Spring Newsletter - Net Impact - Investment in Africa: the Challenges and the Rewards
“Investment in Africa: the Challenges and the Rewards,” a breakout session of the 14th annual Net Impact Conference, brought together a panel of business and nonprofit experts to discuss the issue from political, economic, community-development and human-capital perspectives. The panel was moderated by Nadine Hack, founder and president of beCause Global Consulting, which develops and executes cause-related initiatives.
Although the panelists came to the discussion with different experiences, viewpoints and proposals, they endorsed the same conclusion: there is enormous opportunity in the untapped resources of the world’s poorest two to four billion people. But unlocking that potential is a formidable challenge that requires creative and unconventional thinking.
“I’m at a stage in life where I can take some time to do what I want to do,” said Alan Patricof, MBA ’57, cofounder of Apax Partners, Inc., one of the world’s leading private-equity firms, and an adviser to the International Finance Corporation (IFC) and the World Bank. “I went [to Africa] from a private-equity investor’s standpoint. But I didn’t even try to think that I could apply our approach to that world — because it really doesn’t; it’s not applicable.” “In two days,” he continued, “you could meet every venture capitalist — including in South Africa [which has about two-thirds of the 75 funds in all of Africa] — that exists.”
Less than $2 billion of the $325 billion U.S. private-equity market is devoted to Africa, said Charles H. Allison, Jr., senior investment officer at the F. B. Heron Foundation and former CEO of a listed venture-capital fund in South Africa, because Africa lacks many of what he calls must-have conditions for investing in an emerging market. Patricof noted that the return on traditional equity investments is just not sufficiently attractive. And most funds that have tried it have had poor results.
The current investment trend in Africa is microfinance, small loans at very high interest rates, which Patricof strongly opposes. “You could find tons of people who’d give you loans for $1,000 at 3 or 4 percent a month, but you can’t build businesses on that,” he said.
Instead, Patricof supports companies that approach projects in Africa creatively and realistically, often by serving on their boards. TrickleUp, for example, is a company that gives $50 grants to help poor people get off the ground. “Not figuratively,” Patricof said “ — literally get off the ground and start something: buy a cow, get a potter’s wheel or just put some merchandise in front of your house and sell it. If the person comes back in 90 days and they’ve done something with the $50 that’s constructive, they give them another $50. Now, you can’t imagine what $100 can do in Mali or Mozambique.”
So the real challenge and the hole that needs to be filled, he said, is developing new structures and new ways of doing small and medium-sized enterprise (SME) financing. “Frankly, what I’d like to see and what I’ve been trying to do is to get those 160 [companies in the Task Force for Increasing Capital Flows to Africa, cosponsored by the Council on Foreign Relations and the Corporate Council] to do business linkage with the SMEs,” Patricof said. “What they really need to do is have some sort of business peace corps, that they would really get some of their experienced people to give some help to these SMEs. That’s where the need is.”
In addition to private equity, venture capital and SME financing, companies also need to invest proactively in low-income communities in Africa, said Donna Katzin, founding executive director of Shared Interest, a New York City–based loan guarantee fund for microentrepreneurs in South Africa. Her organization gives low-income South Africans the access to credit they were systematically denied under apartheid and builds self-sufficient community-lending institutions.
“We thought that the most effective thing to do would not be to lend dollars from the United States to low-income people in South Africa, but to recognize the fact that South Africa had plenty of its own capital, though 80 percent of it was in the country’s four largest banks,” Katzin said. So we said, ‘What can we come up with that would be a vehicle for unlocking the money in those banks and getting the right banks to lend to our communities and to understand that 80 percent of the market is an effective market?’”
Shared Interest invests loans in the United States to put up as collateral, which gets banks in South Africa to make loans to community-lending institutions that lend again to thousands of people who start small businesses, grow development projects and build low-cost housing. Every dollar put up in guaranteed money unlocks $10 in loans to low-income South Africans at a leverage of 10, Katzin said. In 10 years, Shared Interest has enabled more than 8,000 small businesses, created more than 13,000 jobs and built more than 63,000 units of low-cost housing, improving the lives of nearly 375,000 low-income South Africans and helping them to take control of their own economy.
One of the most successful projects Shared Interest has enabled with its South African partner, the Bee Foundation, has put 10,000 rural women from traditional communities to work in the beekeeping business. While 70 to 80 percent of the people in South Africa’s flower-producing areas were unemployed, the country was importing two-thirds of its honey from China. Shared Interest guaranteed a loan of 50 hives stocked with local bees so that the Bee Foundation could put people to work, and accepted repayment of the loan in honey. “Now, don’t get me wrong,” Katzin said. “This is terribly, terribly low technology. But it is appropriate technology.”
She has found that these start-up communities not only get the training and the wherewithal to begin businesses but also quickly develop business sensibilities. After one year, the beekeepers in one community told the Bee Foundation they wanted to organize as a community to become more successful. The foundation agreed to put a satellite of the honey-processing plant in their area, and the women, who had very little in the way of literacy or numeracy skills, came back and said, “We should own 30 percent of that plant, you should also own a third of that plant, but so should the local community because they must have a stake in our success.”
“This is a model that is working and multiplying, not only because many, many more hundreds and, soon, thousands of small entrepreneurs are involved, not only because they’ve jump-started the economies in their local communities, but also because they are creating a model that will be the model for other countries in Africa,” Katzin said. “It is also evident on the social level. We are seeing partnerships that we would never have imagined before.”
The beekeepers have partnered with some of the largest mining conglomerates in the country. De Beers, for example, has discovered that flowers grow above remunerative mineral reserves and has invited the Bee Foundation to use its land for the project. Beekeepers have also partnered with local white farmers who help the small businesses because the bees pollinate their crops. “Some could call it the economics of reconciliation,” Katzin said. “We call it a Shared Interest and we call it an essential component of doing business and investing in Africa.”
Mora McLean, president and CEO of the Africa-America Institute, underscored the importance of pairing physical- with human-capital development, that is, expenditures on education and health that increase productivity. “The social rate of return for investing in human capital is very high, indeed,” McLean continued. The problem, of course, is that education is viewed as a long-term investment and so private investors are not inclined to regard it favorably. This presents a particular challenge for places in the world like Africa, where the physical- and human-capital gap with the industrialized world is widening. But the long-standing assumption that human capital is the province of governments rather than corporations is beginning to be challenged, she said.
“The policy challenge is to match skills with machines and to enable them both to grow rapidly,” she said. “We believe that increasing the continent’s economic productivity is every bit as critical as curtailing the spread of the deadly, life-threatening AIDS virus, and that, moreover, massive and strategic investments in human capital are pivotal to the continent’s success in achieving this goal.”
“My opinion is there is more need for economic development at this stage than there is for the social,” Patricof added. “There is a terrible need for AIDS, health, education, all that, but there are a lot of people focusing on that and a lot fewer on doing what we need, which is getting money to help businesses — because with business, people will pull themselves out of their condition.”
“Africa is for those who are not fainthearted, who want to really have a little poetry in their blood, a little bit of do-gooding, but also who, like me, are optimists and see the light at the end of the tunnel,” he concluded. “I think this is the decade of Africa. I really do.”
Nearly 1,400 MBA students, professionals and sponsors attended the 2004 Net Impact Conference, Business Leaders Building a Better World, which was organized by the Social Enterprise Program and took place November 11 to 14. The sold-out conference drew participants from 80 business schools, 167 companies and 11 countries. Hosted by a different business school each year, Net Impact’s annual conference is one of the largest and best-known gatherings of socially minded business leaders in the world.