Summary:
– African companies are now the symbol of Africa’s dynamism. As key players in economic development, they are attracting increasing amounts of foreign capital.
– The telecommunications, construction, and financial sectors account for much of this renewed interest from global investors and thus offer alternative development opportunities to the traditional natural resources sector.
– What are the strengths of African companies? To what extent can these sectors enable the continent to emerge on the international economic scene? What challenges does the African private sector face? These are the questions that the panel of analysts invited by Coface to the country risk conference attempted to answer.
On Tuesday, January 21, 2014, Coface’s annual country risk conference was held at the CNIT in Paris, featuring a round table discussion on the dynamism of African companies and the role played by the private sector in the continent’s emergence. As a prelude to this round table, Mr. Stanislas ZEZE, CEO of the Bloomfield Investment Corporate group, explained the reasons for the enthusiasm for African companies in recent years.
From a macroeconomic perspective, Mr. ZEZE began by pointing out that the continent’s resilience in the face of the 2008 financial crisis, the excellent growth performance of sub-Saharan Africa since the global downturn, and the scale of its natural resources have contributed to making this region one of the most attractive in the world for investors, ahead of China and other major emerging economies. From a more microeconomic perspective, Mr. ZEZE then emphasized that the results recorded by African companies since 2007 have also contributed to the reorientation of foreign investors towards sub-Saharan economies.
Although these companies still face significant financial constraints, their low entry valuations allow investors to expect much higher returns than in other countries around the world (particularly developed countries). This impressive ability to generate significant revenues, coupled with risk diversification through increasing regionalization of activities, means that, according to Mr. ZEZE, companies are now competitive and, above all, attractive to all types of investors, both domestic and foreign. Furthermore, even though political risk remains significant in many African countries, the business climate is improving and the opening up of African companies’ capital to foreign investors is helping to increase transparency and therefore the governance of these private institutions.
Finally, Mr. ZEZE highlighted as a key factor in the current success of African companies the phenomenon of » brain gain » brought about by the growing return of the African diaspora (and therefore their skills) who had initially emigrated to Western countries. Mr. Zeze also emphasized the enthusiasm and determination of this new generation of elites, both local and emigrant, to participate in their continent’s emergence on the international stage.
Which sectors are the most attractive?
- Natural resources, the winner, but no longer by a knockout…
Unsurprisingly, the most attractive sector for international investors remains natural resources. However, Nana OWUSU-AFARI, president of the Ghana Industries Association, explained that while the mining and oil industries represented a potential source of remarkable growth for the countries that possessed them, those that had recently discovered new deposits (such as Ghana) needed to compensate for their lack of experience in managing these resources by calling on various continental and international experts in the field. In addition, Mr. OWUSU-AFARI also emphasized the importance of promoting the integration of local SMEs in the development of these sites, highlighting the need to rethink the management of raw materials within the continent through increased cooperation.
Alain MALONG, CEO of the Cameroon Aluminum Company (ALUCAM) and president of the Cameroon Industries Union, added to Mr. OWUSU-AFARI’s remarks by pointing out that the exploitation of these natural resources promoted the dissemination of technological innovations (such as those related to the extraction of raw materials) and could thus play a key role in the development process through the dissemination of human capital. Finally, Mr. MALONG also stressed the importance that natural resources could have in appeasing social conflicts, particularly through the redistribution of oil and gas revenues in the form of food subsidies, as was the case during the 2008 food crisis.
- The rise of telecommunications and the financial industry
However, while the raw materials sector attracts large numbers of foreign investors, Mr. OWUSU-AFARI also pointed out that telecommunications and the financial industry are also increasingly attractive sectors for foreign capital. Mr. ZEZE emphasized that the telecommunications sector could have significant spillover effects on the local economy, citing the proliferation of companies dedicated to the production of telecommunications derivatives as one of the most obvious examples. Philippe LABONNE, CEO of Bolloré Africa Logistic, agreed with both speakers on this point, insisting on the need for innovation within the continent. Mr. LABONNE also explained that telecommunications could clearly encourage this technological leap and that certain innovations, such as mobile phone payments, which reduce transaction costs, promote commercial development in rural areas, and thus improve the living conditions of a significant segment of the population, were a good illustration of this.
Mr. Gabriel FAL, Chairman of the Board of Directors of the Abidjan Regional Stock Exchange, then shared his expertise on the evolution of the financial sector in sub-Saharan Africa, noting first that while the development of financial markets was increasingly dynamic and allowed large African companies to access more financing, clear efforts towards transparency and regulation were still needed for these markets to reach a sufficient size [1 while continuing to serve the real economy. Mr. FAL highlighted regionalization projects (such as between Ghana and Nigeria) aimed at building a common financial platform with the goal of giving more depth to financial markets. At the same time, Mr. ZEZE added that the creation of regional rating agencies made it possible to refine the information available on financial markets and that, even if the ratings of companies entering local stock exchanges were not generally the most advantageous, this evaluation process should ultimately promote transparency and good management of the rated entities.
Mr. FAL then shifted his analysis to smaller companies operating outside the financial markets and relying mainly on bank financing. He then explained the need for these structures to evolve towards an increasingly hierarchical system of governance and to abandon so-called « traditional » structures in which the omnipotence of the business leader represents, in most cases, a real obstacle to the proper development of activities. Mr. FAL also pointed out the need to remain cautious in financing African SMEs and to have financing institutions close to these companies to provide specialized support, ensure effective monitoring, meet their financial needs, and thus reduce the phenomenon of excess liquidity in the banking market, which today still significantly hinders direct financing of the real economy.
Private sector: development subject to conditions.
- A massive need for infrastructure
Throughout the round table, however, all the speakers emphasized that while the growth of the sectors mentioned above represented an undeniable opportunity for development, this development remained constrained by the continent’s lack of infrastructure. Mr. LABONNE thus emphasized the vital role that infrastructure must play on the continent, even describing it as the foundation of development. Indeed, the lack of roads, ports, energy facilities, schools, and healthcare facilities is currently hindering the accumulation of both physical and human capital, ultimately reducing opportunities for the development of Africa’s entrepreneurial fabric and, therefore, the continent as a whole. Africa has nevertheless become aware of the limitations imposed by this infrastructure deficit and, in recent years, has begun to redefine its large-scale investment policies by making extensive use of local companies through the development of public-private partnerships (PPPs). Thus, in addition to the sectors mentioned above, the construction sector should also be included, which, according to all stakeholders and in view of infrastructure needs and the promotion of PPPs, is increasingly contributing to the expansion of African businesses.
- A necessary improvement in governance
However, the problem of inadequate infrastructure is not new. Since the post-independence years, investment has always been considered one of the main factors in African development. Weak governance, which has been latent for nearly 40 years, is one of the reasons why the level of investment sufficient and necessary for economic take-off and the development of the sub-Saharan private sector has been achieved only very late. Today, according to Mr. ZEZE and Mr. OWUSU-AFARI, the main obstacle facing businesses is governance. Fraudulent public procurement negotiations, limited access to local markets, in short, corruption, limit competition within the local fabric and thus massively hinder the growth of businesses.
Nevertheless, Mr. ZEZE rightly pointed out that poor governance was not a uniquely African problem and that it was still largely encouraged by many Western investors who, attracted by this unregulated environment, decided to set up operations in Africa in the hope of profiting financially from this weak enforcement of legislation. Mr. ZEZE therefore stressed that efforts must be made both within and outside the continent to combat poor governance, which is the main obstacle to the development of African businesses and, to a greater extent, the continent as a whole.
Finally, although this was not discussed at length by the speakers, it appears necessary to ensure effective and rigorous control of the involvement of foreign private actors in major African investments so that these projects fully benefit the network of local businesses. Indeed, emerging countries, led by China, are increasingly involved in the continent with the aim of participating in the development of various activities (particularly infrastructure). While these capital inflows represent a windfall for the continent, certain operational arrangements for construction (the use of Chinese workers instead of local workers) and payment (loans repaid through oil or mining licenses) can sometimes be harmful and largely disadvantage the beneficiary countries.
Conclusion
This round table discussion has therefore shown how attractive African companies can be to foreign capital. However, although financially profitable, it is essential to remember the vital role played by this entrepreneurial fabric in the African development process. In a few years’ time, the private sector’s main mission will be to absorb an ever-increasing workforce, with the major constraint of offering new generations increasingly skilled jobs in order to generate a process of solid, diversified, and autonomous growth. African companies, whether small or large, have begun a movement to promote the continent’s wealth which, if it continues, will not only enable the Millennium Development Goals to be achieved, but will also lead Africa as a whole to join the ranks of the major players.
Marin Ferry
Notes
[1] The size of all the continent’s financial markets (around 20) is barely equivalent to that of the Swiss financial market.
References
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M. Ferry (2013), “ Effectiveness of Official Development Assistance , » BSI Economics.
A. Fofana (2013), « Policies to promote women’s employment as a source of development , » BSI Economics.
E. Koussoubé (2013), » Report on Economic Outlook in Africa (PEA) , » BSI Economics.
E. Koussoubé (2013), « Land purchases by elites: the other face of land grab in Africa?, » BSI Economics.
Y. Lucotte (2013), “ Bank excess liquidity: the forgotten evil of sub-Saharan Africa , » BSI Economics.
