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news july13 1

Can inclusive business become the new business as usual in Africa?

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While many developed nations saw shrinking spending and low economic growth in 2012, twenty one countries in Africa saw growth rates of more than 5 percent, with some countries such as Angola, Ivory Coast, Ghana, Liberia, Libya and Niger showing real GDP growth above 8 percent. These are impressive figures even though these countries are growing off a very low base, and the growth is often due to oil.

However, Mckinsey’s 2012 report, ‘The Rise of the African Consumer’, states that before the onset of the financial crisis, resources contributed a third to African economies while 45 percent of growth came from consumer-facing markets. It also states that “private consumption in Africa is higher than Russia or India; it rose by US$568 billion from 2000 to 2010”. What this tells us is that over the past ten years there has been a dramatic increase in the amount of discretionary spending, which is an indication that there is increased wealth on the continent.

Africa’s vast natural resources, its high economic growth rates, along with an increased demand for goods and services beyond the requirements of basic needs, should make it a very attractive opportunity for investors. This optimism is reflected in many reports of diaspora returning home.

And it would appear that there is growing optimism in the investment community as well, both on the continent and overseas. The head of infrastructure and natural resources at the International Finance Corporation (IFC) said, “The core message about the continent today is that Africa is rising.” (11 February 2013, Mining Prospectus). A few days later, South Africa’s US$120 billion strong Government Employees Pension Fund announced its intention to increase its investments in Africa’s high growth markets. Its Principal Officer, John Olifant, was quoted as saying that some of the most promising investment opportunities are in mobile, retail and property sectors due to the continent’s 316 million-strong middle class.

By many accounts, it would appear that for saturated, developed markets, many parts of Africa are emerging as real opportunities for growth, both for a financial investor, as well as for many businesses looking for expansion opportunities.

AFRICA: THE INVESTMENT RISK
The challenges to doing business in Africa are well documented and include insecure property rights, a lack of infrastructure, high cost of capital and corruption, among many others. However, there is another huge and important risk to doing business – ignoring the plight of the poor. While globally, the goal of halving the 1990 poverty rate by 2015 remains on track, the World Bank predicts that sub-Saharan Africa lags the rest of the world by about 10 years and, due to population growth, the number of poor people actually doubled between 1981 and 2005.

One could argue that South Africa is fairly advanced compared to other far smaller economies on the continent. However, with mobile penetration and access to technology increasing rapidly, many poor communities that were previously isolated are becoming connected – to the outside world, to global news and to each other. I have seen this first hand in three rural villages deep within the jungles of Gabon. There is no electricity or running water and the only food is what is grown or shot by the community. However, everyone has a cell phone. Meanwhile, unemployed youths used technology to help destabilise both Libya and Egypt.

AFRICA: OPTIMIZING RETURNS AND MINIMISING RISK
Very simply put, if companies in Africa want to optimise returns for shareholders, they need not only stable countries, but also satisfied workers and increased buying power. The way to increase buying power is to ensure the continued growth of the middle class. Therefore, if a company takes a long term strategic view of growth, being ‘inclusive’ in the way they achieve this growth within their country of operation should make good business sense. With all good intentions, many companies continue to address the Social aspect of the Triple Bottom Line (financial, social and environmental) through charitable donations in the communities around them – the traditional, sticking plaster approach to development pursued by most businesses.

However, things have changed significantly in the business community over the last ten years and many companies have seen the ‘light’ in terms of how good environmental and social practices are ultimately good for their bottom line. Woolworths, the South Africa-based multinational retailer, tracks more than 200 indicators to evaluate its performance on what it calls its ‘Good Business Journey’. This is a far-reaching corporate citizenship strategy that focuses on sustainable farming, water, energy, waste, social development and transformation. From ensuring that the supply chain favours local producers, to working with farmers to improve soil quality and conserve water, to reducing their use of plastic packaging and their in-store electricity consumption, the strategy is integrated into every aspect of their business.

There has also been a widespread movement in the traditional financial investment communities to start ‘Impact Investing’ funds. These funds look for opportunities for investment into unlisted businesses (often early stage companies) across Africa, which promise both a high social impact as well as a financial return for investors. And the exciting thing is that they are finding these opportunities.

The South African government has put pressure on the business community to invest 3 percent of net profit after tax into growing black businesses.  In many cases, companies are doing this by developing the capacity of entrepreneurs in their supply chain, or by lending money at favourable rates to start-ups.  In other words, the government is forcing them to be ‘inclusive’. One could argue that the government is doing this to re-dress the inequality under apartheid, but it is an incredibly strategic move, because if successful, it will increase the size of the middle class, increase the buying power of individuals and grow the economy.

IN CONCLUSION
Education, entrepreneurship, job creation and access to capital are the biggest enablers for decreasing poverty. They are also the biggest enablers to economic growth, increased spending and stable countries. While (quoting John Olifant) the African middle class is currently 316 million, there are still another 700 million people in poverty – and 700 million reasons contributing to instability and increase risk. However, on the flip side, there is also an untapped market of 700 million potential customers. In conclusion, I would argue that companies that take a long term strategic view and make ‘inclusive business’ the new business as usual, will be the ones that successfully compete and achieve growth within the complexity of differing African markets – and make a real difference within the communities where they operate.