While Africa is teeming with untapped potential, meticulous risk assessment is duly advised
The story of Africa is akin to that of a woman whose beauty is often appreciated by outsiders, but not the man to whom she is loyally married. Probably after years of matrimony and a chain of kids to show for, the husband is blighted by familiarity and would not be bothered.
Put another way, Africa is like a besieged house; those inside want to get out, while those outside want to break down the door to get in.
This is the home truth about our continent.
While foreigners look inward into its vast expanse for a myriad of untapped opportunities, homegrown entrepreneurs still frown upon intra-Africa trade, preferring markets in Europe, the United States, Japan, China or Australia.
American entrepreneur Steve Aronson reinforces this analogy when he says in the book Why Africa is Poor: “Don’t think of the local market as a place to dump what you do not export, using low-grade materials and packaging. Not all important buyers are from outside.”
Sunil Mittal, founder and chairperson of Indian cellular company Bharti Airtel, said recently: “This is the last growth continent in the world. Europe is a done industry. The US is a done industry. South East Asia is old.
“We need growth, and Africa is the right place to grow.”
His remarks were uttered last year in Nigeria on the eve of Bhartel Airtel taking over the operations of Kuwaiti firm, Zain, in Africa.
Do African companies or entrepreneurs share such optimism?
It is a school of thought echoed by Engineering News: There is most certainly a growing conversation about the need to enhance intra-Africa trade, which remains modest; and to put in place the project finance and investment-enhancing cross-border energy and transport infrastructure.
A leading proponent of this vision is Business Leadership South Africa chairperson Bobby Godsell – a valuable champion, particularly given that the 80-member organisation he leads comprises the 50 largest listed companies on the Johannesburg Stock Exchange, as well as large multinationals, black economic empowerment enterprises and leading state-owned enterprises.
These companies increasingly believe that greater continental business activity has to be at the very centre of any plan to transform South Africa from a developing country into a developed one by 2040.
The reason? A quest for new customers beyond 50 million South Africans, only 10 million of whom have considerable buying power.
Broadening that potential to a market comprising the countries of the Southern African Development Community and the Common Market for Eastern and Southern Africa – which together represent 500 million people and an economy with a combined gross domestic product of $800 million – is a key albeit challenging target, reported Engineering News (November-December 2010).
Apart from daring South African companies scouring the continent in search of new markets, there is little movement from other countries in this regard. Intra-Africa trade is a rarely traded commodity on this continent.
This is a concern that Black Business Quarterly shared with Dianna Games, chief executive officer of Africa @ Work.
“A major reason for this trend is non-tariff trade barriers, which include non-recognition of rules of origin by customs officials, the use of weight and axle limits, suddenly imposed import bans in countries of agricultural products, import permits and levies, export taxes and issues of standards, also related to agricultural products,” she says.
“Trade experts have found that as tariff barriers are removed through creation of free trade areas, countries often employ non-tariff barriers (to trade) to protect their industries and raise revenues lost by the reduction or removal of trade tariffs.
“Another reason for low trade is the fact that countries do not have a lot to trade with each other. Many export cash crops such as sugar are grown in most countries, so they do not need to import the same commodity; and there is little manufacturing in a number of African countries,” adds Games.
“Many imports come either from overseas countries or from larger economic powers such as Kenya and South Africa, which have major trade imbalances – in their favour – with other countries in the region.”
African opportunities for SMEs
The success of Shoprite in its African expansion is now legendary. The Whitey Basson-inspired retail chain now operates in 13 African countries, having first ventured out in 1995 when it opened a store in Lusaka, Zambia.
What is not often quoted, however, is that there have been spectacular failures too.
Vodacom – one of the pioneers of the new “scramble for Africa” – has bitter memories of its earlier excursion into the country.
Telkom’s Nigerian venture, Multi-Links, is currently under the hammer.
This is only the tip of the iceberg, and anyone venturing into Africa should bear no illusions.
“Markets in the rest of Africa can be tough and high-cost. These present high barriers for entry even for large companies, so it is even tougher for SMEs [small and medium enterprises],” says Games.
“However, there are opportunities to trade in other countries – export or import – and to form partnerships with local companies, particularly in areas such as training, education, sourcing of goods and other such activities.”
The hurdles
As would be expected, the ride across Africa’s business landscape is a bumpy one at times and a rewarding one at others. However, investors need to make provision for all eventualities.
“There are many constraints to doing business, although in many countries the operating environment is becoming easier, as governments introduce reforms to improve the ease of doing business,” says Games.
Some of the main obstacles she identifies are as follows:
• High cost of doing business. This is because of the inefficiency of state utilities such as power, water, transport and telecommunications, and poor infrastructure. Companies often have to source these services privately, and costs can be pushed up by government monopolies, for example on a telecoms gateway. Unnecessary bureaucracy and long delays in getting things done is another factor. The costs rise exponentially if the business has to be located outside urban areas.
• Skills shortages due to a lack of training facilities by the state and the private sector.
• Political risk, which increases the cost of monitoring and managing risk within the company in cross-border operations, as well as paying for political risk insurance. Recently, Maplecroft cited four African countries – Democratic Republic of Congo, Zimbabwe, Sudan and Angola – as the riskiest countries for companies in which to work.
• Issues related to corruption such as the cost, hassle factor and ethical problems it raises for companies, particularly listed firms with shareholders and boards to whom to account regarding corporate governance principles at home.
• Currency fluctuations both in South Africa and the movement of currencies in African markets. Most African countries use the US dollar or French franc as international trading currencies. Major shifts in these currencies against local currencies can significantly reduce profit margins, and costs depending on the way the African operations are funded.
• High costs of finance locally and unavailability of long-term finance in African markets. Political risk or instability can increase the cost of finance raised in international markets.
• Poor air links, which make it difficult to move between countries and result in longer than necessary trips to manage air travel, particularly on an itinerary that includes several countries or nations not well serviced by African or international carriers.
• Insufficient or poorly policed intellectual property legislation.
• Failure to adhere strictly to the rule of law, compounded by weak and inefficient judicial systems that make legal redress for issues such as contract fraud a lengthy and frustrating process. Zambia has made reforms in this regard; it has initiated electronic forms, real-time court reporting, electronic storage and computer searches of registry files. Records of court proceedings are immediately available to litigants and court officials as well as to the public, through computer terminals in the courts.
• Cost of property and rentals, which are often payable months or even years in advance.
Source: Black Business Quarterly
To be continued
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