between 2009 and 2010, 26 of the 46 African countries studied by the non-governmental organisation Transparency International improved their ratings on the Corruption Perceptions Index.

With an average annual figure of more than 5% over 10 years, growth seems to be sustainable, but is still not “inclusive”, meaning that the benefits are still not shared with everyone.

Now it’s on to the second phase, that of the real development that happens through the creation of a solid entrepreneurial fabric. No real take-off is possible without improving productivity and the transfer of knowledge.

Heads of industry, who are always searching for markets and thus for progress, are instrumental. 90% of the new jobs created in developing countries are by established companies, so solid, formal jobs will not follow without a private sector in good health.


But the climate that may have led to the creation of African businesses is far from favourable for their development.

In its August 2012 study ‘Africa at work: job creation and inclusive growth‘, the McKinsey Global Institute published the results of a survey of 1,373 CEOs in Egypt, Kenya, Nigeria, Senegal and South Africa – most of them from SMEs.

Its purpose was to define the three main obstacles to their development.

Among the entrepreneurs questioned, 55% cite in the first place the macroeconomic instability that makes them fear a return of inflation and a collapse of demand; 40% blame political instability.

The need for capital

”Limited access to financing” was a difficulty for 32% of the respondents. “To retain his portion of the market in a period of strong growth, the entrepreneur must find money,” explains Luc Rigouzzo, co-founder of Amethis Finance, an investment fund dedicated to Africa.

“With growth of 20% or 30%, like that of some Kenyan banks, you have to turn to the markets, but the head or owner of the business quickly risks losing control. We must find the means to put in place long-term partners who will raise capital to buy machines and recruit talent and thus to raise the bar for the future.”

First problem: the African stock markets are in limbo. The Banque de France notes in its 2011 annual report on the CFA franc zone that “the limits of liquidity in these markets – resulting in particular from the lack of activity of institutional investors in the secondary market, the insufficiency of adapted financial products covering a large sector of maturities, as well as the lack of automatisation of exchange systems, creating bottlenecks, are all factors that lend fragility” to their development. 

Second problem: African savings are not being mobilised – because of poverty of course, but also because of a very weak proportion of households holding a bank account. Outside South africa, McKinsey estimates that bank accounts in the sub-Saharan zone are scarcely equal to 35% of the gross domestic product, against 83% in India and more than 175% in China! 

Third is a subject that worries business owners: the lack of electricity and of infrastructure in general. All Africans (linked to the network) suffer accidental power cuts at one time or another and their anger can go as far as exploding into protest, as occurred in Dakar. In terms of transport, the lack of roads or railways is not the sole factor that contributes to the costs and insecurity of businesses.

The absence of regional integration, especially in West and Central Africa, is a major problem for anyone wishing to transport across the continent’s interior.

A 20-foot container transported from Dakar (Senegal) to Ouagadougou (Burkina Faso) costs more than $10,000 and can take as long as 17 days as it has to pass through 55 checkpoints. For the same distance and the same container, the price of transport in China is $2,300 by road and $1000 by rail. 

McKinsey Global Institute gives several examples of good practice by governments who have risen to these challenges. In each case, a strategic vision and a real wish to succeed underlie this success.

This is the case for Morocco’s creation of two free zones for the automobile industry: the sector today employs more than 60,000 people.

The same political ambition is seen in Lesotho, which has welcomed Asian textile companies with a one-stop shop to facilitate their installation in six perfectly equipped zones, promising that they will be able freely to repatriate their profits: the exports of textiles from the country to the United States more than doubled between 2000 and 2008.

And Cape Verde has raised tourism revenues from $23m in 1999 to $542m in 2008 by tax exempting imports and guaranteeing the free repatriation of profits for foreigners who invest in the sector, which today employs 21% of the working population.

Rules of the game

But the State must also play a part by simplifying and enforcing the rules of the economic game. This means the rules that cost – business-creation formalities, registration of deeds of property, connecting electricity, building permits or customs formalities – as well as those that protect – bankruptcy law, commercial law, credit rules, protection for minority shareholders.

African states have made great progress in these fields. Of the 50 countries that have most improved their business climate since 2005 in World Bank rankings, a third are in sub-Saharan Africa.

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