Doing business in Africa Different skills required Can the private sector help make Africa work better?

The Economist: Jun 30th 2005

BEFORE the leaders of the G8 meet in Scotland to talk about helping Africa (see article) on July 6th-8th, companies will gather for their own “G8 Business Summit” in London. Developing a flourishing private sector is crucial if the aid, debt forgiveness and trade reform that, it is hoped, will emerge from the G8 is to bear fruit. The business summit will try to figure out what the private sector can do to improve the business climate in Africa.

Much needs to be done. According to the World Bank's annual “Doing Business” report, sub-Saharan Africa is, on average, the most difficult place to do business in the world when it comes to red tape. The report examines regulatory obstacles and ranks performance using criteria such as ease of starting and closing a business, hiring and firing workers, enforcing contracts, getting credit and protecting investors. The 2005 report found that, in the previous year, sub-Saharan Africa had also reformed less than any other region.

As a result, over 40% of the region's economy is informal—the highest proportion in the world. Big foreign investors are said often to negotiate special deals while small local entrepreneurs are left to cope with business-unfriendly rules that make it hard for them to survive. And firms of all sorts must contend with the severe problems of political upheaval, war, corruption and anHIV/AIDS pandemic.

Yet a growing number of firms now talk of sub-Saharan Africa as a land of opportunity. “If there was any more of Africa, we'd be investing in it,” says Graham Mackay, boss of SABMiller. The brewing giant, formerly of South Africa but now headquartered in London, has interests in 29 African countries. South African businesses are particularly optimistic about the rest of the continent and, with investments worth over R16 billion (US$2.4 billion), have become key investors in the southern tip of Africa. In addition to the traditional mining firms, new arrivals (banks, mobile-phone firms and retailers) have been active north of the border—and making money.

Yet cumbersome logistics, poor infrastructure, abundant red tape, a shortage of skilled workers and HIV/AIDS remain real challenges. Local entrepreneurs face other problems as well, such as lack of capital—despite the rapid growth of micro-finance in some parts of Africa. Yet, outside troubled countries such as Sudan and Zimbabwe, there is healthy economic growth to exploit. GDP in each of 14 sub-Saharan African countries has grown by at least 5% a year since the mid-1990s. Botswana and South Africa have long topped “best African business environment” charts, but other countries are making quiet progress. Since Uganda started to improve its business environment in the early 1990s, private investment as a share of GDP has more than doubled. Some foreign investors point to a drop in petty corruption and better courts in important countries such as Nigeria.

For Strive Masiyiwa, an entrepreneur from Zimbabwe who heads Econet, a telecoms firm, doing business in Africa is no harder than anywhere else—it simply requires a different set of skills. In a region in which the state remains a major economic actor, investors must deal with governments and nascent regulators (which is why corruption is rife in some countries). Those inclined to behave legally need patience and tenacity. It took Mr Masiyiwa five years of court battles before he could launch a mobile-phone network in Zimbabwe. But Econet has now expanded to Botswana, Nigeria, Kenya and Lesotho, and is looking at other opportunities. Creativity is also needed to adapt to local conditions and demand. In Uganda, SABMiller realised that importing barley made beer too expensive. Working with a local agricultural-research outfit, the brewer developed a strand of sorghum that could be used to produce clear beer. The resulting Eagle Lager has been a success, and 3,500 local farmers now supply the brewer. Mobile-phone companies have excelled at tapping into the informal sector to distribute pre-paid airtime.

There is unmet demand for many goods and services. Competitors are often rare, and thus margins fat. Last year, MTN, a South African mobile-phone operator with networks in Nigeria, Cameroon, Uganda, Rwanda and Swaziland, increased subscriber numbers by 50% to about 14m, boosting net profits by over 45%. Outside South Africa, its operating margin is around 50%. Standard Bank, a South African bank present in another 17 African countries, saw its headline profits in the region grow by 30% last year.

Boasting brand Africa Many businesses in the continent now talk of doing their bit to improve “brand Africa”. After consultations for the “Commission for Africa” report, prepared with the G8 summit in mind, a group of big multinationals including De Beers, Nestlé and Standard Chartered has formed Business Action for Africa (BAA), which will be launched at next week's business summit. The idea is to work with governments and non-governmental organisations to improve business conditions in the region. As well as applying collective pressure to governments, BAA intends to promote good business practices and a more balanced view of Africa.

The Investment Climate Facility for Africa (ICF), to be launched in October, may provide another way for the private sector to contribute. In the 24 countries subjecting themselves to the scrutiny of their peers under the New Partnership for Africa's Development (NEPAD) initiative, the ICF aims to bring the private sector and governments together to improve investment conditions. Over its intended seven-year life, the ICF wants to double investment and raise the number of registered firms by 40%. An independent trust, the ICF is banking on the strong African private-sector representation on its board to find pragmatic solutions. Backed by key African institutions, international donor agencies and big private-sector firms, it is now trying to raise $550m.

If the big companies involved in such initiatives can persuade governments to improve the general business environment, smaller local entrepreneurs should benefit, too. There has been real (unreported) progress. But there is still a long way to go. As Mr Masiyiwa puts it, “In the beauty parade for investment, we're learning the catwalk, but we are probably not yet wearing the best dresses.