April 12, 2013

Africa on the Verge

Africa has always been a metaphor for the planet: An Eden rich in natural resources and startling beauty; a hell wracked by manmade plagues of war, corruption, famine, and disease. It’s a continent of untold promise and home to repetitive, often heartbreaking, disappointment. Now all the promise seems poised to become reality.

Sharon Kahn
Print this story

This time, Africa maybe getting it right. Ignited by North Africa's Arab Spring, spurred on by the example of China, and equipped with cheap, barrier-blasting technologies such as wind power, cell phones, and the Internet, attendees radiated optimism at the 10th annual African Economic Forum held at Columbia University in March. The impetus is coming not from NGOs and charities or from corrupt governments. Instead, in country after country — pan-Africa — farmers are forming alliances, entrepreneurs are launching startups, diaspora armed with capital and expertise are returning home.

Take Chid Liberty, whose parents left Liberia when he was a child. Inspired by Ellen Johnson Sirleaf, Liberia's Nobel Prize–winning president, he returned to Africa after 28 years abroad to found Liberty & Justice, the world's first Fair Trade Certified apparel factory to provide opportunities for women workers. He’s finding opportunity as outsourcers see their costs rise in China and look for alternatives in Africa. “Africa has an amazing cotton industry, but in the past it has exported the raw material to Asia for manufacturing,” Liberty said. But as labor costs rise in China, his firm is making inroads with brands such as Haggar Slacks.

Balancing fervor against spectacular failures of the past, keynote speaker Arnold Ekpe, former group CEO of Togo-based Ecobank, launched the conference by asking, "Is there a future for Africa? Have we just rounded a corner?” He was also wary: “Hope is not a strategy,” he said.

But successful Africans and a handful of venturous outsiders are finding ways around a staggering array of problems. Among these problems:

Infrastructure is Sketchy to Nonexistent

Copy-and-paste strategies don’t work on a continent without adequate housing, running water, electricity, and even roads. Beyond the cities, the issues extend even further to lack of basic education and technical expertise and common conveniences such as banks and retail.

A basic lesson of the conference: opportunities exist — sometimes because of the obstacles. “Learn your market. Solve their problems,” said Shannon May, founder of Bridge International Academies, the largest chain of private schools in Africa. She was able to convince venture capitalists to invest in Bridge by emphasizing that people living on $2 a day will spend 20 percent of their income on their children’s education. “If you can serve 2.1 million people, that’s a massive market,” said May (who said Bridge doesn’t turn down children who can’t afford it). “The big players have not yet addressed people in Africa as customers.”

Time and again, the conference’s attendees cited technology as an enabler. For example, Bridge collects monthly tuition through wireless phone accounts so that parents don’t have to physically trek to the school to deliver money or even have traditional bank accounts.

Indeed, “Mobile [technology] has lifted access to financial services from 5 percent of the African population not so long ago to 70 percent today,” estimated Simon Freemantle, a senior analyst for South Africa’s Standard Bank. He estimates that 400 million new accounts (a number larger than the entire US population) will open in the next few years.

Many businesses are pinning their hopes on technology. iROKO Partners, which calls itself “the Hulu of Africa,” provides content (mostly African-made movies) via the Internet. Although iROKO’s current audience is expatriates living in Europe and the United States., founder Jean-Claude Homawoo called Africa its future. “TV did not quite penetrate Africa,” he said, noting that only 7 million people or so pay for satellite or cable delivery throughout Africa. As the populace leapfrogs television and goes straight to the Internet, “we’re starting to see local traffic as broadband speeds catch up.”

Africa Is More than 50 Separate Countries

Ecobank is headquartered in Togo, a tiny French-speaking sub-Saharan nation with a GDP of about $6 billion. What business with an intent to prosper would target Togo? But Ecobank considers itself an African, rather than a Togo, bank. It has operations in 33 countries and its board members come from nine nationalities. “Togo is home to about 5 million people,” said Ekpe. ”But next door is Ghana, and Nigeria is only one country away. I have no problem locating a business in a market of 250 million people.”

The problem — and it is a big one — is that trade barriers are onerous for businesses that want to conduct interstate commerce. “If you’re in Dar es Salaam, it’s cheaper to import materials from China — or Europe or the United States — than from Lagos,” said Ekpe.

Some experiments are laying the groundwork for pan-African trade and easier movement between countries. For example, separate economic unions in East and West Africa are forming regional economic blocs that share a common currency and open borders.

Funding Is an Even Bigger Obstacle in Africa than Elsewhere

Financial institutions — ironically, local African banks in particular — are too risk averse for Africa, especially because entrepreneurs have no collateral to guarantee loans. And government money comes with “too many strings,” said Joanna Harries, who works for Endeavor, an organization that mentors entrepreneurs. “We just want the government to get out of the way.”

Still, African banking appears to be entering a virtuous circle that begins with more convenient retail banking, thanks to the mobile phone. The expectation is that larger depositor assets could spur greater commercial lending. That, in turn, could be a catalyst to business growth — which would increase employment.

But for now, getting a loan if you’re an individual or small business person in Africa is painful if not impossible. And loans that are available come with usurious rates. Amanda Fernandez, senior manager at consulting firm Carana Corp., says that only 20 percent of African companies have ever borrowed money. “Financing is so difficult that buyers have started funding their African suppliers,” she said, pointing out that she spends much of her time creating linkages between African companies and foreign purchasers of their goods as well as helping entrepreneurs form alliances to give them clout.

One of Fernandez’s big takeaways: Social investment firms are crucial players, lending to entrepreneurs when nobody else will. "Once Africans have created a credit history, lenders start falling all over themselves to court the entrepreneurs with low[ish] interest rates," she said.

Andilie Khumoto, chief investment officer of MSG Afrika Investment Holdings, said that equity financing is a better financing tool in Africa than debt since people don’t own anything to use as collateral. In fact, most of the startups taking part in the conference had grown either organically or tapped foreign venture capital or private equity rather than bank loans. Although the angel capital phenomenon is crucial to high-tech startups throughout the world, it may be the only way even non-tech companies can raise cash in Africa.

Where to Now?

To be sure, Africa has a long, unpaved road to travel before it can claim success. The World Bank recommends that policy makers remove restraints that discourage commerce, especially in the most promising sectors. “Lessons from China are that industrialization can happen over a short period, but there needs to be coordination between the government(s) and private sector,” said Hinh Dinh, lead economist at the World Bank, who noted that China set up special economic zones near Hong Kong and Taiwan to attract foreign direct investment, knowledge, and talent.

But he urged entrepreneurs not to wait until all the restraints are gone. “Start small. Postpone the most capital-intensive projects.” Added Ekpe: “The biggest impediment is lack of courage. Africans have to walk the talk. Achievement becomes a state of mind.”

Add new comment

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.